Via the AFR comes the IMF in an unusual break with the tradition of agreeing with whatever the locals say:
Australia’s housing market contraction is worse than first thought, says a top IMF analyst, leaving the economy in what he called a “delicate situation” that boosts the need for faster infrastructure spending and even potential interest rate cuts.
In an exclusive interview, the International Monetary Fund’s lead economist for Australia, Thomas Helbling, endorsed last week’s federal budget forecasts for recognising the “weaker outlook” and its use of sober commodity price forecasts.
…Given those factors, Dr Helbling said the Reserve Bank was right to shift last month from a tightening bias to a more neutral stance given weaker-than-anticipated GDP figures for the fourth quarter and “signals of weakness” elsewhere across the economy…”I think the question is: will it need to change the monetary policy stance, and I think they are looking at that.
More infrastructure is already coming. The problem is not that it has fallen short, more that the nature of the spending is difficult to sustain given each year you have to build more than you did the last to add any growth at all and as projects roll off that gets more and more difficult. As the following ANZ chart shows, the NBN has now peaked and although governments are hosing out new projects they just can’t keep up:
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Despite all of the hoopla, infrastructure investment will withdraw from growth for the next two years and, without a another NBN-like monster, never recover.
That leaves us with monetary policy and the IMF also released new research today that is thoroughly off-message vis the locals:
This paper discusses the evolution of the household debt in Australia and focuses on the empirical analysis of the impact of a monetary policy shock on households’ current consumption and durable expenditures depending on their level of debt. The discussion about the level and distribution of household debt concentrates on the concern whether household consumption could respond differently to monetary policy changes, given that current levels of the household debt are much higher compared with previous episodes of policy rate increases.
The paper finds that high debt exposure is more prevalent among higher-income and higher wealth households. Nevertheless, the debt exposure of lower-income and more vulnerable households has also increased over time, and thereby more exposed to risks from rising debt service. The presence of over-indebted households at both low- and higher-income quintiles suggests that macro-financial risks have increased, suggesting a need for close monitoring.
Despite the high debt level, households’ debt service burden has remained manageable due to historical low mortgage interest rates and given that financial institutions assess mortgage serviceability for new mortgage lending with interest rate buffers above the effective variable rate applied for the term of the loans. However, downside risks on debt service capacity and consumption remain with regards to a sharp tightening of global financial conditions which could spill over to higher domestic interest rates.
The empirical analysis investigates the transmission of monetary policy shocks to the current consumption and durable expenditures of households with different debt-to-wealth ratios. With reasonable assumptions and using the large sample of households available in the HILDA survey for 2001-16, the results corroborate that households’ response to monetary policy shocks will vary, depending on both their debt and income levels. In particular, the results suggest that households with high debt tend to reduce their current consumption and durable expenditures relatively more than other households in response to a contractionary monetary policy shocks. At the same time, households with low debt may not respond to monetary policy shocks, as they hold more interest-earning assets and thereby can smooth 22 their consumption using the higher interest income, suggesting that for these households, the income effect dominates the intertemporal substitution effect.
The results of the analysis suggest that, with a larger share of high-debt households and given their high responsiveness to a monetary policy shock, it may take a smaller increase in the cash rate for the RBA to achieve its policy objectives, compared to past episodes of policy rate adjustments. It corroborates recent RBA research, which suggests that the level and the distribution of the household debt will likely alter monetary policy transmission, in other words, more bang for the buck. By responding gradually, the RBA can still meet its mandates.
The implications of higher household debt for monetary policy have also required that the RBA addresses this challenges in its communication. The results of the textual analysis show that the RBA’s communication has increasingly focused on the impact of household debt on monetary conditions and financial stability over the past decade, consistent with the rise in debt-to-income ratios. Markets have also started to take into account household debt in their assessment of monetary policy and market expectation analysis. Therefore, continuing with a transparent and strengthened communication strategy on issues related to the household debt and household consumption will further improve predictability and efficiency of monetary policy in Australia.
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So much for the RBA’s old chestnut that ‘debt is contained within those high income households that can afford it’. As Banking Day legend Ian Rogers concludes:
In short, the IMF staff paper can be read as supporting the more severe, hard landing scenarios for the Australian banking industry, drawing on an abundance of local data and the Fund’s deep understanding of the last, worldwide, banking crisis in 2008.
Picking choice quotes once more to wrap up, the IMF trio talk up the settled “evidence on how high leverage in combination with asset price shocks can lead to demand driven recessions.”
They “found that the marginal effect of a decline in home value on tighter credit constraints is significantly larger for postal codes that have a high housing leverage ratio.”
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
