Nelson's Column
Charlie Nelson's Blog
Economic seers blind to the obvious
Now that the Reserve Bank of Australia has shifted gears, acknowledging that economic growth “is unlikely to be as strong as expected” through 2011, the big question is how long this economic soft patch in the global and the local economies will last. Like other economic seers, the RBA was taken by surprise by this weak patch.
Australian Financial Review editorial, 6 July 2011
So economic seers have been taken by surprise by this weak patch! How did they not see the obvious? Let’s look at some indicators.
Population growth accelerated between 2004 and 2008 and has since fallen (Chart 1). Much of this is due to net migration – large numbers of people obtained temporary resident visas under a skills program or as students. The skills list was rationalized in 2009, reducing skilled arrivals, and the strong Australian dollar combined with several other issues to reduce student arrivals. Both political parties now seem to support a lower net migration level than at the peak.
Faster population growth means faster consumption growth. It was obvious by late 2009 and early 2010 (not June 2011) that slower population growth would tend to slow economic growth.
Chart 1
Retail sales growth has disappointed since October 2010 (Chart 2). October 2010 data was available before the end of 2010 and as each month passed the slowdown in consumer spending became more obvious.
Chart 2
Employment growth came to a shuddering halt in December 2010, the month after the Reserve Bank last raised interest rates and the commercial banks added to the misery for homebuyers by increasing their margins. Between January 2010 and November 2010 employment increased by an average of 33,400 per month while between December 2010 and June 2011 employment growth averaged only 6,400 per month (Chart 3). The December 2010 data was released in January 2011 and as each month passed, except for March 2011, the slowdown became more apparent.
Chart 3
Then there is tourism. International visitor arrivals have been exceeded by resident departures for overseas since mid-2009 (Chart 4). This is largely due to the strong Australian dollar which has been boosted by Australia’s relatively high interest rates. This has been a double blow for Australia’s tourism industry in that there are less overseas tourists and less domestic tourists because of the attractiveness of overseas travel.
Chart 4
Just on the basis of these four indicators (and there are others such as dwelling approvals) it is clear that there should have been concerns as early as late 2009 or early 2010. By the end of 2010 and very early in 2011 these concerns should have been grave and alarm bells should have been ringing loudly by March 2011.
And yet the Reserve Bank and most economic commentators were still talking about higher interest rates at every opportunity. In the Reserve Bank’s minutes of the May Board meeting, it was noted:
Underlying inflation to be in the top part of the target band over the next couple of years and … to be above 3% by the end of the forecast period.
Members noted that the significant divergences between different sectors of the economy presented challenges for policy-making, but that monetary policy had to be set for the needs of the overall economy.
Members judged that if economic conditions continued to evolve as expected, higher interest rates were likely to be required at some point if inflation was to remain consistent with the medium-term target.
Perhaps the Reserve Bank and other commentators did not want to see just how bad the domestic economy was becoming. It seemed as though they were determined to push the domestic economy into recession. They were fixated on the intended resources investment boom that was the dominant basis for their inflation forecast.
Another sorry chapter in the disappointing performance of the economic “experts”.
Read my suggestion about how the Reserve Bank could have solved this problem.
Charlie Nelson
July 2011