27 September 2023

Not quite eye to eye on economic recovery

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Ian Verrender* explains why the Reserve Bank and the Federal Government don’t see eye to eye on Australia’s coronavirus recovery.


These are unusual times. Despite an economy still in recovery from one of the worst recessions on record with elevated levels of Australians out of work, real estate is booming across the land, and all in the total absence of any immigration.

There’s just as much confusion in the finance world.

Stock markets that for months have been pricing in blue skies and sunny weather forevermore suddenly have been jolted by the concerns of money markets that inflation, which has been dormant for the best part of a decade, could again strangle the economy.

The conflicts are playing out at a leadership level too.

As the Federal Government is adamant that stimulus needs to be wound back, to allow the private sector to take over in the recovery, the Reserve Bank (RBA) is doubling down, arguing that it will be years before Australia can wean itself off the emergency interest rates that have sunk to zero.

That tussle dramatically ramped up last week with one of the most significant addresses ever delivered by a Reserve Bank governor; a speech that highlighted just how far short we are in our goal to get the economy back on track.

As ever, though, most of it was lost in the noise on housing and the lurking danger that banks again will begin to shovel as much cash as possible into a roaring real estate market.

Housing boom headache

Central banks love gradually rising asset markets.

Slow and steady lifts in real estate and shares add to confidence in the economy and help boost spending as people feel richer.

Sudden and sustained bursts, on the other hand, are cause for serious concern.

There was no let-up on the weekend.

Real estate auction clearance rates surged to 83 per cent nationally with extraordinary activity in the two biggest markets with Sydney at 87 per cent and Melbourne at 80 per cent.

It’s a boom fuelled by ultra-low interest rates, a surge in demand from first home buyers and banks actively competing for new business.

Almost as soon as new properties are listed, they are snapped up, leaving the market short of stock.

According to the Australian Bureau of Statistics, first home buyer commitments in January surged to their highest level in 12 years and the pace appears to be accelerating.

That prompted the RBA boss Philip Lowe (pictured) to last week fire a warning shot.

Interest rates, he said, would remain low for at least three years. That’s how long it will take to get back to square one.

But there were other measures regulators could embark upon to take the heat out of the housing market.

“There are various tools, other than higher interest rates, to address these concerns, leaving monetary policy to maintain its strong focus on the recovery in the economy, jobs and wages,” he said.

Essentially, the RBA and the banking regulator APRA would simply make it harder for borrowers to obtain a loan, thereby putting a handbrake on prices.

Then he brought down the hammer. The Council of Financial Regulators, which he chairs, would act swiftly to rein in the banks if lending standards ever deteriorated and put the financial system at risk.

“We are not at this point, but we are watching carefully,” he said.

That puts the RBA governor on a potential collision course with the Federal Government.

Responsible lending not responsible

Ever since Federal Treasurer Josh Frydenberg last year announced the winding back of responsible lending laws, consumer groups have been up in arms, warning that Australia quickly would see a resumption of the type of predatory lending that precipitated a royal commission.

The Federal Government, on the other hand, has insisted that the banking regulator’s existing lending standards and the Banking Code of Practice provided sufficient protection for borrowers.

Privately, many senior bankers expressed surprise at the changes, particularly as they were mooted so soon after the Royal Commission and its damning findings.

But all welcomed them, especially given the fears that permeated the housing market as the global economy plunged into recession.

Many had expected a property price plunge of 20 per cent or more last year as the pandemic induced recession gripped the nation.

To make matters worse, credit growth already had slowed as the banks all paid extra attention to the responsible lending laws which had not been properly enforced for years.

Part of the rationale for winding back the laws — introduced by Labor in 2010 in the wake of the global financial crisis — was that economic conditions had changed and the laws were hindering the supply of credit.

Clearly, with new lending for housing up 44 per cent in January from that of a year ago, that’s no longer the case.

And that puts the onus onto the RBA to try and rein in that extra cash.

Wages growth: RBA says yep, government not so keen

For the past three weeks, central banks globally have been on the back foot.

Money market traders have adopted a vigilante-type assault on their policies, forcing interest rates higher.

While central banks have been wading into bond markets and buying up Government debt in an effort to keep interest rates — short, medium and long-term — on the floor, bond market investors have been doing the opposite.

They’ve been dumping Government bonds across the globe, forcing rates higher, causing one of the greatest upheavals in bond market trading in decades.

The RBA is only a recent convert to the practice of money printing.

Having taken the plunge last year, it’s now committing to what appears to an indefinite program.

It’s about to embark on its second round and a third clearly is on the cards.

Why? Because it believes our jobless rate is way too high.

And, more significantly, it has abandoned the long-held belief that an unemployment rate of five per cent is the sweet spot; that anything below that causes inflation as firms are forced to compete for workers by raising wages.

The RBA now believes that rate is around four per cent and possibly even lower, explaining why wages have been flatlining for years.

Right now, the jobless rate is sitting at 6.4 per cent. To muscle the unemployment rate down that far will require a huge effort.

That’s why it is adamant that it will not raise interest rates for years.

There’s nothing Phil Lowe would love more than a wages breakout to light a fire under inflation, an idea that doesn’t quite resonate with the Government.

Even before the coronavirus swept through the global economy last year, the RBA had been forced to cut interest rates on several occasions.

Economic growth was sluggish, inflation had failed to reach the 2.5 per cent target for four years and wages growth was at record lows.

It repeatedly had called on Federal and State Governments to start doing their bit; that the job of firing up the economy couldn’t be left solely to the Reserve Bank and they needed to spend up on big-ticket infrastructure programs.

We may be bouncing out of recession. But those old problems are about to resurface.

RBA forced to go it alone

The centrepiece of the Federal Government’s economic rescue package winds up in a fortnight.

At around $60 billion, JobKeeper wasn’t cheap. But it worked and it kept millions of Australians tied to their employer during the darkest days of the recession.

After last week’s targeted help to tourism, or Qantas more particularly, it is clear the Federal Government is determined to end the assistance.

Corporate Australia, it says, now must take the running.

But will it? Business investment has been weak for years and the most recent national accounts show it was a drag on growth.

That’s despite a far better than expected half-year earnings season which delivered record profits and windfall dividends to shareholders.

Once again, employees are missing out on the earnings action, part of a decades-long trend across the developed world.

The problem is that, as central bankers now are only too aware, the less workers are paid, the less they spend.

And the less they spend, the slower the economy grows.

With the Federal Government now withdrawing so it can focus on slashing its debt and deficit, that puts all the onus on the RBA.

And with interest rates at 0.1 per cent, it will need to become a lot more creative if it wants to engineer a sustained recovery.

Negative interest rates anyone?

*Ian Verrender is the ABC’s Business Editor.

This article first appeared at abc.net.au.

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