Reserve Bank steps up as our new economic managers

Who is in charge of the economic policy in Australia?

Not Treasury. It has been sidelined under its current head, the Abbott-appointed John Fraser; real economic policy power within the government resides under Martin Parkinson and his deputy David Gruen. The Fraser era will be seen, in retrospect, as the nadir of a once-mighty institution within the Australian Public Service.

Not Scott Morrison, who has struggled in the Treasury portfolio since his appointment, with only the superannuation reform win (and it was a good win) to his credit. Morrison has also struggled with the ill-founded but intense hostility of the Abbott forces (what’s left of them) within the party and a lack of support from his prime minister. Morrison being among the last to know that the budget had been shifted last year was a telling failure. Presiding over repeated budget blow-outs hasn’t helped, either.

Nor Malcolm Turnbull. In macro-economic terms, the Prime Minister is continuing the policy settings he inherited from Tony Abbott — running a substantial budget deficit and higher levels of government spending and taxing than under Labor, although Turnbull and Morrison have reined spending in from the extraordinary levels it reached at the end of the Abbott era. And Turnbull’s economic “reform” agenda is threadbare — tax cuts to the Liberal Party’s big business constituency, preferential trade deals of no actual benefit and an expensive protectionism for manufacturing. Repeated calls for infrastructure spending from the Reserve Bank and international institutions have gone unheeded. Indeed, as Labor has pointed out, the government admitted in Senate estimates answers last year that its much vaunted $50 billion infrastructure investment program in fact totals only $34 billion.

Responsibility for economic policy has thus defaulted to the Reserve Bank, whose handling of monetary policy and jawboning on issues like housing are watched with far greater interest by markets than anything from politicians or Treasury. 

And the RBA is set to offer a clear vision of the economy in coming days. The RBA’s first meeting of the year will be next week, on February 7. That meeting and subsequent statement kicks off a big campaign by the central bank to update and set the economic debate for the next few months. 

On Thursday, February 9, RBA governor Phil Lowe makes the first of two speeches in February in Sydney (the other is on February 22, also in Sydney).

 On February 10, the bank’s first Statement of Monetary Policy for 2017 will be released with updated economic forecasts (which will be directly referred to in the post board meeting statement from Dr Lowe on February 7).

And on February 16, the bank’s new head of economics, Luci Ellis, makes her first public appearance in that role on at a housing conference in Melbourne (note the topic of the conference). Minutes of the February 7 board meeting will be issued on February 21. And that’s before the first appearance of 2017 by Lowe before the House of Representatives economics committee.

So by February 23 we should have no doubt as to what the RBA thinks of the health of the economy and the direction of monetary policy. It is the first time in years that the RBA governor has opened the year with two speeches in February — so it’s plain that Lowe wants to set the agenda.

If we had to guess the tenor of the RBA’s commentary, it would be that the economy is in a much better position than many people understand — their thinking is still conditioned by the weak data from the third quarter of last year when GDP fell 0.5%, and continuing tepid jobs figures. Last week’s weak inflation figures confirm that nominal GDP growth will again be slow in the December quarter. But Australia is facing a massive boost to national income in the December quarter after our terms of trade (which is export prices over import prices) leapt 12.2% in the final three months of the year. That was almost three times the 4.5% jump in the September quarter, in which real net national disposable income rose 0.8%, up from a 0.5% rise in June quarter 2016. In fact it was the largest gain in six and a half years and the third biggest quarterly increase since Australian Bureau of Statistics records began being kept. 

This was down to coal, iron ore, gas, metals, sugars and fuels, while there was widespread weakness in import prices with only fuel prices rising modestly (though they will rise sharply this quarter). The terms of trade will ease this quarter as coal (hard coking coal prices are down 40% in the past two months) and some other commodity prices have come off the boil. But it won’t be by much as iron ore, oil and gas prices, gains and beef prices remain high. 

That’s good news for the economy and for the federal government. It also might pave the way for a long-awaited lift in wages that will in turn help both (and allow employers to go back to whining about the cost of labour, which has sounded increasingly absurd in recent quarters as wages growth has ground to a halt). But we’ll start finding out next week, when the people really in charge of economic policy let us know their thinking.