Chief economist update: What's the RBA waiting for?

The Sino-Yankee trade war, the slowdown in the global economy and more recently, the Brexit fiasco have all had a negative bearing on the Australian economic outlook.

This is no better depicted than by the recent National Accounts update showing the slowdown in Australian GDP growth - to 2.3% in the December 2018 quarter (the slowest since the September 2016 quarter) - from 2.7% in the third quarter of last year which, itself, slowed from 3.1% in the second quarter.

Sure, this is ancient history - outdated estimates of days gone by - but more recent updates on the trajectory of the Australian economy remains ominous, if not outright disastrous.

Indicators released this week - retail sales, business confidence and conditions, consumer sentiment, lending to households and businesses - all but confirm the weakening trend in the domestic economic activity. Add to this the worsening out for the property market, underpinned by the continuing decline in the HIA new home sales stats the week before - down by 18.4% in the year to January that followed a 14.9% slump in the previous month.

Certainly, along with the persistent anaemic growth in wages, these would put more downward pressure to still below target inflation - the average of the trimmed mean and weighted median measures of CPI slowed to 1.75% in the December 2018 quarter from 1.80% in the previous quarter.

So what's the Reserve Bank of Australia (RBA) waiting for? Why doesn't it cut interest rates, and cut it now?

I could only surmise that the reason is because the Australian central bank doesn't want to be seen that it's kowtowing to the dictates of the financial markets or that it's panicking over the deterioration of the domestic economy.

In fact, the March RBA statement remains filled with optimism: "The Australian labour market remains strong."; "The central scenario is still for the Australian economy to grow by around 3% this year." Note: It cut its 2020 growth forecast to 2.75% from 3.25% in the February Monetary Policy Statement.

However, the labour market is generally considered a lagging indicator and given the on-going weakening in business activity, hiring would start shrinking sometime soon. This is indicated by the back-to-back year on year decline in the ANZ job ads series - down by 4.3% in February after declining by 3.8% the month before) - which leads the growth in employment by around three months.

If Australian consumers haven't been spending much despite decent labour market growth, what happens when the labour market turns down?

I turned optimistic when the RBA changed its stance from tightening to neutral, hoping that it would be enough to turn sentiment around and take the A$ lower - itself an equilibrating force on the economy - but they have not?

But it has not. The RBA must act and cut interest rates soon.

Just as the RBA - and most other central banks - justify their decisions to raise interest rates, along the lines of, an early rate hike would reduce the necessity for even bigger increases in interest rates in the future - the opposite must be true.

The longer the RBA waits before cutting interest rates, the stronger the economy's weakening momentum grows, the bigger the rate cut the RBA needs to reverse what is gradually becoming a self-fulfilling prophecy of gloom.

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