The RBA’s narrowing path

As anticipated a couple of issues back, this week saw the RBA Board consider the case for a rate hike, before opting once again to leave the cash rate target unchanged at 4.35 per cent. In both the accompanying statement and in Governor Michele Bullock’s press conference following the meeting, a key message was that disinflation had been proceeding more slowly than expected and that this ‘reinforced the need to remain vigilant to upside risks to inflation.’ 

The RBA's message meant the overall tone of the RBA’s post-meeting comms was more hawkish this month, although the mantra that the Board was ‘not ruling anything in or out’ did enjoy another outing. The governor also said in her press conference that she ‘wouldn’t say the case for a rate rise was increasing’. Overall, though, while the RBA thinks that it is still on the narrow path to return inflation to target without triggering a recession, it also reckons that the path ‘does appear to be getting a bit narrower’.

Consistent with the challenging nature of the policy task at hand, Governor Bullock twice referenced the ‘complex’ nature of the current environment. Notably, towards the end of the press conference in what may have been a response to criticism that the central bank has not been sufficiently aggressive in tightening monetary policy, she remarked that ‘I really genuinely feel that we are in quite a complex situation here…I know that there are people out there who have much more definite [views?] and they seem much more convinced that they know exactly what to do. It’s not as easy as that. It’s a challenging time and the reason it’s a challenging time is because we’ve got balancing risks on both sides here.’ It will come as no surprise to regular readers that I broadly share this diagnosis of the persistence of two-sided risks for the economy and the thorny trade-offs required by the current economic conjuncture.

The RBA thinks recent data point to upside risks to inflation

With the RBA Board’s decision to leave the cash rate target unchanged at 4.35 per cent for a fifth consecutive meeting having been expected by financial markets, the main focus this week was on how the central bank would interpret the recent run of economic data, and the extent to which this would change its appraisal of the relative risks between inflation and recession. According to the accompanying statement, the Board’s overarching assessment of the economic releases since the 6-7 May meeting was they indicated that demand in the economy continued to run ahead of supply, and this imbalance was contributing to a slowdown in the rate of disinflation.

Thus:

• The April 2024 monthly CPI indicator printed stronger than expected and was little changed from the December 2023 outcome. (Governor Bullock did note in her press conference that the April monthly release contained only limited information on services prices, which are currently the focus in terms of the RBA’s inflation concerns.)
• Cost pressures remained elevated for both labour and non-labour inputs.
• Despite some signs of further labour market easing, conditions overall remained tighter than the central bank thinks are compatible with inflation at target.
• Wage growth in the March quarter of this year was a bit weaker than expected and appears to have peaked. But given ongoing weakness in trend productivity, wage growth at current levels is nevertheless incompatible with returning inflation to target.
• Recent revisions to the March quarter 2024 national accounts data suggest that consumption over the past year was somewhat stronger than previously indicated.
• The statement also observed that ‘[r]ecent budget outcomes may also have an impact on demand, although federal and state energy rebates will temporarily reduce headline inflation.’

All of which is consistent with some upside risk to the inflation outlook, which therefore explains why the Board once again found itself discussing the case for an increase in the cash rate target.

At the same time, however, the statement from the Board also noted that output growth remained subdued as those same Q1:2024 national accounts numbers showed real GDP barely grew in aggregate terms and fell for a fifth consecutive quarter on a per capita basis. Likewise, consumption also fell in per capita terms.

One vignette that nicely captures the dilemmas involved in evaluating the current economic environment came when Governor Bullock spent some of the post-meeting press conference discussing two alternative interpretations of recent developments in the household savings rate. According to the March quarter 2024 national accounts, the ratio of household saving to income fell from 1.6 per cent in the December quarter 2023 to just 0.9 per cent last quarter. One view is that this shows households are now feeling more confident about the future and are thus more prepared to dip into their savings to fund consumption. If correct, that would suggest upside risks to consumer spending and therefore to inflation. But an alternative interpretation is that households would prefer to save more, but because their incomes are so squeezed, they have no option but to pare back saving to maintain spending on essentials. That second view would suggest downside risks to activity. It would also seem to be more consistent with extremely low household sentiment readings. (A third interpretation is that different categories of households are having quite different experiences, with households with lots of floating rate mortgage debt faring very differently from those with a positive net financial asset position, for example.) 

Looking ahead, the RBA thinks a combination of the budget tax cuts, easing inflation and rising wealth effects means household consumption has scope to recover through the second half of this year and into 2025, especially if the unemployment rate remains relatively low. But in the meantime, the future trajectory of household spending remains one of the key forecasting uncertainties for the economic outlook.

