Misery Unseen Since 2008 in Australia Challenges RBA: Economy

A deepening gloom across the largest developed economy to escape recession during the global financial crisis is shaping up as one of the toughest challenges yet for Reserve Bank of Australia chief Glenn Stevens.

Australia’s misery index -- the sum of unemployment and inflation rates -- is at 9.0, the highest since 2008, when the collapse of Lehman Brothers Holdings Inc. froze credit markets around the world and triggered the deepest recession in the U.S. since the Great Depression.

While policy makers from the U.S. Federal Reserve to the European Central Bank are still pumping stimulus into their economies at least in part to address job-market slack, Australia’s price pressures limit that option for the RBA. The upshot for the nation’s businesses and consumers: little prospect of lower borrowing costs from Stevens, 56.

“The hurdle to cut further is high,” said Su-Lin Ong, head of Australian economic and fixed-income strategy at Royal Bank of Canada in Sydney. “The RBA is likely to remain reluctant in the absence of an external driver, and the case to cut from an already historical low will need to be compelling.”

Traders are pricing in about a 40 percent chance of the RBA cutting rates again by March, according to swaps data compiled by Bloomberg. The Australian dollar was little changed today, trading at 93.22 U.S. cents at 2:30 p.m. in Sydney.

The misery index is higher than when policy makers began their latest easing cycle that brought rates to a record-low 2.5 percent. It was 9 in June based on a jobless rate of 6 percent that month and second-quarter, year-on-year inflation of 3 percent.

Elevated Unemployment

Since those numbers were issued, the jobless rate has jumped to a 12-year high of 6.4 percent, which the central bank said Aug. 8 is unlikely to fall in a sustained way before 2016. Stevens will deliver testimony to a parliamentary panel Aug. 20.

Australian employers have been squeezed by a currency that averaged more than 90 U.S. cents for the past seven years, compared with about 70 U.S. cents in the 20 years prior. This has been exacerbated by a slowdown in mining investment that the government projected last week will result in the loss of more than 12,000 jobs in the next four years.

The jobless rate Down Under surpassed the U.S. level last month for the first time since 2007. The American misery index was 8.2 for June and for Britain it stood at 8.3.

Australia’s central bank also lowered its growth and inflation forecasts for the year ahead, citing its expectation that mining investment will “decline much further” and budget cuts at the state and federal level. Prime Minister Tony Abbott’s government is cutting jobs and spending and raising taxes to tackle a budget deficit estimated to have swollen to A$49.9 billion ($46.5 billion) in the year to June.

Goldman’s Call

The economy’s spare capacity has meant private-sector wages grew at the slowest pace on record in the second quarter, statistics bureau data showed last week, while the RBA has forecast inflation will cool from 3 percent last quarter assisted by the government’s scrapping of a carbon tax.

“There is insufficient domestic demand growth to stabilize wage growth or the unemployment rate and together with fiscal policy changes this would feed through to weaker household income growth,” Tim Toohey, Melbourne-based chief Australia economist for Goldman Sachs Group Inc., who forecasts a rate cut next month, said after the Aug. 13 wages data.

While Stevens has lauded Australian borrowers for using low rates to pay down mortgages faster than required, the nation’s household debt is still at a 25-year high, and a government inquiry last month found housing to be a significant source of risk to the financial system. The average mortgage is at least four times annual household income in almost 80 percent of the country, research by Digital Finance Analytics shows.

Sitting Around

Firms are also sitting on their hands even amid the already low rates. Business investment has continued to decline from its mining-fueled peak in late 2012, the RBA said Aug. 8.

“My sense is that in a lot of areas of business, people are sitting around tables saying ‘yeah somebody needs to do something and we’re waiting for someone else to do it,’” Stevens said in response to a question after a July 22 speech. “But you know if we all wait for someone else to do it, no one does. So I guess my message is: ‘over to you guys.’”

Business leaders indicated the governor may be waiting for some time.

“It’s difficult from where we sit to see the spark where business lending comes back particularly quickly,” Ian Narev, chief executive officer of Commonwealth Bank of Australia, the nation’s biggest lender, said in an Aug. 13 interview.

Challenging Market

Rowen Craigie, chief executive officer of Crown Resorts Ltd. in the southern city of Melbourne, the nation’s biggest casino company, said consumers at “the lower end” were struggling.

“We’re obviously in what is a challenging market in Melbourne,” he said. The local economy “is subdued and does have some weakness in consumer confidence.”

Stevens’s confidence that Australia will manage the transition from resource investment to other sources of demand is premised on a housing construction boom to soak up spare labor from the mines. The RBA projected housing investment to “increase noticeably as a share of gross domestic product” in its Aug. 8 quarterly forecasts.

“Forward-looking indicators of dwelling investment, such as approvals, commencements and work yet to be done remain at high levels and will support growth of dwelling investment in coming quarters,” it said.

The governor, in response to separate questions after the July 22 speech, brushed aside queries on whether record-low rates are having traction in the economy.

“Low interest rates are doing the sorts of things they normally do in most respects,” Stevens said. “I’d still maintain up to this point that we’re doing what can reasonably be done, but if there’s more that can be reasonably done at some point then obviously we’d do that. But I’m content right now.”

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