Australia´s last recession was almost a quarter of a century ago. That time frame spans both the Asia crisis of 1997-98 and the more recent 2008-09 international crisis. A distinguishing feature of Australia is how close it has come to a de facto NGDP Level targeting regime.
The chart illustrates
Alas, that “consistency” is in danger of being lost. The commodity price boom of 2004-08 lifted nominal spending above trend, giving Australia a nice “cushion” which helped it avoid the debacle that befell many countries, including neighboring commodity exporter New Zealand.
The just released consumer sentiment survey is not encouraging:
The Westpac-Melbourne Institute Consumer Sentiment Index fell 5.7% in December from 96.6 in November to 91.1 in December.
This is a very disturbing result. The Index is now at its lowest level since August 2011 when it briefly fell below 90. Prior to that you have to go all the way back May 2009 to see a period when the Index printed consistently below today’s level.
And advocates Australia join in the “currency war”:
While this survey may prove to be an overreaction to the sobering news from the national accounts and ongoing concern around the Commonwealth Budget, it appears that the messages around spending, the labour market and housing are clearly signaling the need for a further boost in the form of lower interest rates.
In a world where other developed economies have near zero interest rates and, accordingly, the Australian dollar is overvalued, Australia should seize the opportunity to provide further interest rate relief to the economy and exert some more downward pressure on the Australian dollar.
But more likely the RBA has caught a whiff of the “Swedish Riksbank virus”:
In its severest warning yet on house prices, the RBA said surging investor demand for property may cause the market to overheat and invite sudden price falls.
A housing-market crash might undo a lot of the central bank’s efforts supporting a still-fragile economy trying to cope with a downturn in mining investment.
Record-low interest rates were supporting the economy, but policy makers needed to be aware of the risks to future growth accompanying “a large further build-up in asset prices,” the minutes of the bank’s September 2 policy meeting said.
It would be a pity if this late into the game Australia “crossed the Rubicon” and let NGDP go south of trend!