Keep an eye out for the various experts who a while ago were
demanding/forecasting harder and faster interest rate hikes by the
Reserve Bank. I suspect they might be a bit quiet.
For example, Westpac’s forecast a month ago that the RBA cash rate would be 3.35 per cent in February is starting to fit into the “brave decision, minister” category.
There are too many wheels turning in different directions to be
we trust that our central bank will continue to be hairy about raising
rates beyond a “neutral” cash rate of 2.5 percent.
The latest contribution to the confusion over the economy comes from the S&P Global Australian PMI (Purchasing Managers’ Index) which on Tuesday signaled that Australian business activity would fall into contractionary territory this month.
The PMI is derived from a survey of 800 Australian services and
manufacturing companies.
No survey is perfect, but this one is pretty good at showing how the private sector is doing, as subsequent GDP figures confirm. A reading above 50 suggests activity is expanding, below 50 means activity is contracting.
The manufacturing PMI is still positive at 54.5, but it is the lowest in 12 months, and our services sector is much larger and dominates the composite index.
The services PMI fell to a seven-month low of 49.6 in August. Photo: Getty
Thus, the services PMI falls to a seven-month low of 49.6 in August
it was enough to bring the general index to 49.8.
Aside from consumer sentiment turning decidedly negative and the latest wage price index proving to be a weak water gun rather than a smoking gun for the wage inflation story, the PMI is a strong addition to the reasons. why the RBA should tread carefully.
a delicate balance
Next week’s jobs and skills summit (September 1-2) will hear a lot of calls about how the economy is doing and what needs to be done immediately on immigration, but a lot of those calls will be made by vested interests who I don’t want to acknowledge how delicately balanced the economy is today.
The Commonwealth Bank economics team, which is in the least
hardline cash rate field: believes the PMI data supports their decision.
“We see the cash rate target peaking at 2.60 percent at the end of 2022 (a
level that we consider contractionary)”, the CBA said.
The bank with the largest exposure to Australian consumers and
housing is planning on the RBA cutting rates by 50 points in the second half of next year, which could also be a “brave” call.
“We believe that as long as the RBA pauses its tightening cycle when the cash rate is around 2.60 percent (close to the 2.5 percent level that the RBA has designated as its estimate of neutral, that is approximately 100 basis points above our assessment of neutral). ) the data will indicate that there is no need to continue raising the policy rate.
“In fact, raising the cash rate would likely cause a hard landing in the economy,” the CBA concluded.
No one wants a “hard landing,” aka a recession. It is wise to be wary of anyone who tries to tell you that he knows exactly what is going on with our economy and what “they” (government/RBA/business) should be doing right now. However, as we discover more about what goes on behind the usual headlines, the CBA’s case seems more likely than Westpac’s.
Next week’s summit, which will focus on wage and workforce issues, will address the lagging indicators, and we’re still learning about them.
For example, Peter Martin made a valuable contribution in The
Conversation explaining why the new ‘floor’ under our unemployment rate is lower than what we are used to: There has been a significant and very welcome reduction in long-term unemployment.
Martin wrote that the drop in the number of long-term unemployed from 218,200 to 130,100 in the year to June was more important than the drop in the total number of unemployed from 682,400 to 493,900.
The long-term unemployed are those who have been out of work for a year or more.
pushed to the end of the queue
“Every person who loses their job or is unable to get a first job when unemployment soars can lose confidence and up-to-date work experience,” Martin said.
“Then, as things get better and employers start hiring again, the people who have been out of work the longest are coming back into the queue. Employers find it safer to hire new graduates or people with more recent experience.
“The more pushed towards the
at the end of the row, the less employable they seem, and the less
employable they become,” he said.
The current labor shortage has forced employers to hire people who previously would have been overlooked.
“It means that we have bought ourselves a lower and lasting unemployment,
no matter what happens from here on out. It also means that the better part of 100,000 lives have been transformed. It means that most of the 100,000 people no longer face years on JobSeeker.
And it means that we have discovered something really useful. Just as a crisis that leaves people almost unemployed can raise the unemployment floor for years to come, a crisis that forces employers to hire people who are almost unemployed can reduce it, perhaps for a long time.
It means economic commentators don’t have to be so spooked by a downside
unemployment rate causing inflation. Particularly when inflation hasn’t had much to do with the level of wage increases. As has been pointed out many times already, Australian interest rates have no impact on floods, Putin and supply chain problems.
On top of that, Ross Gittins in the Nine newspapers on Monday very well
explained how the government’s failed housing policy is responsible for a large part of the rise in the CPI.
More importantly, the higher costs of building a new home don’t matter to most people, it’s not the “cost of living” that most feel.
It is time to tread carefully on several fronts.
It would be a tragedy if, with the benefit of hindsight at some point in the future, the RBA was judged to have been too slow to start normalizing rates and then went too far in raising them.
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