Reserve Bank frets about spiritual demand in an economy barely registering a pulse

I asked him: ‘Supposing the pope looked up and saw a cloud and said ‘It’s going to rain’, would that be bound to happen?’

‘Oh, yes, Father.’

‘But supposing it didn’t?’

He thought a moment and said, “I suppose it would be sort of raining spiritually, only we were too sinful to see it.’”

Father Mowbray on Rex Mottram, Brideshead Revisited

Be grateful the Reserve Bank didn’t lift interest rates yesterday. You may think that the economy is struggling just to draw breath, but don’t be fooled — there is “continuing excess demand in the economy”.

This may seem curious, given that the national accounts for the December quarter showed household demand rose just 0.1%, monthly household spending was in the doldrums in January, and the Australian Bureau of Statistics described January retail sales figures as “stalling”.

Indeed, even the RBA admits that “the December quarter national accounts data confirmed growth has slowed”. Not, of course, that this has anything to do with the RBA and its unnecessary, ideologically motivated rate hike in November led by a newbie governor anxious to impress financial markets.

But excess demand is, nonetheless, a problem.

“There are uncertainties regarding the lags in the effect of monetary policy and how firms’ pricing decisions and wages will respond to the slower growth in the economy at a time of excess demand,” governor Michele Bullock thoughtfully offers in her post-meeting statement. The labour market remains tight, she laments as well. She sees “conditions in the labour market continue to ease gradually, although they remain tighter than is consistent with sustained full employment and inflation at target”.

That is, we’re going to need more unemployment before anyone gets an interest rate cut.

On the more positive note for Bullock, she says “wages growth picked up a little further in the December quarter, but appears to have peaked with indications it will moderate over the year ahead.” Phew — thank goodness workers only got five minutes of economic sunshine after a decade of wage stagnation and 18 months of big real wage cuts. Still, watch out — the “level of wages growth remains consistent with the inflation target only on the assumption that productivity growth increases to around its long-run average”.

Seems like Bullock hasn’t gotten around to reading the Productivity Commission’s recent dissection of the “productivity crisis” myth. But, to her credit, she rejected the absurd Financial Review effort to hype last week’s welcome final aged care remuneration decision by the Fair Work Commission as inflationary, describing the pay rise as very worthy and unlikely to make a “measurable” difference to inflation. Beating up on aged care workers is a step too far at the RBA, if not in the media.

But what’s driving the excess demand if, by the admission even of the RBA, “household consumption growth remains particularly weak”? Is the famous “business liaison” of the RBA telling them that business investment is going berserk? Has falling public investment in the December quarter turned around this quarter and is now going great guns?

Or perhaps, like Rex Mottram, we are just too sinful to see the excess demand? Like the wage-price spiral forever imminently about to erupt, and the lazy workers causing a productivity crisis, perhaps it’s a phenomenon that only the most holy of monetary authorities can perceive from their vantage point on the economy at Martin Place, while the rest of us are seduced by devilish delusions of gouging businesses and wages decoupling from productivity in exactly the opposite way to that claimed by business.

In which case, we can only join Augustine in urging the Lord to make us pure — just not yet.