The RBA Governor and Federal Treasurer walk into a bar…Okay, it wasn’t a bar. And it may be less of a laughing matter and more on the serious side, when Governor Lowe and Treasurer Frydenberg get all chummy at a joint press appearance. Which is exactly what happened recently.
One can only guess at the conversations and circumstances that led to the rather odd media pairing at the beginning of July. However, the two did talk beforehand, during what was described as a “very productive and constructive” meeting, by the Federal Treasurer.
Details of what exactly was discussed remained somewhat vague however, with Mr Frydenberg giving little away; “We discussed issues relating to the domestic and economic outlook.”
One would hope that topic was high on the agenda, as both the Reserve Bank Governor and Federal Treasurer are meant to be pulling for the same team. That is, Australia’s economic wellbeing.
Cut us some slack
One thing is fairy certain; Mr Lowe no doubt pointed to the rather large and obvious elephant in the room. That is, what happens now that the RBA doesn’t have much more slack in official interest rates? Or, to put it another way, less ways to manage the entire nation’s fiscal health than you can count on one hand. Literally!
The central bank was forced to cut rates by .25 basis points in June and then again in July, to an all time low of 1.00%, the first back to back rate cut we’ve seen in around 7 years.
In the past, this type of rate cut has pushed property markets into overdrive, as asset rich homeowners looking to upgrade or downsize their digs and acquire housing investments, have taken advantage of the “cheaper” mortgage environment.
This time, there’s definitely been a resurgence across our major housing markets, but nothing of the kind we witnessed a few years ago. And certainly not in the area of construction and new building approvals.
Now, it’s all Lowe and his RBA comrades can do, to use what little interest rate ammo they have left in an attempt to stimulate additional spending, and stop the economy from stalling altogether.
What’s the point?
…May have been one of the more philosophical fiscal questions Lowe put to Frydenberg during their closed door meet up. Specifically, the point of lowering rates to stimulate spending and help the economy, when cost of living continues to soar, despite;
- Real wage growth slowing considerably over the past decade. According to data from the ABS, real wages increased by an average of just 0.5 per cent annually in the five years to November 2018, and an average 1.8 per cent in the previous five years to November 2013.
- Aged workers and retirees making diddly squat when it comes to returns on their investments, and;
- A lack of sufficient employment opportunities for new university graduates.
It seems this has become a far bigger problem than what the RBA can handle alone. Which could be reason for the subtle, yet somewhat desperate glances the independent regulator has been shooting at the federal government, hoping for a little more fire under their fiscal policy making.
So, how exactly is the government – and other regulatory bodies for that matter (where’s APRA all of a sudden?) – responding to the RBA’s call to arms?
The bigger picture problem…in a nutshell
Obviously when interest rates threaten to fall below 1.00 per cent, it’s difficult to be optimistic about the overall economic trajectory.
Even though this recent public relations pairing was intended to give the impression that everything is well with the world and government officials are all on the same page when it comes to Australia’s economy, it’s not really clear what page that might be.
Does our economic forecast call for sunny days ahead, or a Titanic type disaster? And if the latter scenario is looming, who will step in and save us from the sinking ship?
Right now, the main concern for the RBA is unemployment. Or rather, underemployment.
Unemployment figures on their own don’t look too bad. Quite stable in fact when you consider they remained steady at 5.2 per cent for April/May, with a record 66 per cent of Aussies either in work or looking for it at that time.
During a recent ABC interview, chief economist at BIS Oxford Economics Sarah Hunter said, “On a trend basis, growth in full time employment remains robust – the economy has added 266,000 full-time jobs over the last 12 months.”
She adds however, “The vast majority of jobs created were part time, and as a result, the underemployment rate ticked up again, to 8.6 per cent.”
In other words, the increasing trend of underemployment – where those engaged in the workforce simply cannot find sufficient hours to boost their household income to meet their monthly expenses – seems to be skewing the statistics.
More than one million Australians fall into the category of underemployment. Of that number, almost half have been actively seeking more hours of work for over a year, indicating just how long this issue has been brewing.
The problem is of course compounded for younger generations and in particular, university graduates entering the workforce with their shiny new qualifications.
Almost 18 per cent (or approximately 400,000) of 15 to 24 year olds, are struggling to secure sufficient employment.
What to do?
With only four bullets left in the interest rate chamber before monetary policy sees official rates slashed to a big fat zero, it makes sense for Governor Lowe to seek some much needed assistance from his mate in Canberra.
After all, the federal treasurer has a little more up his sleeve to work with, such as spending and tax cuts, to boost the economy.
Governor Lowe started directing more pointed comments toward the need for Mr Frydenberg and his team to help the Central Bank out in June, stating, “There are certain downsides from relying on just monetary policy… as a country, we should be looking at other options to reduce unemployment.”
He followed that up in July with this statement; “Over recent times I have been drawing attention to the fact that, as a nation, there are options other than monetary easing for putting us on a better path.”
At that stage, he spoke specifically to greater infrastructure spending and fiscal support from the government, as a potential way out of the problem.
Things seemed friendly enough at face value during the pair’s public meeting. Both Lowe and Frydenberg managed to agree on the fact that our overall economic fundamentals remain sound, with Australia in its 28th consecutive year of growth.
But it’s obvious that moves like the government’s promised $1080 tax offset to middle income earners, is simply not enough to assuage the RBA’s ongoing concerns over our economy, if more immediate and direct action is not taken to address underemployment and stimulate spending.
Ultimately, Lowe and his mates at the Reserve Bank really just want the same thing all of us do – for Mr Frydenberg and his colleagues in Canberra to pull their proverbial fingers out and give them a hand.
The Treasurer is holding the public purse strings after all. Maybe if they were loosened a little to encourage employment in particular, we’d see a much needed surge in the economic trajectory.
Logically, if people are not working enough hours and generating sufficient income, they’ll be far more cautious around how and where they spend their money. Such a prolonged stall in consumer sentiment is most definitely not what the interest rate doctor ordered right now.
About the Author
Since 2008, David Thomas has built a business aimed at servicing the needs of property investors, owner occupiers and small business owners. David is recognised as one of the top 10 independent mortgage brokerages in the country, David and his team have settled almost billions of dollars worth of residential and investment loans over the last decade.
Known for his straightforward, relatable style, David believes by educating people about property funding; they fare better in the market. By sharing his expertise openly, some of the people he educates will likely become his clients. It's a win-win approach.
David Thomas is a credit representative (Representative Number 506153) of BLSSA Pty Ltd, ACN 117 651 760 (Australian Credit Licence 391237).