SPECIAL REPORT: Australia's Economy and the RBA

Australian Private Sector Activity remained in contraction for the fifth straight month and Manufacturing flat-lined. According to the latest Judo Bank PMI data just released today.

The Judo Bank Manufacturing PMI managed to edge up from contraction to just 50.1. This was largely due to some rebound in exports. Partially driven by China’s re-opening. Nevertheless there appears little to no momentum in the sector at the current moment.

Overall Private Sector PMI moved up to 49.5, but confirmed a full five months now in contraction territory.

As expected un-employment in Australia moved higher last week. I say as expected as I always sought to highlight that un-employment only appeared low due to the Covid driven low immigration and travelling/student worker levels. As these aspects of travel return to normal, the true state of un-employment will continue to be seen to be higher.

The distortions in the Australian economy remain extreme and point only to Recession. We were previously forecasting a ‘Surprise Recession’. This was because at the time no one else foresaw such a scenario. Now the view has become more common place, we can simply refer to it as the coming Recession.

Whether we see the consecutive quarters of negative growth to generate a technical recession is beside the point that a severe slowing is now underway. And has been for some time.

Much of this is to do with previous government stimulus measures and the keeping of interest rates near zero for far too long and the ridiculous quantitative easing seen in this country. Conducted by the RBA, QE was merely conducted to be doing what the Federal Reserve was doing? There was no real justification regarding the Australian economy situation.

The current criticisms of the RBA are missing the biggest point of all. They focus largely on the recent hiking cycle. They miss the long history of ineptitude.

More than any other bank or commentator in Australia we have the right to attack the RBA on this point. As I was highlighting in real time that the RBA was making huge errors in June 2021. That inflation would climb as elsewhere in the world, something the RBA said specifically would not happen, and that they should be raising rates gently immediately so as to avoid having to chase inflation aggressively at a latter stage. Unfortunately my view at that time has proven remarkably accurate. The RBA is indeed hiking far too aggressively and far too late.

This is a catastrophe for the Australian economy and property markets.

Yet, to criticise the RBA for these current hikes is really for many to simply talk their own books. It is entirely false to believe only declining rates are good monetary policy, and raising rates is bad policy.

Rates should be hiked when inflation is over heating in a demand driven economic period. This is not however a demand driven cycle that we are now in. Employment was never as strong as it appeared post-Covid and the private sector is in contraction for the fifth straight month.

Raising rates in the current situation only adds pressure to an already stumbling economy. With limited impact on inflation which has already been allowed to run free. The RBA left the gate open, and didn’t even begin the chase until inflation was out of sight. Shooting into the air now will do little to help, though raise rates it must in any case to get back to at least neutral. Knowing the RBA for who they are, they will probably raise rates another four times. If allowed to remain in their armchairs.

The truly big miss by the current attack on the RBA however, is the failure to recognise just how big a failure this institution has been for a very long time.

The RBA was the only central bank in the world to raise rates during the GFC. It did so three times. Then panic slashed to make up for sending NSW and Victoria into recession at the time.

To attack the RBA just on its bizarre, again a no idea central bank, forecast of no rate hikes until 2024, and its current hike cycle is to give the institution a free pass on over a decade of confirmed incompetence where even the OECD recommended a full review of their performance some two years ago.

The Australian economy is largely struggling because it was over-stimulated during Covid and interest rates were kept low for a ridiculous amount of time. This sucked forward future economic activity into that period. Hence the boom. Where we are now is that artificially created desert.

I said all this in real time at the time. This is not hind sighting. This is not something which as Governor Lowe could not be known at the time. It was in fact all clearly visible to anyone who is capable of looking forward. The RBA spends all of its time looking backward at data, and lacks the imagination or economic skills to read the tea leaves as all great central bankers have.

The Governor and the institution of the RBA have failed the Australian people badly. The highest paid central bankers with the poorest performance is some kind of record.

The financial community is to some degree complicit in its long reverence to the RBA. Rather than maintaining a robust critique of the institution as is done in every other healthy western nation in the world.

Australia deserves world class financial markets. This necessitates a healthier and objective debate regarding the RBA than has occurred in the past.

Federal government policies must recognise that we are now in a prolonged period of subdued economic activity. An essential part of the remedy requires immediate invasive surgery of the RBA, due to the poisons mixture of self-importance and Peter Principle.

It is the Australian people, families and the economy that are suffering from this roller-coaster economy that did not have to happen.

Clifford BennettACY Securities Chief Economist

The view expressed within this document are solely that of Clifford Bennett’s and do not represent the views of ACY Securities.

All commentary is on the record and may be quoted without further permission required from ACY Securities or Clifford Bennett.

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