“I would want to see a bit more of a drop in spending before [a rate cut], but consumption growth was up [in the December quarter].”

Picking the right response

The national accounts on Wednesday showed household final consumption expenditure increased 0.4 per cent in the final quarter, and year-on-year growth was at 2 per cent. Real net national disposable income per capita was up 0.8 per cent quarter-on-quarter and 2.1 per cent year-on-year.

The RBA will be encouraged because when consumption is equal to or higher than income growth, it is inferred people are still expecting their wages to grow and won’t necessarily change their spending pattens.

Former RBA board member Warwick McKibbin thinks people will pull back a bit on spending because of falling house prices, but cutting rates was not the right response.

“It’s not clear that the right answer is monetary policy – it’s probably better to have fiscal policy – that would be a better strategy for smoothing the cycle than rates,” Professor McKibbin said.

He said with nominal GDP growing at 5.5 per cent, that gave government better flexibility to make more effective structural changes, such as income tax cuts, to increase spending and growth.

Trade and wages ‘mismatch’

Westpac chief economist Bill Evans, the only big four economist forecasting interest rate cuts (in August and November), said it came down to whether the economy would arrive at below-trend growth necessitating a policy response.

As of the fourth quarter data released on Wednesday, year-on-year growth has slowed to 2.3 per cent versus the Reserve Bank’s official forecast for 2019 year-end growth of 3 per cent, and 2020 year-end growth of 2.75 per cent.

“My view is, in the absence of any stimulus, that it’s unlikely to see a move back to potential growth, which is two and three quarters,” he said. “The mismatch between the terms of trade and wages is reflecting that the beneficiaries of higher commodity prices are not cycling through the economy [except via dividends].

“For me, the key development will be if they have to lower their growth forecasts to below potential. Theoretically, you’re not generating enough jobs to bring down the unemployment rate.”

The Reserve Bank’s unemployment rate forecast is 5 per cent for December 2019 and 4.75 per cent for December 2020.

“If you’re in a position where you’re forecasting below-trend growth, you really have to look at your policy settings,” the Westpac chief economist said.

Economic puzzle

Commonwealth Bank chief economist Michael Blythe agreed with the governor’s assessment that economic conditions amount to a puzzle where the strength implied by the labour market is not apparent in the growth or rate of consumption the economy was experiencing.

“The point really is the discrepancy between those GDP numbers and other indicators,” Mr Blythe said. Strong growth in government taxation revenue arising from corporate profits meant there was a high probability of fiscal stimulus, plus China’s policymakers have been turning to stimulus to cushion growth in the world’s second-largest economy.

“Does [the disconnect] close by GDP picking up, or the labour market subsiding, is the big question we’re all grappling with at the moment,” the CBA chief economist said. He was reminded of the plunge in exports, which led to a 1.2 per cent contraction in seasonally adjusted growth in the March quarter of 2011, which was subsequently revised to a decrease of 0.3 per cent.

“My inclination is to say the labour market data is the more reliable statistic.”

Yet, the Australian dollar has not adjusted sharply given the apparent decline in growth.

“If you only looked at interest rate differentials, typically we’d be in the 60s against the US dollar,” Mr Blythe said. “The other issue here is, one of the outcomes of higher commodity prices is we’re running these massive trade surpluses.”

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