The Reserve Bank governor has made clear the cash rate has been increased not to reduce inflation but to make it harder to bargain for higher wages. Greg Jericho, a Guardian columnist and chief economist at the Australia Institute, writes that the RBA's bleak view that unemployment needs to rise shows it acts firstly in the interests of companies, not workers.
RBA Governor's Miserable Assessment
On Tuesday, Reserve Bank governor Michele Bullock delivered a miserable assessment of the Australian economy by suggesting the best it can do is 2% growth per year – a rate well below the long-term average and a pace that almost guarantees unemployment will rise. There was essentially no expectation of a rate rise, as the market had been forecasting rates staying at 4.35% ever since the April inflation figures showed a drop in the annual rate from 4.6% to 4.2% followed by unemployment rising to 4.5%.
Unemployment Likely Needs to Rise More
Not only was there no change in the cash rate, neither was there any change in Bullock's bleak view that unemployment likely needs to rise more. In May, Bullock made it clear the RBA was raising rates not to reduce inflation but purely to raise unemployment so that workers would worry more about holding on to their job than being able to bargain for higher wages.
If this makes you think the RBA always acts firstly in the interests of companies not workers, you are getting warm. In RBA publications, workers getting higher wages is always a worry; companies making higher profits is never bad – even if those profits are the main driver of the boost in inflation that caused the RBA to raise rates three times this year.
RBA's Curious Definition of Full Employment
In Tuesday's statement, the RBA board suggested it is focused on its mandate to deliver price stability and full employment – but remember, the RBA only regards full employment as the level of unemployment that exists when inflation is consistently below 3%. Thus, the RBA has a curious definition of full employment where in order to get there more people need to be out of work than currently.
The governor of the RBA really has one description of the current economy – excess demand. It was the motif of her entire press conference – the repeated justification for raising rates three times this year and also to warn that more rate rises might be needed. So desperate is the RBA to suggest that Australia is experiencing excess demand that Bullock suggested the economy can only grow by about 2% and that much stronger growth than that's going to cause inflation.
Historic Context of 2% Growth
Annual growth of 2% has historically been a sign of a weak economy. Now the head of our central bank says it is as good as we can do. The main reason GDP matters at all is its link with unemployment. Historically, GDP has needed to grow by about 2.5% to keep unemployment from rising. Bullock is essentially saying we should be content to have unemployment rise.
That might be fine if there were strong evidence of too much excess demand causing inflation, but there is not. Wage growth is showing no signs of soaring – let alone even an uptick due to increased inflationary expectations. In the March quarter this year private-sector wages grew at just 3.2%. If our economy can't cope with that, we might as well close up shop.
Household Spending Weak
We also know household spending was pretty weak. If it hadn't been for the big increase in spending on electricity due to the end of the government rebates, household spending in the March quarter would have grown a measly 0.3% rather than the still below average 0.5%. Worse still, households barely increased their spending on discretionary items (those things you buy when you are not feeling the pinch). The 0.1% quarterly growth was well down on the 0.6% average.
Were it not for the abnormal boost in spending in April, May and June last year due to holiday travel and people taking advantage of end of financial year sales, the level of people spending on non-essential items would be historically low.
Excess Demand in Investment?
So, I guess the excess demand is all in investment? And yes, there was a huge boost in investment … in datacentres. Please tell me the RBA is not so silly as to have bought into the snake oil that somehow all that investment – most of which has the purpose of not requiring workers – is generating actual demand in the economy? At least during the mining boom when construction soared, jobs and wages followed; the datacentre boom is a hollow show.
Market Reaction
The market did not react to Bullock's warnings that higher rates might be needed. When rates were raised in May, another rate rise seemed a certainty; now it is a less than 50-50 chance. Given the RBA's proclivity for always seeing too much economic activity wherever they look, this may change again, but for now at least the bank looks to have stopped trying to slow an already slowing economy.
