"While it looks as though the country’s most powerful economists are at odds, they are actually just operating to different briefs."
Are Treasury and the RBA at odds about the Australian economy?
The cut in official interest rates this week opened up a debate on the differences in opinion between the Treasury and Reserve Bank economists.
While the Reserve Bank was talking about economic growth as something that had been at trend, the Treasury economists – through Treasurer Wayne Swan – were talking about economic growth operating at trend.
The Reserve Bank sees a softening economy in 2013, while the Treasury is holding to an “at trend” growth figure.
While it looks as though the country’s most powerful economists are at odds, they are actually just operating to different briefs.
The Reserve Bank collects domestic and global data and forms an opinion for the medium term. It looks at Chinese manufacturing and commodity prices, and adds those against domestic measurements such as inflation, house prices and employment.
The Treasury brief is typically more focused on domestic economic data, long term trends and historic information.
Treasury plots long economic cycles while the Reserve Bank plots the smaller ups and downs that add up to a longer cycle.
The Reserve controls monetary policy – the price of (or demand for) money – and it makes its cash rate decision once a month, so it has to break down its horizons into months and quarters and price money appropriately for the forces operating in the longer cycle.
The Treasury, on the other hand, is mostly concerned with fiscal policy (collecting taxes and government spending) and economic reform. Its brief includes the phrase “whole-of-economy”.
Nevertheless, we ended up with a situation on Tuesday where the Reserve Bank was cutting official interest rates in anticipation of a slowdown in 2013 while the government was sticking to its Treasury forecast for sustained economic growth into next year.
Perhaps it would help to list the influences that the Reserve prioritises when it sets the cash rate.
In its statement on Tuesday, Reserve Bank governor Glenn Stevens started with the global economy: the soft economy of Europe, the modest improvement in the United States and the slowing pace in China.
Then he looked at commodity prices for Australian producers and the falling balance of trade. Next came the financial markets – bond yields, access to capital markets, the stock market – and mentioned that the “at trend” GDP growth was being propped up by large capital investment in our resources industry, which is expected to peak in 2013.
He added in housing markets, employment figures, and the low inflation numbers that will be threatened by the carbon tax over the next six months.
However, in the end he made the assessment that should get our attention: “on the back of international developments, the growth outlook for next year looked a little weaker…”
Which shows us that even with low inflation, moderate wages growth and good economic growth, the health of our global trading partners still affects how we price money in Australia.
The lesson is important: we operate in a global context and within economic cycles we can not influence.
Mark Bouris is executive chairman of Yellow Brick Road, a financial services company offering home loans, financial planning, accounting and tax, and insurance.