Last week’s release of Australia’s September quarter national accounts has left policymakers grappling with the harsh reality of a low-growth economy coupled with persistently high inflation.
While the Reserve Bank of Australia (RBA) had forecast slow growth, the actual figures came in below expectations, while inflation remained strong, leading to concerns about policy efficacy.
Namely, Australia’s GDP grew by 0.2 per cent in the third quarter of 2023, below market expectations for 0.5 per cent growth over the quarter and down from 0.4 per cent growth in Q2 2023.
The RBA’s response to the inflationary pressures has since come under scrutiny, while fiscal policies, particularly at the state government level, are also facing criticism for not providing adequate support.
Commenting on the recent data, GSFM’s investment strategist, Stephen Miller, said the depicted picture partly reflects shortcomings in policy formulation.
“The RBA bears some, but certainly not sole, responsibility for this by showing too great a tolerance for inflation, at least early on in the inflation upswing. Fiscal policy, mostly at the state government level, has not helped, while any propensity for governments to initiate meaningful structural reform is a memory from decades ago,” Mr Miller said.
Touching on the RBA’s recent policy rate hike in November and its potential to soothe inflation, Mr Miller argued that it may not be sufficient to address the underlying challenges.
Namely, he pointed to elements of the national accounts, particularly with respect to labour cost growth and productivity growth and said they “remain portentous” of some continuing challenges to inflation containment.
Reflecting also on the RBA governor’s statement following the most recent 5 December board meeting, in which Michele Bullock emphasised the need for increased productivity growth to align with wage increases, Mr Miller said this is “a critical assumption”.
“Despite some signs of a recovery in productivity in the September quarter, the assumed ongoing pick-up in productivity growth remains a critical assumption,” he noted.
“By retaining a moderate tightening bias, the RBA seems to implicitly acknowledge the challenge of getting unit labour cost growth down via productivity growth, albeit that the tightening bias is conditional on how economic data may unfold and any attendant risk assessments based on that data.”
In a context of heightened global and domestic uncertainty, Mr Miller deemed the tightening bias and the articulation of conditionality “entirely appropriate”, emphasising that the prevailing risk balance suggests that inflation could potentially prove more challenging to manage.
Mr Miller also highlighted the global consensus among central bankers on the structural factors contributing to persistent inflation, such as the waning globalisation of labour and goods markets, increasing domestic market regulations, and declining baby boomer workforce participation. In Australia, however, the situation differs somewhat, he said, with the country’s high immigration rate offering a mitigating factor in the longer term, although short-term inflation risks from housing pressures due to immigration exist.
As extant as these risks are, however, Mr Miller said “there are some going the other way” with risks that any slowdown and attendant disinflation obviates the need for further monetary tightening.
Looking ahead, Mr Miller said the RBA’s February board meeting is anticipated to be a crucial juncture.
“The September quarter CPI released on 31 January looms as a key staging post in determining whether another policy rate hike is appropriate.”
Other economists share Mr Miller’s projections for February, with AMP’s Shane Oliver noting last week that the risk of another rate hike remains high at around 40 per cent – and if it occurs, it will be at the February meeting.
Similarly, Westpac’s chief economist and former RBA assistant governor Luci Ellis said the February meeting should still be considered “live” because the RBA clearly has no more tolerance for further delays in the return of inflation to target.
Given that in her post-meeting statement, the RBA governor underscored that the board’s foremost priority is to achieve the timely return of inflation to target, she certainly did keep the possibility of additional rate hikes on the table.
