Chief economist update: A prelude to a rate cut?

Could it be? Could it be that the Reserve Bank of Australia (RBA) is now pondering the likelihood that the next move in interest rates is down rather than up?

In early June this year, I put forth a thesis that long stretches of steady interest rates have been followed by a rate reduction ... despite a prior "statements" of optimism from the RBA on each and every occasion.

Fast forward to 6 December 2018 - a couple of days after the RBA added another month to the length of time it has kept interest rates unchanged at 1.5% since August 2016 - and RBA deputy governor Guy Debelle's hinting a down move on interest rates.

In his address to the Australian Business Economists Annual Dinner in Sydney yesterday, Debelle said: "The Reserve Bank has repeatedly said that our expectation is that the next move in monetary policy is more likely up than down, though it is some way off. But should that turn out not to be the case, there is still scope for further reductions in the policy rate. It is the level of interest rates that matters and they can still move lower."

Not only that, Guy also talked about QE: "QE is a policy option in Australia, should it be required." This may be because he talked about the "lessons and questions from the GFC." Then again, it could also be because RBA is now weighing its countercyclical options.

The recent arrest of the Huawei executive in Canada has just upped the ante on the US-China trade battle and adds to the list of challenges the world faces. One that's voiced out by IMF managing director Christine Lagarde:

"There is that concern about trade...rhetoric and tariffs ... the "uncertainty over how this is going to be resolved, which is weighing on the optimism of markets."

But we don't need Christine to tell us what is already a known known. The stats speak for themselves:

While the lead from the Markit PMI shows the US economy still up there in terms of economic expansion, the yield curve brings not so good tidings.

Not surprisingly, commodity prices have been dropping. The Thomson Reuters/CoreCommodity CRB Commodity Total Return Index has fallen by 4.8% this year to date.

The slowdown in China and the decline in commodity prices isn't good news for Australia. Were it not for the RBA's forward guidance the "next move in interest rate is likely up than down," the Australian dollar would have adjusted to a lower level than it currently is ... and thereby, act as a shock absorber to the global shocks buffeting the domestic economy.

The disappointing National Accounts - where GDP slowed to an annual rate of 2.8% in the September quarter (from 3.1% in the previous one) - bears this out with exports contributing zilch to third quarter GDP. Sure, the contribution from net exports was positive 0.3 percentage points but this resulted entirely from the 1.5% quarterly decline in imports - itself, a negative because it underscores the weakness in the country's domestic demand.

Household consumption's contribution to GDP growth declined to just 0.2% in the September quarter from 0.5% in the June quarter, and private investment subtracted 0.1 pps after recording no contribution in the previous quarter.

Whatever growth in consumer spending is there is due to households dipping into their savings...

...because growth in wages continue to be lacklustre.

Stagnant wages growth and the negative wealth effect from falling equity and property prices don't bode well for consumer spending going forward.

The S&P/ASX 200 index is down 6.2% this year to date and CoreLogic's "5 city capital aggregate" home value index has fallen by 5.7% in the year to November.

I don't know if anyone out there still believes in the "Taylor Rule" but plugging in the recent domestic data - growth, inflation, interest rates - required by the rule in calculating the "appropriate level" of nominal interest rates in Australia, the Taylor Rule says, the official cash rate should be at 1.375%.

Read more: USGDPChinaGuy DebelleHouseholdQETaylor RuleASXAustralian Business EconomistsCanadaChristine LagardeCoreLogicearly JuneGFCHuaweiIMFMarkit PMINational AccountsReserve Bank of AustraliaS&PSydneyThomson Reuters/CoreCommodity CRB Commodity Total
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