China won’t sway the RBA…the individual will

China won’t sway the RBA…the individual will

They wouldn’t.

They couldn’t.

They won’t.

That’s been the prattle I’ve read about Australian interest rates for the past two years.

Ever since the Reserve Bank of Australia dropped the cash rate in August 2016, the focus has been on when our central bank would start increasing it again.

Almost no one entertained the idea that rates would go lower from here.

After all, 1.5% was the lowest cash rate Australia had ever seen.

It was a historical precedent.

But just because something hasn’t been done before…doesn’t mean it can’t happen.

Buckle up, investors, because 2019 is the year the Reserve Bank of Australia does what everyone said it wouldn’t do…

Old models give you old information

Rates were going to go up in 2017.

Then they didn’t.

Next, some of the economists at major Australian banks said the RBA would raise rates in early 2018.

That never happened.

However, it was around the middle of last year when I noticed the tone began to change.

It began simply enough. The odd financial section suggesting rates wouldn’t move for the whole of 2018.

A month or so later, it would be revised to suggest that perhaps rates would remain at 1.5% for all of 2019… Then that forecast would drag out the next rate move to 2020.

But the articles always implied that rates simply must go up from here.

What doesn’t help is that all these ‘forecasts’ were based on exactly what the RBA was saying.

In September last year, RBA Governor Philip Lowe gave a speech about the next move in interest rates. He said, ‘… you could expect the next move in interest rates to be up, not down.’ 

This sunny disposition of our own central banker fuelled the idea that the change to rates would be an increase, not a decrease, in the cash rate.

Yet the new year is here along with a new reality. Things aren’t as rosy as they seem. And the RBA is going to cut rates in the next few months…

China isn’t the swing factor…

You may have seen it yesterday.

Chinese economic growth ‘dropped’ 0.1% to 6.4% for the final quarter of 2018.

Yet suddenly, The Australian Financial Review reported that the Chinese economic data could be the swing factor in a rate decision from our central bank.

Furthermore, an RBC Capital Markets rate strategist suggested that the Reserve Bank will be keeping an eye on our exports to China. This suggests that if Chinese retail sales fall below 8%, that could be the ‘trigger’ for a rate cut.

However, let’s just debunk this for a minute.

China’s economic growth is 6.4%. That’s more than double Australia’s. The current rate of economic growth is hardly disastrous. Importantly, retail sales data in China currently sits at 8.1%. So falling below 8% is entirely possible.

This isn’t economic Armageddon.

In fact, the Aussie market barely reacted to this data when it came out. The Aussie dollar rose a smidge, and XJO was up 0.3% yesterday.

In other words, the Chinese data didn’t bother us.

Plus, this overhyped ‘slowdown’ is currently getting the Western market treatment to maintain growth…propping it up with cheap stimulus.

Already, China has introduced tax cuts, reduced the amount of capital a bank needs in order to make loans…and encouraged banks to reduce their interest rates.

In essence, this puts 1.1 trillion yuan (AU$230 billion) of cheap money into the Chinese economy — in the last week alone. 

While China is no doubt a contributing factor to any decision the RBA makes, it’s not the reason the RBA will end up cutting rates…

The swing factor is…you

The real reason the RBA will cut rates is much simpler than you’re lead to believe.

The deciding factor is much closer to home.

Believe it or not, what the RBA does next all comes down to you.

Well, a bunch of ‘yous’, really.

As much as analysts and economists want you to believe it’s more complicated, the simple reason the RBA will cut rates is because of individual behaviour.

Sure, the unemployment rate is sitting at 5.1%…which lulls you into thinking the Aussie economy is at ‘full employment’. The flip side to that is the underutilisation rate, which is a combination of underemployment and unemployment. That figure sits at 13.5% today.

Here’s the thing. The underutilisation rate has been going sideways for almost two years…and it’s almost double what it was in the peak of the mining boom in 2007.

The point is, the unemployment rate doesn’t truly reflect the state of the individual in the Aussie economy.

Our savings rate is sitting at 1%. Wage growth is at 2%. Westpac’s January consumer confidence data recorded the biggest monthly fall in three years…and the double whammy is that individual consumption is falling as a contributor to our gross domestic product.

We are yet to see December 2018 retail data. But a good proxy is the falling sales of Australia’s discount retailer Kmart.

Sales are falling at one of the cheapest stores in the country.

That’s an ominous sign.

What the RBA does next won’t be based on a country with 1.4 billion people in it.

The next move from our own central bank will rest on how individuals in the Aussie economy are spending their money.

China isn’t the swing factor in a rate decision. You are.

Until next time,

Shae Russell Signature

Shae Russell,
Editor, The Daily Reckoning Australia