With the Reserve Bank worried by fast-rising house prices, but the
dollar coming down and the unemployment rate now said to be steady, can a
rise in the official interest rate be far off? Yes it can.
On the
face of it, last week's revised jobs figures have clarified the picture
of how the economy is travelling. The national accounts for the March
and June quarters show the economy growing at about its trend rate of 3
per cent over the previous year, which says unemployment should be
steady.
And now the jobs figures are telling us the unemployment
rate has been much steadier than we were previously told, at about 6 per
cent.
If economic growth is back up at trend, we need only a
little more acceleration to get unemployment falling. The Reserve is
clearly uncomfortable about keeping interest rates at 50-year lows while
rapidly rising house prices tempt an already heavily indebted household
sector to add to its debt.
So, surely it's itching to remind us
that rates can go up as well as down and, in the process, let some air
out of any possible house-price bubble.
Well, in its dreams,
perhaps, but not in life. Even if hindsight confirms the latest reading
that the economy grew at about trend in 2013-14, the Reserve knows it
can't last. Its central forecast of growth averaging just 2.5 per cent
in the present financial year is looking safer, maybe even a little
high.
The sad fact is that a host of factors are pointing to
slower rather than faster growth in 2014-15, implying a resumption of
slowly rising unemployment and no scope for even just one upward click
in interest rates.
The biggest likely downer is the long-feared
sharp fall in mining investment spending. To this you can add weak
growth consumer spending, held back by weak growth in employment and
unusually low wage rises.
Now add the point made by Saul Eslake,
of Bank of America Merrill Lynch, that real income is growing a lot more
slowly than production, thanks to mining commodity prices that have
been falling since 2011.
Weak growth in income eventually leads to
weaker growth in production, which, in turn, is the chief driver of
employment. With the Chinese and European economies' prospects looking
so poor, it's easy to see our export prices falling even faster than the
authorities are forecasting.
Real gross domestic income actually fell in the June quarter, and Eslake sees it falling again in the September quarter.
Apart
from the recovery in home building, pretty much the only plus factor
going for the economy is the recent fall in the dollar, bringing relief
to manufacturers, tourist operators and others.
But measured on
the trade-weighted index, the Aussie is back down only to where it was
in February, and since then export prices have fallen further, implying
the exchange rate is still higher - and thus more contractionary - than
it should be.
In other words, the usually strong correlation
between the dollar and our terms of trade has yet to be restored. Why
hasn't it been in evidence? Because our exchange rate is a relative
price, affected not just by what's happening in Oz but also by what's
happening in the economy of the country whose currency we're comparing
ours with.
The Aussie has stayed too high relative to the
greenback not because our interest rates have been too high relative to
US rates, as some imagine, but because one of the chief effects of all
the Americans' "quantitative easing" has been to push their exchange
rate down.
As the US economy strengthens and the end of
quantitative easing draws near - and, after that, rises in their
official interest rate loom - the greenback has begun going back up. The
prospects of it going up a lot further in coming months are good.
That's
something to look forward to. But our exchange rate would have to fall a
long way before it caused the Reserve to reconsider its judgment that
"the most prudent course is likely to be a period of stability in
interest rates".
But that still leaves the real risk of low rates fostering further rises in house prices, particularly in Sydney and Melbourne.
What
to do? Resort to a tightening of "macro-prudential" direct controls
over lending for housing. The restrictions may be announced soon, be
aimed at lending for investment and even limited to borrowers in the two
cities.
But though they'd come at the urging of the Reserve,
they'd be imposed by the outfit that now has that power, the Australian
Prudential Regulation Authority.