Did you know that the last time annual Australian GDP growth was above 3.0% was 17 quarters ago (March 2008)?
That’s almost 4 straight years where GDP has been running below trend.
Not once in the last 51 years (the full data set for quarterly GDP data) has Australia had such a run of sub-3% GDP growth. Never. Sure, recessions have occurred and some have been deep – and this is nothing like that; but we are seeing a “rolling moderating” in the growth rate and the performance of the economy.
The economy is being constrained by the all important fiscal policy tightening which must continue, but it is also being hamstrung by the RBA which seems to be persistently pessimistic about the inflation outlook, persistently optimistic about the lack of impact on the economy from an overvalued Australian dollar and therefore reluctant to set interest rates at an accommodative level.
Thankfully the RBA Board next meets in on 27 days, so it can make up for it then.
Before I forget - the national accounts showed GDP growth of 0.4% in the December quarter, which followed a 0.8% increase in the September quarter. Over the year, GDP rose 2.3%.
If you move away from the flood impacted data in the March and June quarters 2011 (March artificially lower due to floods, June artificially higher due to bounce-back), the last 2 quarters show growth at an annualized rate of 2.5%, not great and sort of close to the annual figure in any event.
The Australian economy can grow at an average pace of 3% without generating inflation above the RBA target range. There is plenty of slack in the labour market at the moment, evident in hours worked and the drop in the participation rate. A few weeks ago, the news on wages confirmed a benign environment with annual growth of 3.6%. It is odd that the RBA did not mention wages in their statement yesterday, especially when it fits so well with the moderate inflation outlook.
As 2012 unfolds, not one aspect of economy policy is accommodative. Fiscal policy is tight. The AUD is in the RBA’s own words misaligned and again in their own words, the RBA estimates the cash rate to be neutral. Yet the economy is performing below par.
One arm of policy should be erring on the easy side.
We know the Budget will remain tight - as it should. It is hard to guess where the AUD will go , but it needs to fall at least 10% and stay down for it to be at all supportive. So it comes back to the RBA. It needs to cut. Let’s look to the April RBA Board meeting for that move and if things look crook globally and domestically, the RBA will keep cutting as the year unfolds.
Get set for a 3.5% cash rate and a move to accommodative monetary policy in the next few months.