Wednesday, March 03, 2010

Wednesday column: You think there's agreement around the the Reserve Bank board table?

If you can't make sense of what's happening to the economy you're in esteemed company. The Board of the Reserve Bank can't easily agree either.

The staff of the Bank represented on the board by the Governor and Deputy Governor are pretty sure. They think we're in a boom with no end in sight. Deputy Governor Ric Battellino dates the start of the boom to 2005. He told the Sydney Institute in February the global financial crisis stalled the boom for a bit but that "now that this has passed, the underlying dynamics of the resource boom are starting to re-appear". Most resource booms last 15 years, but "given the growth potential of countries such as China and India" this one could continue "for an extended period".

The staff view makes a compelling case for a continuing swift return to "normal" interest rates, defined by the Governor as a further 0.25 to 0.75 points of rate hikes beyond this one, followed by vigilance lest the boom look like getting out of control.

But there are other views and other economists on the board... Warwick McKibbin of the Australian National University has at times been even keener than the Bank's staff to push up rates. He thinks we escaped from the crisis early and did it without help from the stimulus.

The other view, quite possibly being put at the board by the Treasury boss Ken Henry, is that our apparent recovery is fragile - largely due to the stimulus and at risk as the stimulus is withdrawn.

An examination of much of the ostensibly strong economic data supports this view. The language of the Treasurer suggests he believes it.

The economic growth figures out today are expected to be strong in part because of the very strong growth in spending on capital equipment by business in the December quarter reported Thursday.

In volume terms business capital expenditure jumped a very respectable 5.5 per cent. But examine where the money was spent and the growth looks dodgy. Capital spending by business grew the most in the Australian Capital Territory, by an extraordinary 25 per cent. That's right capital spending by businesses grew the most in the city-state that houses our parliament and the public service, a place normally thought of as being almost industry-free. It grew the second most - by 22 per cent - in the Northern Territory, another region normally thought of as almost industry-free. In the mining powerhouses of Queensland and Western Australia it actually fell.

Look for an answer and you can't go past cars. Among the "industries" reported to be boosting their capital spending are real estate, travel, and the arts. So hard its it to think of how they might be tooling up that the Bureau of Statistics went back and looked at the uncoded answers on the forms its researchers fill in and found a preponderance of mentions of cars.

When it asked why it was told they were rushing to take advantage of the government's end of year business investment tax break.

Industry figures show business purchases of passenger cars jumped 36 per cent in the quarter. Business purchases of four wheel drives soared 43 per cent.

The 48,000 extra passenger cars and the 25,000 extra four wheel drives bought by businesses are real investment alright and who knows, they might even make those businesses more productive. I might feel better about buying an expensive house from a real estate agent with an expensive car.

But they are investment that won't keep growing. The special tax break ended on December 31. It's no longer propping up economic growth.

The import figures are also misleading as sign of strong demand. Commsec believes as much as 70 per cent of the strong 7.7 per cent lift in exports in the quarter was due to motor vehicles.

Take away the stimulus - and it is being taken away - and its hard to find evidence of a boom.

Since it was introduced after the collapse of Lehman Brothers in late 2008 the First Home Owners Boost pushed up the number of new private houses built per month from 7500 to 9600. We learned yesterday that number stopped growing when the boost ended in December.

So important has the stimulus been in the mind of the Treasury that without it it believes the economy would have shrunk 2 per cent in the year to September instead of growing an anemic 0.6 per cent.

The Reserve Bank declared in its statement yesterday that "growth in the economy may have already been at or close to trend for a few months."

Trend is about 3 per cent per annum.

Asked whether he believed the Bank about a return to trend the Treasurer replied, "it depends who you talk to".

"If you are in resources the outlook is quite bright, there is no doubt the economy is strengthening," Mr Swan told a crowd gathered in a Parliament House courtyard within minutes of the Bank's announcement. "But if you see some of the data, parts of the economy are still soft. It depends where you are in the production chain and what industries you are in."

"I'm still cautious if you like. I am confident but I am certainly not complacent."

In fact he's probably worried.

Two more of the stimulus props holding up the economy were removed in February. The Green Loans program was axed and the home insulation scheme suspended. Unless the economy is genuinely picking up the tradespeople who lose their jobs will push up the unemployment rate. The upward momentum in confidence will stall. What's left of the stimulus won't help much. Most of the measures are medium-term rather than helpful right now.

The Treasury's fear is that we'll soon be on our own. Entranced by thoughts of a continuing boom, the Reserve Bank isn't much worried.

Published in today's SMH  and Age 

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