‘It’s not a recession’…and other lies by the RBA

‘It’s not a recession’…and other lies by the RBA

Nine months ago, pretty much everyone in the mainstream press agreed with the Reserve Bank of Australia.

Nine months ago, there was a broad consensus that the next interest rate move was more likely to be up than down.[1]

Nine months ago, piece after piece from mainstream rags like The Age, The Australian Financial Review and even The Australian told you everything was fine. Just fine.

And anyone who disagreed with them was a scaremongering doomer.

Someone who couldn’t be happy with good news. 

Someone who couldn’t accept the data at face value.

Gross domestic product was up. Unemployment was low. Inflation was as expected.

The doomers and gloomers couldn’t accept the positive data, even when it hit them in the face.

But it wasn’t that at all.

The doomers and gloomers were simply able to see past the spin and look at how the data was put together.

A handful of economists and analysts like myself were able to join the dots from hard data.

That’s why the mainstream missed it…

And that’s why you have an official cash rate of 1% today.

Nine months of lies

Let’s take a trip back in time.

To November 2018, when the Reserve Bank of Australia assured us that everything was okay.

Domestic economic conditions have been a bit stronger than were expected at the time of the August Statement on Monetary Policy.

‘As a result, the forecast for GDP growth has been revised a little higher and the unemployment rate forecast has been revised a little lower.

Consistent with this, the forecasts for wages growth and inflation have also been revised slightly higher.

In summary, GDP growth is expected to be above trend over the forecast period and inflation is expected to pick up to 2¼ per cent by late 2019 and to be a little higher in the following year.[2]

The November statement on monetary policy is one of the last times the Reserve Bank of Australia was fairly optimistic about the Aussie economy.

Although I wrote at the time that it wasn’t optimistic — it was deluded.

Nonetheless, the November announcement spurred on many daily newspapers to back the RBA’s view.

That’s in contrast to the statement released by the RBA yesterday.

The statement is a little disjointed, even by central bank standards.

In one paragraph, the RBA points out that the Aussie economy as a whole is weak. Then a paragraph later, it says unemployment is decreasing, and Australia is even experiencing skill shortages.

Let me show you what I mean.

The RBA starts off with weak GDP and income growth…

Over the year to the March quarter, the Australian economy grew at a below-trend 1.8 per cent. Consumption growth has been subdued, weighed down by a protracted period of low income growth and declining housing prices.

Then in the very next paragraph, the RBA tells us that the unemployment rate is reasonable, but ideally they’d like it to fall a little further:

Employment growth has continued to be strong. Labour force participation is at a record level, the vacancy rate remains high and there are reports of skills shortages in some areas.

There has, however, been little inroad into the spare capacity in the labour market recently, with the unemployment rate having risen slightly to 5.2 per cent.[3]

This mashup of information is used as justification for the latest rate cut.

But as I explained last month, pinging the rate cut on one little number is absurd.

The statement ends with the RBA declaring that ‘further inroads’ to reduce the unemployment figure will boost inflation in the long run.

In saying that, the supporting statement for the July interest rate cut is similar to June’s.

In fact, the closing paragraph for the June and the July statements are exactly the same…[4]

It’s almost like the RBA did a straight cut and paste.

And to end the statement, the RBA tells us that unemployment is strong, more people than ever before are working, and some companies can’t find staff.

This how ordinary investors get confused.

So, how did we miss this?

How did we go from the ‘she’ll be right’ spin to back-to-back interest rate cuts?

Wasn’t everything fine?  

Investors are easily confused.

Oh, don’t worry. It’s not your fault.

It’s the constant misinformation we all get fed.

Not only that, but each statement from the Reserve Bank of Australia has backed up this view that everything is fine.

For too long, the central bank has reassured us that the Aussie economy is gradually progressing.

Unemployment is fine, inflation is fine, growth is fine.

For the past two years, the RBA has done nothing but reassure you the economy is just fine.

Every single month. 

I’ll be honest. I don’t know how the RBA gets away with being so misleading.

I mean, if that were me, I’d have ASIC knocking on my door, asking me to have a chat in a very small room, with lots of lawyers present.

Not only that, but where is the accountability from the mainstream press?

There are some very smart economic journalists out there. Why aren’t they pushing back on the rhetoric? Why aren’t they digging through the numbers? Why aren’t they asking how and why the RBA continues to pump out fairy tales on the Australian economy?

These papers — once trusted sources of information — do nothing but argue in favour of the central bank, rather than criticise its short-sighted policy.

I guess when you’re the central bank, you can tell the people whatever you want them to hear.

And then the mainstream will repackage it into simpler words. 

Whether it’s true or not doesn’t matter.

Aussie economy wasn’t doing what the RBA said

Way back at its November 2018 policy meeting, the RBA said Australia’s GDP growth rate would average 3.5% to 2020.

Almost exactly one month later, the GDP figures showed that growth had slowed at the sharpest rate on record.

Meaning Australia ended 2018 with year-on-year economic growth at 2.8%. Well down from the 3.1% we recorded in 2017.

Yet, here’s what makes the RBA’s November statement even more absurd.

In the first nine months of 2018, the Aussie economy grew at a rate of 2.2%.

And the RBA knew this.

Meaning the Aussie economy would have to grow at an unprecedented rate of 1.5% for the final three months of 2018. 

Let’s put that in perspective.

In the last 10 years, the highest quarterly GDP growth figure was 1.2% in the September 2011 quarter.

Almost every quarter since has seen economic growth below 1%.

Check it out for yourself:

Australian quarterly GDP 2009-2019


Source: Trading Economics[5]

In fact, if you average out the past 28 quarters since then, you get a rough figure of 0.50%.

That means the RBA has been bullishly predicting extremely strong economic growth for Australia…even when the numbers don’t support it.

That’s why investors are confused.

Our own central bank promotes the idea that we can have incredible economic growth when the numbers don’t stack up.

No one wants to say the R word

Here we are.

Lumped with a never-before-seen cash rate of 1%.

After a long period of blindness from the mainstream press — and the RBA’s refusal to admit that the data is BS — what are investors meant to do?

Over the next couple of months, prepare yourself.

No, I’m not joking.

When I say ‘prepare yourself’, I mean assess your investments, any shares you own, and any cash you have in the bank.

The lower interest rate means cash at the bank is earning less and less. And it’s likely that lower rates will drive more investors into the stock market in the hope of capital growth.

More to the point, the two back-to-back rate cuts look like a desperate attempt to avoid an Australian recession.

The RBA has been dishing up economic fairy tales for a couple of years now.

The Aussie government has then backed it up by declaring we have a strong economy.

And the mainstream rags have then regurgitated all this.

I wrote last year that ‘the Reserve Bank of Australia will cut rates in a desperate attempt to avoid [a recession].’

However, perhaps it’s no longer avoidable.

In fact, I think the rate cuts we just witnessed may have propelled us into a recession quicker.


I’ll explain tomorrow.

Until next time,

Shae Russell Signature

Shae Russell,
Editor, The Daily Reckoning Australia