Overall, then, this week’s communications from the RBA are consistent with my earlier judgement that a rate cut is now unlikely this year. Some analysts would go further than this and suggest we might see a rate hike before end-2024. A rate increase is not in my base case scenario and that view has been reinforced by the RBA’s repeated revealed preference for leaving rates unchanged. That said, however, given that we are still very much in the RBA’s data-dependent world, a large-enough upside surprise to inflation could yet force the central bank’s hand.

As Governor Bullock reminded us this week, the narrow path is getting narrower.

What else happened on the Australian data front this week?

The ANZ-Roy Morgan Consumer Confidence Index rose 8.3 points to an index reading of 80.3 in the week ending 16 June 2024, largely reversing last week’s fall. The biggest mover was the ‘future financial conditions’ subindex, which jumped 9.9 points to a 12-week high after having hit a 6-month low in the previous week. There was also a marked 5.4-point rise in ‘short-term economic confidence.’ Despite the rebound, the headline index has now spent a record 72 consecutive weeks below a reading of 85. The level of confidence is also 1.7 points below the 2024 weekly average (82) to date. Weekly inflation expectations rose 0.1 percentage point to 4.9 per cent.

ANZ-Indeed Australian Job Ads fell 2.1 per cent over the month in May 2024 (seasonally adjusted) and were down 18.1 per cent over the year. Job Ads have now fallen by 8.2 per cent since the end of last year. Even so, they remain more than 20 per cent above their pre-pandemic 2019 average. ANZ said the numbers were consistent with a continued moderation in the labour market over the course of this year.

Last Friday, the ABS published quarterly tourism labour statistics for the March quarter 2024. The Bureau said that last quarter there were 644,600 tourism jobs, down one per cent (6,600) from the December quarter last year, 10,600 (1.6 per cent) less than in the March quarter last year, and 53,800 (7.7 per cent) fewer than pre-pandemic, in the March quarter 2019. Over the past year, the biggest falls in job numbers were in Cafes, restaurants and takeaway food services (down 26,900 jobs or 11.9 per cent) and Accommodation (down 15,400 jobs or 17 per cent). The biggest rise was for Education and training (up 29,600 jobs or 87.6 per cent).

Other things to note . . .

• The Australian Tax Office (ATO) has released its latest tax statistics update with Taxation Statistics 2021-22. The numbers show that of the $530.1 billion collected by the ATO that year, 50.3 per cent ($266.7 billion) came from individual income tax, 24.2 per cent ($128.1 billion) came from companies and 14.3 per cent ($76 billion) came from the GST. For income tax receipts, the 772,544 individuals in the top tax bracket that year (those with taxable income of $180,001 or more) accounted for 40.1 per cent ($106.8 billion) of net tax paid. The average taxable income in 2021-22 was $72,327 while the median taxable income was $53,041.
• John Quiggin is sceptical about nuclear energy in Australia.
• On the difficulties of comparing the costs of electricity generation.
• A speech from the RBA’s Head of Payments Policy on some policy issues relating to online retail payments.
• New ABS analysis on Innovation in Australian Business finds that for the two-year period ending 30 June 2023, about 46 per cent of all businesses reported being ‘innovation-active.’ That was down from 52 per cent in the two years to 30 June 2021, when the COVID-19 pandemic prompted a spike in process innovation. Of businesses that spent money on innovation, 41 per cent focused on buying machinery, equipment or technology. This was followed by marketing activities and training, both at 37 per cent.
• Also from the ABS, a methodological update.
• The FT reports on the surge in Australia-China trade.
• How the 2022 energy crisis accelerated green technology adoption. Data using online job postings from 35 countries finds that higher energy prices due to the Russian invasion of Ukraine encouraged firms to hire more workers that could help them adopt or develop low-carbon technologies.
• Related, Brookings on Europe’s messy Russian gas divorce.
• A column considering the implications of AI and automation for tax policy.
• A look at 200 years of US Share Market Concentration.
• The WSJ explains why bonds markets are so spooked by the French election.
• What’s the real size of the Chinese economy?
• The Economist magazine says China has become a scientific superpower.
• Interesting Noema magazine essay with some musings on what China might look like in 2035, and how that might compare with Japan’s present.
• From the Journal of Ethics and Information Technology: ChatGPT is bullsh*t. The argument is that because Large Language Models (LLMs) ‘cannot themselves be concerned with truth, and because they are designed to produce text that looks truth-apt without any actual concern for truth, it seems appropriate to call their outputs bullsh*t.’
• An FT Big Read on the race against time to defeat mosquito-borne diseases.
• From Nature, new quantitative research on hybrid work.
• This Grattan Institute podcast asks, Should Australia abandon the Paris Agreement?
• The Econtalk podcast with a thoughtful discussion of government vs market failure.