The Reserve Bank’s board meeting minutes for July paint a much more gloomy picture of the economy than the one governor Philip Lowe paints in public.
The door was left open to even more interest rate cuts due to their ongoing concern about the state of the jobs market and the lack of wages growth.
The RBA board members agreed that jobs growth needed further acceleration when they cut the cash rate to a record low to 1% at the beginning of July, but the minutes from the central bank’s latest board meeting confirmed that further rate reductions are on the table.
Since then, the latest ABS figures show that unemployment hasn’t budged from 5.2%
In fact, seasonally adjusted overall employment increased by only 500 persons in June 2019.
Digging deeper, the underlying composition of the net change was an increase of 21,100 persons in full-time employment and a decrease of 20,600 persons in part-time employment.
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What is really going on with our economy
The RBA minutes seem to contradict the positive spin RBA governor Phillip Lowe put on things when he recently met with Treasurer Josh Frydenberg and said:
“I agree 100 per cent with you that the Australian economy is growing and the fundamentals are strong.”
The Reserve Bank seems to have set itself some ambitious goals when it indicated that it wanted our unemployment rate to drop to 4.5 per cent, which they argued would mean full employment.
At that level the RBA believe excess capacity in the labour market would be soaked up, wages would start to rising and in turn this would drive inflation back up into the RBA’s target band.
This looks like quite a challenge.
The last time unemployment was that low was late 2008, and inflation has only been in their preferred range of 2-to-3 per cent a couple of times in the past five years.
The big question is – where will all the new jobs come from?
With the construction industry slowing down and retail spending languishing, it will be really hard to create the number of new jobs the RBA is hoping for.
Will lower interest rates lead to another property boom?
Some commentators are suggesting we’re on the cusp of another property boom with surging house prices.
While lower rates and more jobs will be positive for our property markets, we don’t see a property boom ahead.
Sure prices will flatten out over the next few months and then start rising gently, but it is likely property values will only rise 3% to 5% in our 3 big capital cities next year.
Of course our markets will, as always, be fragmented, so some areas will outperform the averages.
However if overall house prices do respond aggressively, this will create a policy dilemma for the RBA which doesn’t want this to occur.
What’s happening on the jobs front?
The continued flood of new job seekers has pushed the participation rate to record highs and meant solid employment growth has made no inroads into the unemployment rate (5.2%) which has actually climbed a little over recent months.
The problem is it’s unclear how the economy will produce enough jobs to push the jobless rate to 4.5 per cent, which is where monetary policymakers now reckon it needs to be before we get some meaningful and sustainable wages growth.
This means that we will also need fiscal stimulus to get more jobs created. This has begun with tax cuts and infrastructure spending. But that is unlikely to be enough to grease the wheels of industry to create all those new jobs.