In economics, as in most areas of life, no news is entirely good or entirely bad.
The renewed vigour of the currency in recent months has frustrated hopes of a competitive boost for non-mining exporters and import-competing businesses.
But as the Government, the Reserve Bank of Australia and business groups fret over the sustained strength of the dollar (which has been above US90 cents for the last six weeks), it has also been working – along with tepid global growth – to help hold the cost of imports down.
This is made clear in the breakdown of inflation figures between tradable and non-tradeable items.
The cost of tradeable goods and services – that is, those items whose prices are largely determined on the world market – rose by 0.4 per cent in the March quarter. While the cost of fuel, tobacco and medicines all went up, these rises were offset to a considerable extent by cheaper furniture, clothes, shoes (thank you, Boxing Day sales) and overseas holidays.
In the same period, the cost of goods and services whose prices are largely determined by the domestic market, climbed by 0.7 per cent, driven by rising electricity charges, a seasonal jump in school and university fees, and annual cut in the percentage of patients qualifying for Medicare and PBS subsidies.
The ace in the hand for the RBA as it contemplates the official inflation numbers is that wages growth is being held well in check by soft economic conditions and elevated unemployment. The Wage Price Index grew by 2.6 per cent in the year to the December quarter.
While an underlying inflation rate of 2.65 per cent is above the mid-point of the central bank’s 2 to 3 per cent target band, there is little in the March quarter CPI figures that are likely to surprise or alarm the RBA.
Combined with the fact that wage pressures are moderate, and the possibility that the currency may stay higher for a little while yet, there is nothing in the inflation data to suggest the RBA Board needs to begin pushing up interest rates yet.
Some of the CPI detail:
Headline inflation: up 0.6 qtr/2.9 annual
Underlying inflation: up 0.55 qtr/2.65 annual
Tobacco – 6.7
Secondary school – 6
Medicine – 6.1
Fuel – 4
Vegetables – 3.3
Electricity – 1.4
Main falls(%) Furniture – down 4.3
Clothing and footwear – down 2.1
Internat. and domestic travel – down 2.4
As economists are often wont to say, the March labour market figures are decidedly ‘noisy’.
The unemployment rate is down (a 0.2 percentage point drop to 5.8 per cent), but so is the participation rate (also slipping 0.2 of a percentage point to 64.7 per cent.
So, jobseekers were more successful last month, but there were proportionately fewer of them.
In addition, the Australian Bureau of Statistics tell us, more than 22,000 full-time jobs were lost, offset by the addition of more than 40,000 part-time positions, to push the aggregate hours worked in the month up by eight million.
A review of recent jobs data shows these numbers have been volatile. Until last month, the unemployment rate seemed to be on an inexorable rise. After hovering around 5.7 to 5.8 per cent for most of the second half of 2013, it climbed in quick succession to 6.1 per cent by February.
Over the same period the participation rate slid down to a seven-year low of 64.5 per cent (in December 2013) before jumping to 64.9 in February and settling a little lower last month.
The trend measure, which is offered as a way to ‘see through’ the monthly volatility, says the unemployment rate held steady last month at 6 per cent, and the rate of increase has slowed and may be levelling off.
Looking at the labour market through the prism of demand for workers, the ANZ job ads series suggests more employers are looking to add staff, which would be a concrete vote of confidence that better times lie ahead.
Turning points in indicators of economic activity often seems to be characterised by a period of volatility before a definite direction asserts itself, much like a sail that momentarily flaps in the breeze as a ship changes tack.
Often such turning points only become really apparent with hindsight.
But other evidence suggests that jobless rate might not have much further to climb, bringing the prospect of an interest rate hike into sharper focus.
Retail sales are firming (strong monthly gains in December and January were consolidated in February), building approvals are up more than 23 per cent from a year earlier, and business conditions and confidence are improving.
But the recent appreciation in the exchange rate (the Australian dollar surged to US94.3 cents following the release of the jobs data) is a clear risk for the RBA, which has been keen to see the currency lose much of its altitude.
Today’s activity shows the currency markets are primed to exploit even the hint of an increase in the interest rate differential between Australia and the US, where confirmation by the Federal Reserve of a US$10 million cut in bond purchases under the quantitative easing program saw the greenback lose ground.
The stronger $A will also hamper the shift in the economy away from resources-led activity toward other sources of growth, possibly prolonging the nation’s lacklustre GDP performance.
A turn in the labour market, if that is what this proves to be, is unlikely by itself to convince the RBA Board to hike rates – particularly while wage inflation appears so tame.
A more probable prompt for a rate rise would be increasingly uncomfortable signs of heat in the housing market, particularly credit growth. So far, the warning signs on this front are amber, rather than flashing red.
