The Reserve Bank’s quarter-point cash-rate cut will make life easier for borrowers, but we live in very interesting times with a debilitated economy in transition.
Amid Donald Trump’s tariff assault, RBA governor Michele Bullock declared the lesson of the past few years is to be patient and cautious.
That’s not easy for families facing ongoing bill shock, despite an easing in petrol prices, mortgage costs and government energy bill rebates.
The shock policy makers are dealing with this time – the hit to global growth from the US President’s sheer unpredictability – is very different to the last campaign monetary officials faced with the Big Inflation.
The RBA’s job now would be easier if government spending was in check and if productivity growth looked like returning to long-term trend rates (rather than simply being an assumption in the models of experts).
The central bank’s latest economic forecasts, published on Tuesday in its quarterly Statement on Monetary Policy, set off a series of storm warnings.
The classic game plan for officials cutting interest rates is to shift the drivers of economic growth from public to private.
For the past few years, as the RBA instituted restrictive monetary policy to tame inflation, public demand (which includes government spending on services, employees and capital works) has run rampant.
The broad measure of government spending increased by an after-inflation 5.6 per cent in the year to December. Wow.
Rather than retreating, governments facing re-election, such as Anthony Albanese’s in Canberra, kept stoking demand.
There’s been little let-up, with higher headcounts in the public service and care sector, as well as more taxpayer-funded “free stuff” all around (such as health services and energy subsidies), rather than traditional targeted welfare.
RBA economists have upgraded their forecasts for growth in public demand for this financial year and calendar year.
At the same time, growth in spending in the ailing private sector, both households and business, is being wound back over the next few years by the central bank’s economists.
But as the RBA eases its monetary squeeze and household disposable incomes rise, the private sector is meant to carry more of the growth load.
It will, over time, but consumer spending and business investment won’t be as strong as previously expected.
Bullock told reporters that consumers were watchful and still reluctant to spend their income gains from new wage deals, tax cuts and reduced borrowing costs.
This year consumer spending is expected to grow by an insipid 1.9 per cent (down from a 2.6 per cent estimate three months ago).
Of greater concern is the ongoing capital strike. Business investment has been flat, at historically miserable levels, to get technical.
Now the RBA has scaled back its previous expectations of a capital recovery this year, more than halving its forecast to 0.6 per cent growth for this calendar year. Next financial year’s investment growth estimate has been slashed by one-third.
In the real world, this manifests itself into a huge problem – for all of us. We need fresh thinking, new tools, factories, foundries, machinery and computer software to raise our productivity performance.
Jim Chalmers says he has turned on the porch light for sustained growth in national incomes through working smarter and getting more from our precious capital and labour.
Sadly, the private sector is not coming home just yet, with very little wind at its back.
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