A Wake-Up Call for the Perfect Economy?
(Bloomberg Opinion) -- Anyone who still thinks Australia’s economy is an all-conquering model of perfection is likely to get a wake-up call soon.
A 28-year run of expansion has had people abroad fawning over life Down Under — Federal Reserve Chairman Jerome Powell among them. For all the superlatives, though, the local central bank considers everything far from rosy. Reserve Bank of Australia officials never really bought the hype. Notwithstanding, the policy landscape has undergone a big shift the past two months.
The chances that the RBA will deliver an interest-rate cut as soon as next week rose after figures April 24 showed a significant slowing in inflation. As in many developed countries, and quite a few emerging markets, the pace of price increases is consistently below target. Growth isn’t collapsing, but it could do with some perking up.
So why pull the trigger when many others are talking dovish but balking at action? In essence: the effects on consumers of a home-price slump and air pockets resulting from a global downdraft, especially in China. Taking out insurance against a more pronounced slowdown makes sense.
The prospect of lower borrowing costs presents the RBA with two main risks, both of which are worth considering — and then putting aside. They are that the central bank becomes embroiled in politics a week before the May 18 federal election, and that it revives a property boom many felt couldn’t, and shouldn’t, go on forever.
The politics of Reserve Bank Governor Philip Lowe acknowledging all isn’t entirely well are problematic so close to balloting, especially when there is a very real prospect of the incumbent losing. Prime Minister Scott Morrison hasn’t publicly tried to nudge the central bank; that could change in coming days.
The RBA has adjusted rates during campaigns a few times, though it tries not to make a habit of it. Borrowing costs were raised during the 2007 campaign, which saw John Howard defeated by Kevin Rudd. In 2013, the bank cut. The first of those two adjustments during the political season caused a fracas; the second less so.
The key point is that life went on, and the RBA’s credibility survived. Arguably, the moves may even have enhanced the central bank’s standing. Few institutions are revered in Australian life like the RBA, probably reflecting that 28-year run. There’s little mileage in taking on Lowe in public, and Morrison would be ill-advised to attempt it.
The second risk relates to a series of rate cuts. Arguably the biggest chink in Australia’s domestic armor is the slide in home prices. The irony is everyone wanted the residential real-estate market to cool at least a bit. A few cuts from the RBA could breathe some life back into the sector. That would arrest the drop, but would it bring things back to the way they were?
An RBA research paper published in March found that low rates, with an assist from immigration, fueled the surge in house prices and construction. (The paper was careful to note that low rates have been a global phenomenon.) As my Bloomberg News colleague Michael Heath has written, Sydney home prices climbed about 75 percent in the five years through mid-2017, coinciding with central bank easing. More recently, Sydney prices are down by more than 10 percent from their peak. Supply struggled to keep pace with demand, which meant that extra capacity hit the market just as prices came off the boil.
While a breather was welcome, the descent is probably too jarring for some. The unemployment rate is low at 5 percent, but consumer spending isn’t firing.
The central bank has held interest rates at the current level since August 2016. Low inflation seems here to stay, so it’s a question of what you do about it. The RBA should consider the risks, then move anyway.
For everyone else, let’s hold the hagiography when talking economics Down Under.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously he was executive editor of Bloomberg News for global economics, and has led teams in Asia, Europe and North America.
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