The author has been described by News Ltd as an "iconoclast", "Svengali", a pollie's "economist muse", and "pungently accurate". Fairfax says he is a "Renaissance man" and "one of Australia’s most respected analysts." Stephen Koukoulas concludes that he is "85% right", and "would make a great Opposition leader." Terry McCrann claims the author thinks "‘nuance’ is a trendy village in the south of France", but can be "scintillating" when he thinks "clearly". The ACTU reckons he’s "an enigma wrapped in a Bloomberg terminal, wrapped in some apparently well-honed abs."

Thursday, June 2, 2011

Terry McCrann calls July, then maybe June, or July, or not!

Another top column from McCrann on the RBA's supposedly complex problems. The consensus view is it's highly unlikely they will hike next week. While that is likely correct, my personal view, as noted by McCrann below, is that that would be illogical. Waiting for more 'past data' after yesterday's confirmations vis-a-vis (a) growth, (b) inflation, and (c) wages via the National Accounts would be a waste of time. Frankly, it would suggest to me that something is not quite right with the RBA's decision-making processes (a conflicted, dovish Board, perhaps?). You can always find a reason not to hike. It's easy not to hike. Or, as RBA folks like to say, It's actually hard to hike. Yeah, well there are a lot of tough jobs in life. It's not easy apprehending criminals, shooting Taliban, putting out fires, or cleaning your garbage. Get over it. You can always look for the perfect suite of data to rationalise the decision not to hike. But if you wait for these two things, you--as Stevens has repeatedly acknowledged--will almost certainly be too late. I repeat: you will be too late. Where I differ from McCrann over July vs. June is this: what happens if we get another set of data that appears to 'rule out' a July hike, only to be superseded by high Q2 CPI? Think about it. Time is emphatically not on the RBA's side if you assume that there is a reasonable probability of a high Q2 inflation print. And if you hiked, say, next week, and the Q2 CPI printed low? Fantastic! You can claim that your November and June moves were inspired, and you will be sitting on the sidelines for an extended period. No more rates hikes for the time being. A pre-emptive RBA has snuffed out burgeoning inflation pressures. Here's today's article:


A contracted economy has done little to curb the inflation beast

THE Australian economy shrank in the March quarter but is smack in the middle of a boom and the Reserve Bank will lift interest rates in July.

The boom is the commodity boom. The RBA's index of commodity prices, coincidentally and usefully also released yesterday, showed our commodity prices rose even further in May from their already dazzlingly high levels.

The prices we get for our iron ore, coal and the rest are now nearly 25 per cent higher than even the previous peak they had reached in 2008 before the global financial meltdown.

They are running nearly four times -- four times -- higher than the levels of the 1990s and the early part of the 2000s. Which back then, we thought were pretty good! And helped produce solid economic growth.

To say this is extraordinary fails to capture just how much money it is pouring into the economy and which the RBA knows -- fears -- all too well, could so easily spill over into a serious inflation problem.

Two things have been standing in the way of that potential spending surge -- and a series of rate rises that could have, indeed, would have, already been delivered.

One is the strong dollar.

The RBA has made it quite clear that a strong dollar won't substitute for a rate rise or rises. But in this context it has given the RBA time to assess, not so much what's happening locally but that uncertain and volatile global backdrop.

That's still importantly the big qualification to the certainty of a rate rise in July with probably at least one more later in the year. If Greece went over the cliff and triggered another global financial implosion.
The second big factor has been the accompanying rise and rise in our household saving ratio. The GDP numbers yesterday showed it kicked up again to nearly 12 per cent of household income -- the highest it's been since the early 1970s.

Again, if we were spending not saving, we would have been whacked with rate rises.

Even so, the GDP numbers showed signs of a developing spending surge in the economy. Arguably the RBA should hike next week -- Christopher Joye said they should have hiked last month.

I wouldn't be quite that determinative. Given the savings ratio and the strong dollar, and those global uncertainties, the difference between a month, even two months isn't over-powering.

But it would be a big mistake to leave the hike until after the June quarter inflation numbers, to the August meeting. It is a mistake the RBA is not going to make.

This might seem extraordinary, bizarre and even wilful for the RBA to lift interest rates after the economy recorded one of its biggest one-quarter GDP falls in many years.

The 1.2 per cent -- near 5 per cent annualised -- fall was entirely due to the Queensland floods, stopping coal exports.

Take them out of the equation and the economy would actually have grown at a solid clip of around 1 per cent for the quarter, or 4 per cent annualised.

Critically, domestic demand -- the best guide to what we are spending -- increased 1.3 per cent in the quarter, or an annualised rate above 5 per cent.

That is really pushing the envelope with inflation already right at the top of the RBA's 2-3 per cent target range, with unemployment below 5 per cent and surging demand for skilled labour.

It also means you cannot totally rule out a rise in the official rate at the meeting next week. I'd give RBA governor Glenn Stevens the extra month, but he mightn't give himself it.

If he's demonstrated one clear characteristic in his time at the helm, it's been his ability to do the unexpected. And raising rates a week after figures showing the economy shrank at a 5 per cent annualised rate would certainly be `unexpected'.

Because of the strong dollar, a sizeable part of that rising demand will spill into imports, not put pressure on local supply, local wages and local prices.

Even so local prices -- inflation -- are right up against the RBA's ceiling. Its quarterly statement last month showed that pressure persisting, even assuming two rate rises over the next year. But later, not immediately.

Absent some global implosion, the RBA has to deliver somewhere between two and four rises over the next year. It has to start now and it has to start before the June-quarter inflation numbers surface.