In a quiet week for Australian data the minutes from the RBA’s 6 August meeting show a central bank waiting for additional evidence before delivering further policy adjustments, but also one that is prepared to deliver more rate cuts and is currently contemplating the international lessons on unconventional policy.

    We’re still growing the number of goods exporters, but our trade profile remains extremely concentrated. President Trump is keeping the world guessing with mixed messages on fiscal stimulus plans, renewed pressure on the Fed and a range of signals on China. Oh, and a frustrated bid to acquire Greenland. This week’s readings cover intergenerational equity, Brexit contingency planning, Italian politics and the risks of an Asian debt crisis.

    The RBA minutes from the 6 August meeting added little to the picture painted by Governor Lowe’s previous testimony to the House Committee and the August Statement of Monetary Policy. The central bank stands ready to deliver more rate cuts if it judges them to be necessary.

    According to the latest ‘flash’ CBA purchasing managers index (PMI), activity in Australia’s services sector fell in August, leading to the first decline in private sector output since March.

    Australia continues to grow the number of exporters, with the ABS reporting that there were 53,015 merchandise exporters in 2017-18.

    Minutes from July’s meeting of the US Federal Open Market Committee showed that members were divided over the decision to cut rates last month. A couple of members wanted an even bigger cut while several others argued in favour of keeping rates unchanged.

    US President Trump has made several noteworthy interventions over the past week, including contemplating and then ruling out tax changes to boost the economy and again calling for a big Fed rate cut.

    Please note that I will be on the road for a big chunk of next week, there will only be a truncated version of the Weekly next time. Apologies.

    What I’ve been following in Australia . . .

    What happened:

    The RBA published the minutes from the 6 August Board meeting.

    The concluding summary noted that ‘members judged it reasonable to expect that an extended period of low interest rates would be required in Australia to make sustained progress towards full employment and achieve more assured progress towards the inflation target. Having eased monetary policy at the previous two meetings, the Board judged it appropriate to assess developments in the global and domestic economies before considering further change to the setting of monetary policy. Members would consider a further easing of monetary policy if the accumulation of additional evidence suggested this was needed to support sustainable growth in the economy and the achievement of the inflation target over time.’

    The minutes also reported Board members had ‘reviewed the experience of other advanced economies with unconventional monetary policy measures over the preceding decade. These measures comprised: very low and negative policy interest rates; explicit forward guidance; lowering longer-term risk-free rates by purchasing government securities; providing longer-term funding to banks to support credit creation; purchasing private sector assets; and foreign exchange intervention.’ Apparently, the key lessons from this review included the context-specificity of policy initiatives, that packages of measures tended to do better than individual initiatives, and that clear and consistent central bank communication was critical.

    Why it matters:

    The RBA’s testimony to the House Standing Committee on Economics and the release of the August Statement on Monetary Policy (both discussed in some detail here) had already provided us with a detailed update on the central bank’s thinking, and August’s minutes basically reinforced the same set of messages. So, the RBA is keen to see whether the two rate cuts it has already delivered are having any traction, it thinks low rates will be with us for some time, and it stands ready to do more policy easing if required. For their part, markets continue to think that the RBA will have to live up to that commitment, anticipating that we will see a sub-one per cent cash rate before year-end, and continue to do for the next three years.

    Australia: Shift in actual and implied policy rates, May to August 2019 230819

    The repeated discussion on the state of the domestic economy did reveal some cautious optimism on the part of board members, with the risks around the outlook for consumption now seen as ‘more balanced than they had been for some time’, with tax rebates, a housing market recovery and lower interest rates all expected to help. But this optimism was tempered somewhat by the ‘key uncertainties’ around the labour market outlook.

    What happened:

    The ‘flash’ CBA composite purchasing managers index (PMI) fell below 50 (indicating that conditions declined relative to the previous month) for the first time since March this year. The decline was driven mainly by a fall in the services index, while the manufacturing PMI remained above 50.

    Australia: CBA PMI 230819

    According to CBA, businesses cited a lack of confidence around the economic outlook and drought conditions, while services firms reported a decline in new business. Set against this were positive readings on the labour market and future business expectations.

    Why it matters:

    The PMI readings provide another cautionary message about the current fragility of business confidence in the economy – no surprise given the uncertain global backdrop.

    What happened:

    According to the ABS, the number of Australian merchandise (goods) exporters rose to 53,015 in 2017-18.1

    Australia: Number of goods exporters 230819

    Following a period of relative stability between 2007-08 and 2012-13, exporter numbers started to increase from 2013-14 onwards, likely boosted by a more competitive exchange rate and possibly reflecting a lift from new technologies and new FTAs. After slowing in 2016-17, it seems that growth has picked up a bit.

