2011 ended with falling employment, falling house prices, a retail recession, a decade low underlying inflation rate, housing credit at a 34 year low, the global economy looking at a BRIC wall, a massive fiscal tightening and sentiment measures at levels more or less consistent with recession. The Government was fearing that their precious surplus in 2012-13 would be swept away as economic growth undershot the MYEFO projections.
In the first 7 or so weeks of 2012, many of these indicators look like they have stopped falling, or even better, have rebounded spectacularly.
What could account for this turn?
It would be silly to link the RBA rate cuts of November and December to much of this, other than perhaps sentiment. Maybe the interpretation of the numbers in late 2011 was overcooked – that is, the house price falls were not only manageable but are good news; or the jobs numbers were distorted by statistical noise or some other unknown factor. Maybe there was too gloomy a view of the global situation and a lack of appreciation of the success global policy makers are having in putting a floor under the parlous position of many governments, banks and economies. The low inflation result locally could be boosting the purchasing power of consumers, because after all wages growth is still rolling along at a 3.5 to 4% pace. The money being saved on cheap bananas and electronic goods is being spent elsewhere?
It’s not clear. But let’s take the better news at face value and now try to assess whether it can be sustained.
There obviously remains a medium term downside risk to Australia as the ever appreciating Australian dollar clips growth at a time when monetary policy is only neutral and fiscal policy remains as tight as a fish’s bum.
I wrote a while back that households were about to get a bit of a cash boost -http://stephenkoukoulas.blogspot.com.au/2012/01/household-incomes-about-to-get-boost.html – which may have an influence a little down the track. And while the RBA will “look through” the 0.25% impact of the carbon price on underlying inflation, “looking through” might mean different things to different people, if you get the drift.
I won’t be convinced that things are find and dandy until there are material improvements in global conditions, Australia sees GDP growth above 3% for at least two straight quarters and we get trend employment growth to 15,000 a month or so. That is, at best, still 6 months away.