The financial regulator has warned that continued Government cost-cutting could “ultimately compromise” the safety of the financial system.
In its submission to the Financial System Inquiry, released today, the Australian Prudential Regulation Authority (APRA) unsurprisingly expressed satisfaction with its performance.
But, as the Federal Government talks up the prospect of a slash-and-burn Budget next month, the regulator warned that cuts to resources can come at a heavy cost.
APRA said that in recent years the previous Government’s so-called “efficiency dividend” demands had made things increasingly difficult for the agency, which had to compete with a strong private sector to retain talented and experienced staff.
“The mechanism of efficiency dividends is not well-suited to an industry-funded agency,” APRA said. “Continued efficiency dividends will ultimately compromise financial safety but make no contribution to the Government’s budgetary objectives.”
In its, submission, also released today, Treasury warned of the threat to effective financial market supervision from a blurring of the lines of responsibility among the key regulators.
Treasury said the current regulatory framework was sound, with only improvement “at the margin” needed.
In a swipe at those in the finance industry chafing under more stringent international standards, like Basel III’s highly prescriptive rules, Treasury said Australia, as a significant capital importer, had little scope to ignore such developments.
In fact, the department said, many such reforms would bring regulatory standards in other jurisdictions closer to those in Australia.
But it also acknowledged problems in current arrangements, including the distortions caused by the Commonwealth’s guarantee for bank deposits, which not only create moral hazard, but give the major lenders a clear competitive advantage.
And Treasury warned of the danger that the clear demarcations that had existed between APRA and the Australian Security and Investment Commission (ASIC) were becoming blurred, undermining the effectiveness of the regulatory framework.
“Recent proposals for ASIC to take on quasi-prudential functions following the collapse of Banksia illustrate the difficulties in maintaining clear demarcations in the fact of changing products and market structures,” Treasury said.
In a fillip for SMSFs, the department endorsed the current policy approach of relatively low levels of regulation and oversight by the Tax Office to ensure compliance with taxation law.
Taking unfashionable positions seems to be part of the job description for central bankers.
And the Reserve Bank of Australia was at it again yesterday.
The Abbott Government has been trying to endear itself to the business community by talking up its campaign to slash red tape, headlined by its so-called Repeal Day on March 26, when 10,000 pieces of legislation and regulation were put on the chopping block.
Few would quibble with the move to get the Dried Fruits Export Charges Act 1927, which set a levy of one-eighth of a penny for each pound of dried fruits exported, off the books.
But, as the RBA pointed out in its submission to Financial System Inquiry, the mania to be rid of regulation must have its limits.
Reflecting on the nation’s ability to endure the global financial crisis in much better shape than most other major developed economies, the Reserve Bank said Australia’s “sound prudential framework” had served it well, and saw no need for major change to current arrangements.
Many in the finance sector chafe under what they see as the unfair regulatory burden and capital requirements placed on Australian banks in complying with the terms of the international Basel III rules.
The rules were developed to help reduce the vulnerability of the global financial system to future credit shocks, including by increasing capital adequacy requirements for banks.
While the RBA and APRA are among those who successfully argued for some leeway in applying the new standards to take account of different business models and operating environments, Australian banks have nonetheless – like their overseas counterparts – had to increase the amount of capital on hand to help offset liabilities.
Often, regulation is seen as a dead-weight cost without any perceptible redeeming benefit.
In this it is like investing in education with the aim of boosting national productivity – the upfront cost is all-too apparent, while the pay-off is distant and rather nebulous: you know that a better educated and higher skilled workforce will be more productive, but credibly quantifying the effect is difficult.
That is why there was some benefit out of the gloom caused by the GFC. As the RBA said in its submission, it showed “that the costs imposed by effective regulation and supervision are more than outweighed by the costs of financial instability, even if that differential only usually becomes apparent after prolonged periods”.
That is, financial crises only happen every now and then, but when they do, the insurance of a robust financial system is worth the regular but relatively small cost of regulation.
In keeping with this “nothing good comes for free” theme, the RBA also backs the idea that the banks be charged a fee for the protection to depositors provided under the Financial Claims Scheme.
One of the key lessons the central bank draws from the GFC is that “the financial cycle is still with us”, meaning that risks have to be managed.
In its submission to the inquiry, the RBA made a number of other noteworthy observations and recommendations.
While much attention in recent years has been on competition in the mortgage market, the central bank said competition in small business lending was much weaker and deserved greater attention.
It also warned politicians off the idea of forcing superannuation funds to invest in certain sectors or asset classes, and questioned whether or not the fees and costs charged in managing retirement savings were reasonable.