7
Mar
2012

Mr Hockey’s Speech – More Holes than Swiss Cheese

Shadow Treasurer Joe Hockey gave a speech to the Sydney Business Chamber and while the sentiment in the speech surrounding strong growth, low taxes and job creation was sound, it was riddled with factual errors and a misrepresentation of some facts.

I have not seen any media coverage of the errors – the speech seems to be been taken at face value – but below is an analysis of some of Mr Hockey’s comments,  with my comments in the square brackets.

  • “since 2007 the ratio of net debt to GDP of the leading western economies has grown from 52% to 82%”  [That is a swing of 30% of GDP; in Australia, net debt to GDP has grown from minus 3.8% to 8.9%, a swing of 13% of GDP.]
  • “Sovereign risk was never an issue before but since the election of Labor in 2007 analysts have added it into the Australia equation”.  [Sovereign risk is difficult to determine but on two important measures, sovereign credit ratings and government bond yields, sovereign risk has fallen.  For the first time ever, Australia has a triple-A credit rating from all three major ratings agencies and the 10 year government bond yield is now around 4.0% having recent hit an all time low of 3.65% - it was above 6% in late 2007 when the Coalition was in office.]
  • “if the Labor Party does manage to deliver a surplus next year it will not be based on a significant reduction in the size of Government but rather, it will be based on a massive increase in tax receipts for the Commonwealth.”  [Factually wrong.  The size of government – taken as government spending – will fall from 26.0% of GDP in 2009-10 to 23.6% of GDP in 2012-13.  As a memo item, the Howard government’s average government spending to GDP ratio was 24.2% of GDP.  The tax to GDP ratio will rise from a 30 year low of 20.0% of GDP in 2010-11 and will reach 22.3% of GDP in 2012-13.  As a further memo item, the tax to GDP ratio in the last Howard year was 23.7% and the average tax to GDP ratio under Howard was 23.4% of GDP.]
  • “we will achieve a surplus in our first year of office and we will achieve a cash surplus in every year in our first term”.  [Assuming a late 2013 election, this is promising what the current government is already going to deliver.]
  • “Under the Coalition the budget will not be the first lever pulled in the event of another downturn.  I would prefer to see greater use of monetary policy for managing demand, with movements in interest rates used to smooth the economic cycle…. I would prefer to see monetary policy used as the primary tool for managing demand. ”  [This hints at undermining more than two decades of bipartisan support for the RBA to set interest rates independently of government.  This is a very dangerous path to follow and would see international investor take fright at the prospect of political interference in the RBA and implicitly, in the inflation target.]
  • Australia should ideally be running very large budget surpluses.  This would allow money to be put aside for a rainy day.”  [There is an inconsistency in Mr Hockey’s approach.  Putting money aside “for a rainy day” suggests that the Coalition would be willing to run down surpluses if there was a shock to the economy – I thought he said they’d prefer the RBA to cut interest rates?]
  • “The second step in the Coalition plan for a stronger economy is to reduce the overall burden of taxation.”  [This is an interesting issues touched on here … http://alturl.com/iib8h ]
  • “A number of private sector commentators now believe the inflationary impacts of the carbon tax will be higher than the government has said.”  [Mr Hockey provides sources for many items in his speech but not this.  Who says this?]
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7
Mar
2012

Employment drops in February – C’mon RBA!

The monthly volatility, plus revisions, make reading individual moves in the labour force very difficult.  It doesn’t make it impossible, nonetheless, to make well informed judgments about the health of the labour market.

Employment fell 15,400 in February after rising 46,200 in January and falling by a total of 40,900 in the final two months of 2011.  A quick calculation shows that the level of employment is lower now (February) than it was back in March 2011.  

The unemployment rate, which is very much an artifact of the participation rate (or is that the other way around), rose to 5.2% from 5.1% in January with the participation rate dropping to 65.2%.  The unemployment rate has been stuck at a little above 5% for more than a year.

