Chief economist update: Lower rates still fail to animate

Uh-oh...we might be getting in trouble now.

Not only are Australian households not lifting their spending despite the drop in the official cash rate to a record low 0.75% but it's looking a lot like businesses aren't too.

The Australian Bureau of Statistics' (ABS) Private New Capital Expenditure and Expected Expenditure, Australia, Sep 2019 report showed actual total new private capital spending fell by 0.2% in the September quarter, a bit better than the 0.6% decline in the June quarter, but still worse than the "relatively" upbeat expectations of no growth, marking the third straight quarterly contraction in capital investment.

Year-on-year, the contraction in actual total new private capital expenditure quickened to minus 1.3% in the third quarter from minus 1.0% in the second - also marking the third straight quarter of year-on-year decline.

More worrying, growth in expected capital expenditure has slowed markedly to 3.2% in the year to the September quarter, down from 12.8% in the June quarter and 12.3% in the March quarter. Recall that the RBA announced the first of its three rate cuts (so far) on the 4th of June.

Perhaps, the RBA is correct in its optimism that, "one day my prince will come", and eventually the lagged effects of monetary policy will flow through into the general economy.

However, given the prevailing sense of uncertainty in the global economy (despite recent optimism over a US-China trade deal and indications of a bottoming in global manufacturing activity) and the persistent weakness in household spending (due to the high level of household indebtedness), perhaps not.

Former RBA governor Glenn Stevens had already spoke about this way back in 2014 (mind you, that was before Trump and his trade wars and after he cut interest rates in successive moves from 4.75% in 2011 to 2.5% in 2013 before taking it even lower to what was then a fresh low of 1.5% in 2016).

According to Governor Glenn, he would cut rates "if that really would be helpful" to the economy, but "at the end of the day monetary policy can't be the engine for growth. We can help smooth out fluctuations but we can't drive growth."

"You can't make people be confident, I certainly can't."

"I've allowed the horse to come to the water with cheap funding. I can't make it drink."

And if I may add...adding more water could, instead, drown the horse.

Read more: Australian Bureau of StatisticsGlenn Stevens
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