Terrible data means RBA can’t hike – surely

The AUD has bounced with the EUR today in Asia as rumours spread about a bailout package for Greece but it has underperformed largely because today’s data was so weak. We posted a quick take on the data over at MacroBusiness when it came out and our take on it is that there is no way the RBA can keep faith with the Australian population and its very important role in our economy and still hike next week.

We know the RBA has both a medium term mandate and time frame which  it is managing monetary policy to. That’s why, on occasion, as required they have been able to let inflation slip outside their target band for a time if they believe that it will slip back in.

But it also means that even in the face of weak data, they retain their central tendency (anyone interested in a piece on the conduct of monetary policy should read this piece at MacroBusiness I wrote some time ago) that the mining boom is transforming the income in terms of both investment and household incomes and that eventually, following the end to this period of household retrenchment, it will flow through to the broader economy. So they are managing with one eye on the now but a primary focus on the road ahead. We reckon that the road is veering off to the left and while we are not heading off a cliff as we alluded to yesterday the hurdles to a rate hike are growing.

The headline number today, in terms of tomorrow’s Q1 GDP, release was net exports which was -2.4% (the dollar value of what we sell overseas minus the dollar value of what we buy). This will be a significant drag on growth for the quarter and almost guarantees a number lower than -0.5%. Now the punditry has already jumped all over this and said that it is one-off weather related factors (coal particularly)   and that there will be catch-up later in the year and that the RBA will look through this.

Let’s say we grant them that there should be some give back as exporters try to recoup what they have lost. But is there enough spare capacity at the mines and ports to make up the lost ground in any one quarter, probably not, or even this calendar year, not sure. So the catchup will be gradual and get washed through in a manner that is observable but not felt in the way this net exports reduction has been.

For us the headline number was not net exports but private sector credit which was flat at 0.0% on the month. Why is this so important? Because we believe in a developed economy it is the demand for credit that sets the speed limit for economic growth. So while business credit is picking up, something the RBA has noted, housing and other personal are dropping away.  

Indeed the magnitude of the fall in housing credit can be seen in the chart above. Clearly demand for housing credit is at its lowest in 30 years, probably more. This is vitally important because of the relationship between demand for housing finance and house prices and the knock on impact, into the “wealth effect’ and consumption, for the economy.


Indeed the RP Data-Rismark series on house prices was out today and showed a fall of 0.1% raw on the month with a seasonally adjusted fall of 0.3%. Looking at the relationship between house prices (as measured by the ABS Capital city house price – pink line) and the flow of housing finance (as shown by the total monthly value of housing fiance ex-refinancing – white line) it is clear that the fall in demand for housing and personal credit remains the OTHER big and enduring story for the Australian economy.

This is not a forecast of a housing crash because this chart above clearly shows that house prices are stickier on the downside than the upside. But it does suggest is that while the demand for credit, and thus housing, is subdued prices can not sustainably rise on average. Therefore Australian’s will continue to be focussed on the visible increases in the cost of living and managing their enormous debt burden, all the while not feeling any “richer”.

The RBA has a medium term mandate and as such it can afford to wait a little longer and see if their hypothesis that household retrenchment is transitory is correct. We think they’re wrong and that it is structural. So with a mountain of debt to chew through Australian households and the economy will remain subdued.

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One Comment on “Terrible data means RBA can’t hike – surely”

  1. Leslie Neilson Says:

    Great post Greg….but don’t call me Shirley


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