Is the Reserve Bank of Australia Just Telling Us Bedtime Stories?

Is the Reserve Bank of Australia Just Telling Us Bedtime Stories?

Toilet paper and booze.

Australians have saved the economy…at least in March.

Turns out, by buying enough toilet paper for the next five years, and stockpiling a pirate’s currency of choice, we’ve managed to keep the retail data strong in March.

What about April though? When we were all shuttered indoors…

Well, I suspect it will be worse then. But those numbers don’t come out ‘til June.

In the meantime, over the next few months, we need to get ready for bad data.

Because official government data that comes out lags the real world. So official bad news will take some time to get to us.

Never fear, because the Reserve Bank of Australia recently said that sure, this year will be really bad. But not to worry, ‘cause by 2022 things will be just fine once more…

My children like fairy tales at bedtime, too.

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Economies don’t snap back

As I type this, I’m sitting here waiting for official unemployment data from the Australian Bureau of Statistics to reach my inbox.

Already I’m tipping it will be wildly different to what Roy Morgan has put out. Last week Roy Morgan said they estimate that some 2.16 million people are out of work. Experts say ABS data will show 750,000 folks aren’t working. It’s no secret the two have very different methodologies. And I’ll let you guess which one I trust more.

The ravages and potential devastation of just how many people are unemployed is something I’m sure we’ll discuss over the coming weeks.

Because right now, we need to talk…

About what the Reserve Bank of Australia is whispering in our ear.

Are they soothing our greatest fears about the future…

…or are they just telling us bedtime stories so we go to sleep at night and don’t revolt against the government?

Mere hours before end of week, the RBA dropped their forecast of just how bad things might be.

Telling Aussies that we should prepare for a 2% drop in gross domestic product growth in March data. Followed by an 8% drop in GDP from April to June.

Meaning in the first the six months of the year, they reckon the Aussie economy will contract 10% in total…

Yikes.

That is a bad number.

To put that in perspective, in the 1991 recession, GDP fell only 1.7%.

Sure 10% sounds bad, but the RBA are confident the economy will recover 6% in 2021.

And roughly the same again in 2022.

Their take is, less then two years from now, economic growth will be basically where it was.

Let’s put that another way.

Back in 1991, it took the Aussie economy two years to regain what was lost in economic growth. And then another eight years to get back to the original economic growth trend.

Yet, economic growth in Australia is tipped to shrink more than five times what it did in our last recession, and then it’s meant to just snap back inside two years?

Someone should tell those in charge…that’s not how economies work.

Chickens and eggs

I feel our fearless leaders are counting their chickens before the eggs hatch.

More to the point, I wonder if they are too busy reading numbers and hoping the data falls in line with their models.

Because there seems to be too much invested in the idea of getting things back to the way they were. Who says the way it was, was so great anyway…

But why should we even put any stock in their analysis?

The RBA have a stunning track record at getting economic growth wrong.

They always predict it will be better than it really is.

In November 2018 they thought the Aussie economy would reach average growth of 3.5% for that year. Predicting that number, even though growth was running at 2.2% at the time.

In the end, total growth for 2018 was 2.8%.

A similar tune followed in 2019. In February that year, they reasoned it would be a bit over 3%. By August it was revised down to 2.5%.

Actual economic growth for last year? A grand total of 2.2%.

Forecasting is not a perfect science, but our own central bank has routinely been optimistic in the face of hard data.

Data which has consistently come in below what they told us to expect.

Making their forecast of a miracle bounce back over 2021 and 2022, not optimistic, but deluded.

Of course, few could see how one virus would completely turn things inside out.

But perhaps right now a frank admission of not knowing the outcome would be better than coming up with fluffy numbers to pretend they have everything under control.

They don’t. No one — governments, central banks, and even us — has a rulebook for this.

Take the forecasts from our central bank with a grain of salt. They didn’t call it right when the times were good. They sure as heck aren’t going to call it now. Just like many of us, they don’t have all the answers yet.

That’s not to say they won’t try to engineer some sort of economic miracle. I suspect every lever will be pulled in an attempt to right the ship.

Until next time,

Shae Russell Signature

Shae Russell,
Editor, The Daily Reckoning Australia

 

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