What is worrying the RBA

If you’re trying to work out where the economy is going don’t read the latest forecast from the Reserve Bank of Australia. That’s because the economy isn’t going anywhere fast.

This may be a good thing if you’re doing your budget the second half of 2014-2015, but if you’re seeking to discover what’s going to underpin productivity or investment growth next year you may be disappointed.

It’s very much as case of ‘steady as she goes.’

Just look at the numbers: Gross Domestic Product a little easier at 2-3 per cent at the end of this financial year and perhaps a little higher 2.5-3.5 for calendar 2015 but only to slide back a bit in 2016. Yes that’s right it’s flatlining. Surprisingly the forecasts are no better for non-farm GDP with the numbers exactly inline, while inflation is expected be slightly higher for 2015-16 because of that lower $A, but even that isn’t certain.

So not much happening on economic front, or for that matter the interest rate front, so let’s have some fun and see if there’s anything on the horizon that is worrying the RBA.

And there’s plenty of worry on the international scene:

1)    The recovering US economy could overshoot, leading to higher interests spreading around the world

2)    The stimulus to the Japanese economy – and now more likely the Euro market – could both resulting in a longer period of low global growth

3)    The Ebola virus isn’t particular worrying the bank, but if efforts to contain it prove difficult then global confidence could take a hit.

4)    The Chinese property market gets a lot of the bank’s attention. “The Chinese authorities have taken some actions recently to support activity in the property market, but it remains to be seen if these measures will be sufficient to avoid a protracted slump. There are a few reasons to be concerned about downside risks to the property market in the current episode and the potential effects on residential investment and economic activity more generally. First, unlike previous episodes (including in 2008), the current downturn in the property cycle has been accompanied by a slowing in growth in total social financing, partly as a result of efforts to place financing and economy- wide leverage on a more sustainable footing.

“Second there appears to be a large overhang of property developer debt and unsold property relative to earlier episodes, and anecdotal reports point to weak demand conditions in smaller cities. “The housing market also poses risks to financial stability in China. Although the direct exposure of the banking sector to the real estate market is moderate, property developers also raise sizeable funds through trust companies, entrusted lending (bank-intermediated intercompany finance) and informal lending channels. As the banks ultimately fund much of this lending, they would potentially be exposed if a negative shock to the housing market led to financial losses among less regulated financial entities.

“If there was a very large and protracted decline in the Chinese property market, this would be likely to reduce demand for Australia’s exports of bulk commodities and the prices received for them

5)    And lastly there’s the great unknown surrounding the Australia dollar. As the bank points out the $A has lost 4.5 per cent of its value since August which is in line with RBA thinking that the currency has been over-priced for some time. But the bank points out it is captive to overseas market forces. If the US raises interest rates next year, as widely expected, it could put more downward pressure on the $A. However reflation in Japan could see a revival of capital inflows from that country into Australia as a counter-vailing force.

A lower dollar would be good news for Australian manufacturing and export industries, as long as it wasn’t accompanied by further falls in the terms of trade, with economic growth expected to benefit to by about 0.5-1.0 per cent. It would also put a cap on inflation for short period of time.

6)    Domestically there is not a lot happening but the Australian housing market is still getting a lot of RBA attention. Any further rises in an already hot market would be a worry for the bank as historically people tend to spend more when buoyed by their perceived increase in wealth generated by increasing home values. Of course a little retail therapy is good for a flat economy but if people started borrowing to fund their expendiure, as they did before the global financial crisis, the RBA might be forced to cool off the sector at a time when the economy was just ticking over.

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