RBA Gov Stevens made yet another excursion off the RBA’s ‘demand management’ turf in today’s speech Economic Conditions and Prospects. His message – the two-speed and low growth (and revenue) problems are an issue for the fiscal authority.
After telling the Australian Story (part of Asia, Europe only matters if it causes a financial crisis), Gov Stevens spent a goodly portion of his speech talking about productivity.
Whenever I hear a central banker speak about productivity growth, I hear ‘codewords’.
Monetary policy has almost no influence of productivity growth, so when central bankers speak about productivity, they are talking about something they cannot control.
They normally speak about things they can control, so when they do not, it begs the question – why?
For the RBA right now, productivity is both a sword and a shield. It is the sword they will brandish to explain the need for higher rates, should it arise. And until that time, it is the shield they will use against criticism that they ought to do more to help the economy.
In the case at hand, I think RBA Gov Stevens is trying to achieve three things.
First, he is trying to point out that the RBA cannot fix everyone’s problems.
The problems of Australia’s trade exposed sectors are a sort of productivity problem (competitiveness issues are not exactly the same thing, when they are caused by a 40% move in the currency), and the RBA would not be able to fix them even if they could return the AUD to ~70c. The relative price signals are too strong, and the inflation that would result from easier money and a weaker currency would leave the weaker sectors bleeding, as they lack (relative) pricing power and so would be crushed by inflation.
Second, Gov Stevens is trying to create some distance between the tepid Q4’11 GDP report and policy. Stevens did this in two ways. First, he questioned the National Accounts data, by contrasting it with a range of other indicators. Second, he linked into a discussion of productivity.
The RBA are as aware as all data watchers that the Okun-relationship appears to have broken down, due to a persistent slump in Australian productivity growth.
Taken together, the bank’s position appears to be: “we don’t rate GDP (they tightened 25bps per meeting in Aug and Nov 2006, despite the first estimate of both Q2 and Q3 GDP printing at 0.3%q/q), and even if we did, there is evidence to suggest that trend may be lower”.
Third, Gov Stevens is sharpening his sword. By talking about productivity, he is opening the narrative that will explain the need to tighten, should inflation spike despite the unemployment rate holding around current levels.
The fact is that we don’t know what the NAIRU is, and won’t have even a good guess until we have had a few years perspective. However, we do know that the balance of power has been shifted in favour of labour, and that all things equal this ought to mean a higher NAIRU.
So there isn’t much here for the doves. The RBA is digging in at 4.25% and watching the data. The next jobs report is after the April RBA meeting, so the next live meeting is May. Should the unemployment rate rise to 5.4% in the April jobs report, and inflation print below 0.5%q/q in the Q1 CPI report, a 25bps cut in May would be around even money.
But with the unemployment rate stable, and the leading employment indicators firm, that seems an unlikely combination of events. Most likely the RBA will retain their weak easing bias and do nothing – with the next move determined by the global backdrop (which by the way looks okay just now).
If Swan wants faster growth to help him with his fiscal gap, he’s going to have to do it himself. I’m sure Gary Banks would be delighted to take his call.