The RBA says one thing, its pictures and graphs say another

Stephen Koukoulas examines the recent RBA assessment of the economy as "running a bit hot" and discovers its own charts tell a different story.

BY NOW, everyone knows that the RBA left official interest rates unchanged following its regular board meeting last week.

In the hours and then a couple of days following the formal interest rate announcement on 6 August, the RBA Governor Michele Bullock and Assistant Governor Sarah Hunter gave speeches and afterwards answered questions.

In the prepared remarks and then in the Q&A, Bullock and Hunter left no doubt that on the RBA’s assessment, interest rates would not be reduced any time soon and may even increase if a series of conditions, particularly relating to inflation, unfolded.

Governor Bullock and Assistant Governor Hunter assessed that currently, there was “excess demand” in Australia and that the economy was “running a bit hot”.

These were the reasons why investors and the financial markets – in the view of Ms Bullock at least –were wrong to price in interest rate reductions before the end of 2024.

But what is actually happening in the economy?

On the day of the RBA decision, it published its quarterly Statement on Monetary Policy and then its regular the next day.

The curious thing about those publications was the number of charts that showed anything other than “excess demand” or the economy “running a bit hot”.

Indeed, they were pointing to economic weakness, rising unemployment, an easing in capacity utilisation and falling inflation.

The following set of charts are extracts from the Statement of Monetary Policy. It is clear that the economy is not hot.

As readers look at these charts, make up your own minds. Would you be inclined to keep hiking interest rates after already hiking 425 basis points since May 2022, or do you think the economy is actually weak and in need of some interest rate relief?

This first chart shows market pricing and expectations for official interest rates in a series of major economies, including Australia. Interest rate cuts are expected in all countries, including Australia.

Source: RBA Statement on Monetary Policy

In terms of consumers, spending is weak. Spending intentions for renters are actually falling while for homeowners spending is weak and has taken a step lower since the start of 2024.

Business investment, which was strong through to the end of 2024, is slowing with annual growth easing from over 10% to now being below 5%. The momentum is clearly lower.

More bad news on the economy, this time with the RBA chart showing a material spike in the share of businesses experiencing corporate insolvency. To be sure, it is currently a little less than during the peak of the global financial crisis around 15 years ago, but there are no signs of it topping out which is a concern.

As the economy slows, the pace of employment creation slows. Despite a much-needed lift in Government hiring in health and education – something largely irrelevant to the interest rate cycle – employment growth is falling. The earlier interest rate hikes are dampening private sector demand for workers which is why the unemployment rate has already risen from a low of 3.5% to the current 4.1%.

The main game for the RBA is getting inflation to between 2% and 3% over the course of the business cycle. Curiously, it is forecasting inflation to be in that range when the September quarter CPI data are released in late October. That aside, the RBA chart on the trend in the various measures of underlying inflation are all pointing in the direction of inflation falling towards the target.

From those charts in the Statement on Monetary Policy to charts from the RBA Chart Pack.

Any signs of a “hot” economy?

This chart shows annual growth in GDP – the line – with the quarterly change shown in the bars. Aside from the well-understood volatility in GDP growth at the time of the pandemic, the momentum of growth over the past year has been down. Indeed, annual GDP growth is currently 1.1%, a pace rarely seen except when the economy is cascading towards recession. Indeed, the last quarterly GDP growth rate was a puny 0.1%.

The headline inflation rate has fallen from a peak of 7.8% in late 2022 and is currently tracking at 3.8%. To be sure, the RBA – and all of us – would like it to be within the target band NOW, but a trend should be the RBA’s friend.

Australian consumers are savvy. The level of sentiment tends to be high when their financial position is favourable and low when finances are tough. Consumer sentiment now is miserable and well below the level that could even be classed as neutral. When consumers are gloomy – and especially for such an extended period – they scale back their spending, which is exactly what is happening right now.

Dwelling investment is a key part of the economy. Strong dwelling construction adds to GDP via demand for brick, cement, wood, windows and all the materials; plus the labour needed to assemble a dwelling — tradies, architects and the like.

As the chart below shows, the volume of investment in housing is falling, which is making a hole in GDP and holding back much-needed new supply of dwellings.

The business sector, which was resilient through 2023 is now tracking lower in line with the overall slowing in economic growth. Both business conditions and business confidence are below their long-run average. The level of capacity utilisation, shown in the third panel, is also falling and while it remains above its long-run average on current trends it will sink below those levels by end 2024.

The RBA judges that the labour market is relatively tight. This was the case a year ago with record levels of demand for labour, via the job vacancies survey. The trend now is towards a free-fall in labour demand which points to yet higher unemployment in the next six to 12 months.

The pace of economic growth, inflation and trends in the labour market are a reliable guide to the growth in tax revenue. During the period in the immediate aftermath of the pandemic lockdowns when the economy was super strong, the unemployment rate was at a multi-decade low and wages growth was lifting, annual growth in tax revenue was above 10%. This growth is now below 5% and falling as all segments of tax revenue subside in line with the soft economy.

Given that Australia is one of the world’s largest efficient producers and exporter of commodities, commodity prices play a vital role in its economic performance.

While the level of commodity prices is still solid, there has been a 27% fall in the RBA index of commodity prices since the mid-2022 peak as the global economy generally – but, in particular, China – has slowed. This is undermining national income, capex and growth.

Bad debts are the most lagging of lagging economic indicators. People defer and then default on debt repayments when all other avenues of financial repair and remediation have been exhausted.

While the level of bank non-performing loans is lower than during the financial crisis and peak-COVID, it is increasing at a sharp pace and is signalling not all is well in the economy as interest rates bite.

So there you have it.

A "hot" economy that might need yet higher interest rates in the months ahead?

Hhhmmm… it looks like the RBA is misreading many of its own charts.

More news on the cooling in inflation.
Wages up just 0.8% in Jun qtr.
Last four qtrs: 1.3%; 1.0%; 0.9% & now 0.8%.
NAB survey - lower buying & selling prices for business & a drop in capacity utilisation.
Inflation has been beaten.
RBA needs to cut rates.
My Two Minute Take pic.twitter.com/abvgvkh3fG
— Stephen Koukoulas (@TheKouk) August 13, 2024

Stephen Koukoulas is an IA columnist and one of Australia’s leading economic visionaries, past Chief Economist of Citibank and Senior Economic Advisor to the Prime Minister.