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RBA must shed house price blinkers as global deflation spreads; The ABS data fiasco is the least of our worries on unemployment
Topic Started: 15 Oct 2014, 02:27 PM (458 Views)
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RBA needs to shed its house price blinkers as global deflation spreads

Wed, 15 Oct 2014 | Stephen Koukoulas

Deflation is spreading like the plague throughout Europe to the point where negative interest rates are in play. In the UK, inflation has cascaded to a 5 year low and is set to fall further as the early and encouraging signs of economic recovery in the first half of 2014 are snuffed out. Even in the US inflation is too low and this alone is seeing the market question just when the US Federal Reserve will start to hike interest rates from zero per cent.

This morning the oil price has crashed to below US$82 a barrel (WTI) as a ramp up in supply meets softening demand. The global indices of commodity prices are also plumbing fresh lows.

For Australia, this news is poison.

As an exporter of energy, the falling oil price is parlaying into coal and gas prices. The Australian economy, which is muddling along at best, it facing not just these specific commodity headwinds, but is getting a kick in the face from the broader deflationary global pressures.

At the same time, falling real wages are set to fall further. Pay rises in the public service and the defence force will be 1.5 per cent per annum, at best, and more likely will be around 1.2 per cent per annum for the next few years. The close correlation between public service wages and those of the private sector, means that aggregate wages growth and household incomes will be crunched lower from what is already a record low pace of wages growth at around 2.5 per cent.

Falling real wages will knee-cap the retail sector and consumer demand more broadly. Real GDP growth cannot get near 3.25 per cent if this is the case and the unemployment rate is set to rise further. Soon there will be talk of unemployment reaching 7 per cent. The risk is that Australia's inflation rate will fall to, or even below, the bottom of the RBA target band.

The budget will be shot to pieces as revenue from PAYG income tax, capital gains and company profits gets mauled.

The RBA, currently with its 'house price blinkers' on, will need to dust off its obsolete forecasts and cut interest rates. It is always difficult to be sure how much more interest rate relief will be needed in the year ahead, but given the malaise creeping into business confidence, rising unemployment and a still high Aussie dollar, a cash rate of 1.5 per cent, or so, seems fair in the year ahead.

The economy needs this monetary stimulus if the unemployment rate is to be capped at 6.25 per cent, let alone fall back to 5 per cent which of course, is the main aim of macroeconomic policy.

Read more: http://thekouk.com/blog/rba-needs-to-shed-its-house-price-blinkers-as-global-deflation-spreads.html#.VD3bTmMjSE1
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The ABS data fiasco is the least of our worries on unemployment

Stephen Koukoulas
theguardian.com, Tuesday 14 October 2014 16.23 AEST

The debacle of the Australian Bureau of Statistics (ABS) being unable to publish reliable monthly seasonally adjusted labour force data does not hide the trend of deterioration in unemployment over the past couple of years.

The most recent labour force data, as published, suggests the unemployment rate has been about 6% for the past three months and the 6.1% unemployment rate for September is the highest in more than a decade. There are no signs in other indicators that suggest this will be the peak in unemployment and there are plenty of unfolding trends that point to the unemployment rate going higher still in the months ahead.

What is most disconcerting at the moment is a lack of policy resolve to do anything about it.

A few years ago, Australia had an unemployment rate well below 5%, a strong rate of economic growth that delivered new jobs, and decent increases in real wages.

Full employment was reached for the first time in a generation. Indeed, in the period from 2005 to early 2009, the unemployment rate was in a broad 4% to 5% band.

The global banking crisis came along and threatened to hit Australia hard to the point where the Treasury was forecasting the unemployment rate to spike to above 8%.

But due to an adroit fiscal stimulus package from the government and aggressive interest rate cuts from the Reserve Bank of Australia (RBA), the economy maintained resilience and unemployment remained below 6% right through the crisis, while most other industrialised countries saw unemployment rates reach 10% and sometimes much more.

It was this Keynesian fiscal approach in Australia that, ironically in the eyes of the anti-government debt zealots, influenced credit rating agency Fitch to upgrade Australia to triple-A. In making the upgrade in November 2011, Fitch noted Australia’s “high value-added economy, strong political, civil and social institutions and its flexible policy framework”. This meant that all three major ratings agencies, the others being Moody’s and Standard & Poor’s, gave Australia the highest possible rating for the first time in history.

At the moment, the economy is in the early stages of a disinflationary funk. That means real GDP growth is likely to be sluggish – perhaps 2.25% to 2.75% on average for the next year or two. The freefall in the terms of trade with commodity prices cascading lower will erode national income, and for many it will be one of the toughest economic environments since the recession of the early 1990s.

The domestic economy is simply not providing sufficient offset to these negative external influences. Consumer spending is subdued, dogged by persistently weak consumer sentiment while housing and business investment is not adding much at all to growth.

This means that the unemployment rate is all but certain to remain high unless there is a policy response.

The Abbott government shows little interest in tackling unemployment. Tony Abbott has not made any significant mention of the rising unemployment rate and policies aimed at lowering it in any press conferences, speeches or in parliament in at least the past three months.

The treasurer, Joe Hockey, is similarly uninterested, and to date has failed to note any policy changes designed to tackle the rising unemployment rate. Indeed, Hockey seems more determined to reach an arbitrary and economically irrelevant goal of a budget surplus ahead of any policy strategy to address the economic and labour market weakness.

Getting rid of the carbon price and mining tax, policies the government has suggested might improve the outlook for labour hiring, have close to zero impact on the level of employment, according to most reliable econometric models. And now with the labour market so weak that real wages are falling, there is the prospect of a vicious cycle unfolding where consumers cannot increase their consumption due to falling real wages and deteriorating job prospects, those poor job prospects in turn dampen wages which in turn dampens spending and so on.

There is a strong case for some policy stimulus to rebuild the growth prospects for the economy and with it, to arrest the deterioration in the labour market.

The RBA can cut interest rates but is seemingly obsessed with elevated house prices in Sydney and Melbourne and is unwilling to see the case for easier monetary policy.

For the government, a recasting of policies that take account of the labour market would also seem appropriate. Perhaps it could tighten the tax expenditures associated with superannuation and negative gearing. The revenue here would affect a section of the economy that is not income and spending constrained, yet could provide the money needed to underpin growth and employment elsewhere in the economy.

It would be most unfortunate if the poorly constructed labour force data from the ABS masked a genuine deterioration in the labour market that the RBA and government have misunderstood or ignored. If so, when the data are sorted out some time in the months ahead, there might be a lot of policy catch-up to do if the unemployment rate is to ever get below 5% again.

Read more: http://www.theguardian.com/commentisfree/2014/oct/14/the-abs-data-fiasco-is-the-least-of-our-worries-on-unemployment
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