Low rate of growth tests everyone’s patience

Auction clearance rates in Sydney and Melbourne last weekend were about 75-80 per cent Picture: Aaron Francis

Tuesday sees the final scheduled meeting for the year of the Reserve Bank board and Wednesday the release of the September quarter national accounts. The consensus among economists is another soft quarter with annual economic growth stuck at less than 2 per cent.

The federal government will use the release of the national accounts to update its economic forecasts that will shape its midyear budget review (MYEFO) to be published within the next few weeks. It already is clear the May budget forecast for economic growth this financial year of 2.75 per cent is too high. Last month the RBA lowered its 2019-20 growth forecast to 2.25 per cent.

Fortunately for the budget finances, employment growth has been stronger than expected and so have commodity prices. As a result, the government should still be in a position to forecast a small budget surplus in the MYEFO, even with the announced increases in spending, including for the drought and infrastructure.

The more fundamental issue confronting both the government and the RBA is how long they are prepared to wait for clear signs that the economy is building momentum towards a stronger growth path that will lower unemployment sufficiently to produce a lift in wage rises and a return of inflation to the 2-3 per cent target.

In his speech last week, RBA governor Philip Lowe again pointed to signs of a gentle turning point in the economy and indicated he remained patient to see further progress to faster economic growth before considering the case for additional stimulus.

The obvious sign of the gentle turning point is the strengthening of housing, led by the resurgent Sydney and Melbourne markets where preliminary auction clearance rates last weekend were again around 75-80 per cent. These strong results are in turn starting to translate into improved order books for companies operating in the housing sector. There also are brighter prospects in the mining sector after a long and deep correction in mining investment.

But high household debt and low wage rises are limiting the responsiveness of consumer spending to the lower interest rates and the tax refunds. Only heavy price discounting with the Black Friday sales seems to have temporarily motivated the consumer. And the robust growth in non-mining business investment seems to have faltered somewhat.

More broadly, the stimulus measures are battling structural headwinds in the global economy that are restraining the appetite of companies to invest in expensive organic growth projects. These same headwinds are encouraging a desire to save more. The bottom line is that potential economic growth globally and domestically is now much lower.

The obvious question therefore is how long is Lowe prepared to be patient before easing monetary policy further, including by launching Reserve Bank buying of government bonds.

A pessimistic view is his patience will be sorely tested as there are no signs of a reversal of the structural global headwinds of high debt, low productivity growth, ageing populations and the breaking down of the post-World War II consensus of open trade and investment.

More positively, he can point to some of these headwinds being less binding in Australia, most notably that the population is growing faster than in other advanced economies and is ageing at a slower rate, thanks in large part to high immigration.

In this regard Australia is more like the US than Europe and Japan.

But even in the US, where the economy has run above its potential growth rate for an extended period, it has taken a very large decline in the unemployment rate to 50-year lows to generate the pace of wage rises that Lowe would like to see in Australia.

On the RBA’s forecasts we are a long way from seeing this in Australia with the current low rate of wage rises described as having become the norm.

Provided unemployment does not rise much and employment growth remains strong, then both the RBA and the government can afford to remain patient.

But the prospect of a further period of little growth in real national income per capita will surely test the patience of the broader community for visible increases in its standard of
living.

Paul Brennan is an independent economist based in Sydney and has worked at Citigroup Global Markets as well as the RBA, federal Treasury and OECD.