The RBA neutral rate at 3.5% per annum may be appropriate, but their comments around the “recent strong run of employment data” are misleading
In the past three years, our underutilisation* rate has oscillated between 13.9% and 15.7%. The recent run of data took us from 15.3% in January this year to 14.0% in May. However, underutilisation fell from 15.4% in January 2016 to 13.9% in May 2016, and from 15.7% in January 2015 to 14.1% in May 2015.
Underutilisation anywhere in this range is more than we have seen since the 1990s, when it peaked at 18.2% and took five years to recover. Total hours worked in the economy jumped in May’s data, but that is the only recent meaningful increase. In fact, hours worked has not kept up with working age population growth for the past five years. It is still 0.5% below population growth despite May’s one off jump.
The reality is that conditions are not improving – they have stagnated since the end of the mining investment boom.
Moreover, Australians have borrowed more in recent years than any time in the past 20 years. We previously estimated the weight of this borrowing would push GDP growth down by 1-1.5% per annum over the next five years. Any increase in interest rates will hurt our economy’s consumer spending – which is around 65% of total GDP – especially considering our very low wage growth and record high household debt levels.
The RBA is again guilty of looking in the rear vision mirror to predict what is in front of us, combined with governor Philip Lowe’s strong optimistic bias. His comments that the solution to wage growth declines was for “everyone to ask their boss for a pay increase” is out of touch with an economy producing less work than it has since the mid-1990s. We should see slightly better wage growth in the July quarter due to higher minimum wage increases than last year, but minimum wage legislative increases do not equate to a healthier employment market.
Yesterday’s bullish comments, clearly trying to boost optimism, will really only serve to increase the AUD for a while – hurting employment.
The neutral rate is now estimated to be 3.0% to 3.5% depending on whether you listen to CBA or the RBA. Personally, I think CBA is closer, but either way it is going to be a very slow path back toward that rate.
*Underutilisation is ABS’s measure that combines unemployment (worked no hours) and underemployment (worked at least 1 hour but wanted more)