The data continue to show a sub-trend growth performance for the economy – one that needs a monetary policy boost.  It’s simple to cut rates and it is free – i.e., there is no budget impact at a time when it is important to lock in that surplus for 2012-13.   To reiterate the words in recent blogs, with fiscal policy remaining tight and subtracting from growth, the RBA needs to move interest rates to an accommodative stance. 

The RBA remains starry eyed about the resources boom (fair enough), but it allows this infatuation to distract it from looking at the big picture sub-trend softness in the economy.

Global growth is weak; inflation is low; Australian GDP has had almost 4 years muddling along below trend; asset price deflation remains for houses and stocks and credit conditions are at best mixed.

There seems little doubt now that the RBA will cut in April.  Had it had the GDP and jobs numbers when it met on Tuesday morning, it may have cut then.  Whatever. 

Monetary policy needs to move to an accommodative stance and a further 25 basis points will not be enough.  There are good and growing reasons why the RBA will need to cut towards 3.5% sooner rather than later.  Today’s numbers escalate that need a bit more.

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6
Mar
2012

>RBA Leaves Rates Steady … But For How Long?

The RBA left the cash rate unchanged at 4.25% but kept its view that inflation is and will be low enough to allow it to cut interest rates if demand conditions weaken further.
The Statement from RBA Governor, Glenn Stevens, was very dovish.  Indeed, the words are more aligned to the announcement of an interest rate cut than to leaving rates steady.

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6
Mar
2012

It’s a new record – longest ever period of sub-3% GDP growth continues

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.

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5
Mar
2012

>Mr Hockey’s Black Hole From a Different Perspective

Over the course of two interviews today – one with Sky and the other at the ABC’s 730 – Shadow Treasurer Joe Hockey has set the framework for cuts in spending under a Coalition government.
As per my earlier post on Mr Hockey’s guarantee to have a lower tax to GDP ratio than Labor  http://stephenkoukoulas.blogspot.com.au/2012/03/joe-hockey-just-made-his-black-hole.html  (a point he reiterated on 730), Mr Hockey has also promised to deliver Budget surpluses.

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5
Mar
2012

>Joe Hockey Just Made His Black Hole Bigger

Shadow Treasurer Joe Hockey has made an astonishing commitment for a future Coalition Government with his “absolute guarantee” that the Coalition tax take will be less than under Labor.

Interviewed on Sky TV, Mr Hockey said:

“we’ll deliver lower taxes than under Labor, I can give you that absolute guarantee.”
I suspect Mr Hockey does not know what he has just guaranteed to deliver.

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5
Mar
2012

>Inflation in the groove; RBA can move

The ever reliable TD-MI Monthly Inflation Gauge* rose 0.1% in February, a touch weaker than what look to have been seasonally large rises of 0.2% in January and 0.5% in December.  Cutting through the volatility in the monthly data, it looks like inflation continues to hover in the lower part of the RBA target band.

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4
Mar
2012

>Not a Media Release from the RBA – 6 March 2012

The following is not the media release from the RBA on Tuesday, after is regular meeting of the Board.
Not A Media Release
Number 2012-XXX
Date 6 March 2012
Embargo For Immediate Release

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1
Mar
2012

>RBA Commodity Price Falls Continue

Busy day.  The RBA monthly commodity price series confirms further commodity price falls.
In Australian dollar terms, the RBA Index of Commodity Prices fell 1.3% in February and is now 11.5% below the August 2011 peak.  The index is at its lowest level since December 2010.  That said, commodity prices are still at elevated levels.

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1
Mar
2012

>The House Price Data In Context

Just to clarify a point:  RPData chose to release two monthly data readings simultaneously today as they promoted their daily house price series.
Had they retained their previous schedule, today would have seen just the January data released and this showed a sharp 1.0% monthly fall in house prices.  In releasing the data for February, RPData gazumped the 1.0% fall with the February information which showed house prices rising 0.8% in the month.

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