This morning we have heard from the Reserve Bank of Australia. Times have been getting harder in a strategic sense for the land down under as the Chinese economy has struggled. Last year was one where the consensus was of recovery for China whereas I was worried about the consequences of the popping of the property bubble about which we have heard more in 2024. Whereas those who piled in are now thinking this according to the Financial Times over the weekend.
Chinese authorities’ promise of “forceful” measures last week was their most vocal attempt yet to halt a stock market sell-off that has wiped out almost $2tn in value. For many investors at a Goldman Sachs conference in Hong Kong, that vow was too little, too late.
More than 40 per cent of those surveyed while attending a session on Chinese equities held by the US bank on Wednesday said they believed the country was “uninvestable”.
It is hard not to have a wry smile at this morning’s update from the same source.
Chinese stock rally gains momentum with tech and small caps rising.
For those unaware China stepped up its own version of the plunge protection scheme yesterday. But for our purposes the Chinese economic struggles are bound to have an impact on a country christened the South China Territories. In another form it led to the AUKUS defence deal with the US and UK as Australia looks to protect its resources.
The Reserve Bank of Australia
Looked at in the light of the above this is a curious statement from the RBA in terms of the part I have highlighted.
Goods price inflation has declined but services price inflation remains high, supported by continued excess demand in the economy and strong domestic cost pressures, both for labour and non-labour inputs.
Yet only a few paragraphs later apparently it isn’t.
Tighter monetary policy has contributed to a noticeable slowing in the growth of demand over the past year. Household spending growth has been weak, and in per capita terms spending has declined.
The latter view is reinforced by the reality about to further impact the mortgage market.
A large share of the increase in the cash rate since May 2022 has been passed on to borrowers. The most recent cash rate increase in November 2023 has been passed through to advertised rates, and most remaining low fixed-rate loans will roll off onto higher rates over 2024. The share of household incomes used to meet mortgage payments is high by recent historical standards and still rising.
This part of monetary policy via higher interest-rates is always more than a bit awkward. You deal with a cost of living crisis by further raising the cost of living via higher mortgage costs. Buy returning to the excess demand point, if there is any it looks to be on the way out. In fact the theme takes another pounding below.
High inflation as well as higher interest rates and tax payments have weighed on household disposable incomes. In aggregate, households have responded to these pressures by curbing their spending, particularly on discretionary items. Households are saving less and, in some cases, drawing down on their accumulated savings buffers. Timely indicators, including from the RBA’s liaison program, suggest that growth in consumer spending has remained subdued this year so far.
In essence this is another way of looking at the impact of lower real wages.
What happens next?
Did anybody mention China?
In China, growth is expected to slow over the next two years as the post-pandemic rebound in services consumption fades and the property sector remains weak.
Actually the RBA takes this wider.
Economic growth in Australia’s major trading partners is expected to slow in 2024 and remain well below its pre-pandemic average for some time.
That rather ignores the better performance from the United States so far.Although that does get a mention in another section.
In the United States, economic growth has remained robust while inflation has continued to decline.
But anyway this feeds into prospects for the Australian economy.
In Australia, overall demand growth is expected to remain subdued in the near term as high inflation and earlier interest rate increases continue to weigh on consumption. The near-term outlook for GDP growth has been revised down modestly since November, primarily reflecting a weaker outlook for consumer spending.
The “excess demand” claim is in rather a mess here as if there was any it is on the way out. Maybe quite quickly.
The decline in real incomes over the past couple of years is expected to continue to weigh on consumption, particularly in the first half of 2024.
What about inflation?
Inflation is expected to decline to be in the target range of 2–3 per cent in 2025 and to reach the midpoint in 2026.
So a decline from present levels.
The Consumer Price Index (CPI) rose 0.6% this quarter.
Over the twelve months to the December 2023 quarter, the CPI rose 4.1%. ( Australia Bureau of Statistics )
So inflation is on its way to the target.
The Decision
We get told this.
At its February 2024 meeting, the Reserve Bank Board decided to leave the cash rate target unchanged at 4.35 per cent. This decision supports progress of inflation to the midpoint of the 2–3 per cent target range within a reasonable time frame and continued moderate growth in employment.
Comment
This is something of a holding statement from the RBA which is why their explanation has rather tripped over its own feet. They forecast inflation to be on target at the policy horizon and reduced their inflation forecasts. For example it is now expected to be 3.3% in June rather than 3.9%. Economic growth is now expected to be weaker as in 1.3% in the year to June as opposed to 1.9% for example. Unemployment is forecast to be higher as well. So we would looking at those have expected an interest-rate cut today and maybe one of 0.5%. So why not?
Well it is only a short sentence but it carries a lot of weight.
Overall, the Australian dollar has been little changed.
It is in fact some 6% lower over a year and has been weakening so far this year. My view is that we are watching another central bank twist and turn as it realises that things are weaker in the domestic economy but is waiting for the US Federal Reserve to move first to avoid currency weakness and a possible inflation boost via that. With the Federal Reserve presently suggesting no move in March the RBA is very much at risk of being too slow on the way up followed by too slow on the way down.
Plus there is this from the inflation release.
The most significant price rises this quarter were Tobacco (+7.0%), New dwelling purchase by owner-occupiers (+1.5%), Domestic holiday travel and accommodation (+3.9%) and Medical and hospital services (+1.2%).
Rising house prices as opposed to falling ones will be noted by housing obsessed central bankers.
Still there are always alternative views out there and the one below is very alternative, in my opinion.
SYDNEY, Feb 6 (Reuters) – Australia’s central bank held interest rates steady on Tuesday but cautioned that a further increase could not be ruled out given inflation was still too high, a strong signal that it isn’t in a hurry to start easing policy anytime soon.