RBA Cash Rate Hold Shows Misplaced Optimism about Aussie Economy

Once again, the RBA cash rate remains the same at 1.5%. But the RBA continues to show misplaced optimism about the Aussie economy.

The RBA cash rate has flatlined since August 2016:

RBA Cash Rate

Source: RBA

According to the RBA, household income and consequently household spending are both going to experience a ‘pick-up.

This is rose-tinted thinking, and I will explain why.

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Global growth slows, local problems remain for Aussie economy

The RBA noted in February ‘downside risks’ with regards to global growth, but was curiously bullish about the Aussie economy

As per its media release last month, the RBA said the following:

The labour market remains strong, with the unemployment rate at 5 per cent. A further decline in the unemployment rate to 4¾ per cent is expected over the next couple of years. The vacancy rate is high and there are reports of skills shortages in some areas. The stronger labour market has led to some pick-up in wages growth, which is a welcome development.

This time, the language emphasized the housing market with a purported uptick in household spending in the next 12 months:

The central scenario is still for the Australian economy to grow by around 3 per cent this year. The growth outlook is being supported by rising business investment, higher levels of spending on public infrastructure and increased employment. The main domestic uncertainty continues to be the strength of household consumption in the context of weak growth in household income and falling housing prices in some cities. A pick-up in growth in household income is nonetheless expected to support household spending over the next year.

But despite the most modest of upticks in wage growth over the past two years, the historical data does not look great:

RBA Cash Rate

Source: tradingeconomics.com

In a previous post, I discussed how the recent ABS wage data was revealing structural problems in the Aussie economy.

Basically, if the Aussie economy was a person, I would say it is on a fast-track to heart disease.

The lifeblood of the economy, business investment, is quickly drying up:

RBA Cash Rate

Source: Institute of Public Affairs

Economists have woken up to RBA cash rate cuts (finally)

As far back as October/November, we were writing about rate cuts regularly on our sister site Markets and Money.

And it wasn’t doom mongering either. The signs have been clear to see for some time now.

But the sentiment among Australia’s leading economists shifted around December/January with Shane Oliver of AMP being one of the first to break from the pack.

Markets are now beginning to price in two 25 basis point cuts.

It was nice to be out ahead of others on this, but that doesn’t mask our concern for the Aussie economy going forward.

A trade deal may well be cut in the coming weeks, but this won’t be a panacea for the structural problems in the economy.

As a result, I suspect equity markets will get a quick sugar hit and then begin to shed value over the course of the year.

This also means that gold could experience a bump in the coming months as well.

My colleague Selva has a great look at the investor risk appetite/gold nexus below:

Regards,

Lachlann Tierney,

For Money Morning

PS: Free Guide: How to invest in gold for 2019. Download now.


Lachlann Tierney is a writer for Money Morning and has been investing for nearly a decade. With an MSc from the London School of Economics, he brings a sound understanding of global markets to his writing. Lachlann is interested in emerging technologies, energy solutions and helping people invest their money wisely. Recently, he has been working with Phil Anderson and Terence Duffy. They have three publications:

Phil Anderson’s Time Trader
Cycles, Trends & Forecasts
Money Morning Trader


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