No one was shocked on Tuesday to hear the Reserve Bank of Australia did not cut rates, but reading the economic tea leaves (that is, the RBA board statement), it would appear the belief a rate cut would happen after the rise in the unemployment rate was misguided. They really had no intention of lowering rates at all.
In the end, even the 7% chance the market gave of a rate cut on Tuesday was overstating it. The governor of the Reserve Bank, Michele Bullock, told reporters the RBA monetary policy board didn’t even discuss cutting rates.
I suggested last week the RBA was rather sanguine about the rise in unemployment, and so it was. The updated unemployment estimates in the November statement on monetary policy are for it to stabilise at 4.4% from now till the end of 2027 (even though it is currently 4.5%).
Bullock told the media on Tuesday that “the board are concerned about employment as well because that is part of their mandate, but I would say at the moment we are a little more concerned about making sure we get inflation sustainably back in the band”. The only aspect I would quibble with is the “at the moment” part. It has been many years since the RBA has been more concerned about unemployment than inflation.
At 3.6% the cash remains high, but the “real rate” (which takes into account inflation) is around where it was in 2016. This suggests that while interest rates are still slowing the economy (ie causing unemployment to rise) they are not at least doing so excessively.
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The next meeting of the RBA board is on 9 December. Between now and then there will be the latest wages data, the first full monthly inflation figures and the September quarter GDP.
This week, we have started to get some of the data that will feed into those GDP figures.
On Monday the Australian Bureau of Statistics released the September quarter household spending data. This covers about 60% of the household “consumption” that makes up just over half of the economy, and the two measures move in sync.
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One problem with the household spending data is that it includes spending on alcohol and tobacco. As the ABS notes, the sale of illegal cigarettes has pretty much destroyed that measure because it only counts legal sales. In the past year, apparently the volume of alcohol and tobacco sold has fallen 21%. That clearly is not the case – it’s just that all the spending on tobacco is no longer being counted.
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But even when we exclude tobacco and alcohol, household spending in the September quarter was relatively weak – up just 0.5% and less than the 1.2% growth in the June quarter.
Worse still, the big growth was in spending on healthcare and food. This is despite the RBA suggesting “data on consumption suggest that the pick-up in private demand evident in the June quarter is ongoing”.
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Rather than the pickup being “ongoing”, this, as AMP economist My Bui noted, shows that “household spending has lost momentum quickly after getting a short-lived boost in May & June from weather events and EOFY sales”.
But no matter, Bullock told reporters on Tuesday that the RBA still thinks “there is a bit of excess demand in the economy”.
One way to test this is to look at how households spent in the run-up to the pandemic and compare how we are now spending.
The period of 2014-18 saw pretty much a straight-line increase in the amount of things we spent on. Importantly, this was not a period of strong growth, but it was better than in 2019 when things slowed (because as I keep trying to remind people, we looked like heading into a recession before Covid hit).
But if you extend the 2014-19 trend, you can see we have not returned to trend. And the growth of our spending is the same speed as back then.
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If you look at all the categories in the household spending figures, most show spending at a level below the pre-Covid trend. This does not suggest excess demand at all.
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But one area that truly shows how little heat there is in the economy is real wages. The RBA revised up its estimates for inflation and also slightly for wage growth. But through 2026, it now estimates that inflation will rise faster than wages.
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If the RBA is right, then by the end of 2027 the average wage will only have the same purchasing power as it did at the end of 2011.
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That is not a situation that suggests boom-time spending or a need to worry about excess demand.
And it leaves us hoping that the RBA is right about unemployment not rising and so it does not need to cut interest rates, but also that it will be wrong and our ability to buy things with our wages will soon rise rather than go backwards.
• Greg Jericho is a Guardian columnist and policy director at the Centre for Future Work