    Australia: Change in number of goods exporters 230819

    That said, although the number of exporters has continued to rise, there appears to have been little change in the overall propensity of firms to sell into overseas markets. Separate data released by the ABS as part of their Characteristics of Australian Businesses report suggests that the share of businesses selling goods or services into overseas markets edged down a little in 2017-18.

    Australia: Share of businesses selling goods or services in overseas markets 230819

    Like most economies, Australia has a highly concentrated export structure. In 2017-18, just 470 very large exporters, defined as firms making export sales of $50 million or more, accounted for roughly 88 per cent of all export values. That’s a bit less than one per cent of the total number of exporters that year.

    Australia: Size Distributions of merchandise exports 2017/18 230819

    Most (but not all!) large exporters are also large firms. Using the ABS definition, about 96 per cent of the value of merchandise exports were accounted for by large firms in 2017-18. And, reflecting the critical role of resource exports, just 229 large mining firms accounted for about 57 per cent of all export values.

    Australia: Source of merchandise exports, 2017/18 230819

    Finally, the data show that while China might dominate Australia’s exports in terms of export values, New Zealand is by far the most popular destination in terms of number of exporters. In 2017-18, 18,774 exporters sold into the market – or more than one in three of all exporters. The United States was the second most popular choice, with China in third place. And note that for all the emphasis placed on the potential importance of markets such as Indonesia and India as targets for Australian businesses, on the metric of exporter numbers (not values) both lag Fiji.

    Australia: Top export destinations by number of merchandise exporters 230819

    Why it matters:

    Most trade data are focused on overall aggregates such as the total value of exports and imports for example, or the trade balance. As a result, they can sometimes obscure the fact that exports require exporters. In that context, the ABS annual exporter data is a useful snapshot of the state of the latter. It also serves as a reminder of several key points about Australia’s export profile:

    • For all the talk of globalisation, most Australian businesses do not export, at least as conventionally measured. Indeed, according to the ABS Characteristics of Australian Businesses, only about 36 per cent of firms even venture beyond their own state or territory to make sales.
    • A small number of firms drive the overall export story. In marked contrast, most exporters account for a very small share of total exports by value.
    • Ranking markets by the number of Australian exporters, rather than by the value of exports, provides an interesting alternative way of thinking about the relative intensities of our international economic engagements.

    . . . and what I’ve been following in the global economy

    What happened:

    The Fed published the minutes from the 30-31 July meeting of the US Federal Reserve Open Market Committee (FOMC).

    According to the summary, the discussion over the monetary policy decision split into three camps: those who favoured the 25 bp cut that the Fed delivered last month; those who would have liked a deeper cut; and those who thought the Fed should stay put.

    The case for a cut was based around three factors: (1) ‘signs of deceleration in economic activity in recent quarters, particularly in business fixed investment and manufacturing’ which appeared to be driven by slowing overseas growth, possibly due to trade policy uncertainty; (2) a ‘risk-management’ response to the ‘elevated’ risks and uncertainties surrounding the outlook; and (3) concerns about the inflation outlook, with most participants judging ‘that long-term inflation expectations either were already below the Committee's two per cent goal or could decline below the level consistent with that goal.’ In addition, a ‘couple of participants indicated that they would have preferred a 50 bp cut in the federal funds rate at this meeting rather than a 25 bp reduction. They favoured a stronger action to better address the stubbornly low inflation rates of the past several years.’

    On the other side of the debate, ‘Several participants favoured maintaining the same target range at this meeting, judging that the real economy continued to be in a good place, bolstered by confident consumers, a strong job market, and a low rate of unemployment.’ In the event, two members of the FOMC voted against the final decision to cut, both dissenting in favour of leaving policy unchanged.

    Why it matters:

    The July minutes were always going to be worth a look given that the meeting marked the first Fed rate cut in more than a decade. The range of views on display in the minutes was noteworthy, with some FOMC members judging the Fed should have been even more aggressive and delivered a larger rate cut last month but others unpersuaded of the need for any cut at all, and with two members voting against the rate cut. That doesn’t paint a picture of a central bank in a hurry to deliver significant further stimulus, although it’s worth remember that the meeting was held before the latest bout of financial market turbulence earlier this month.

    All of which makes for an interesting backdrop to the Fed’s next meeting in September. Financial markets have been convinced that more rates cuts are on their way, expecting two or three more cuts before the end of the year. As of end July, at least, the Fed did not appear to be on the same page.

    United States: Shift in implied fed policy rates 230819

    Fed Chair Jerome Powell is scheduled to speak on Friday (US Time) at the annual Jackson Hole Symposium, and Fed Watchers will be keen to see how he responds both to the recent bout of market turbulence and to the unrelenting pressure from President Trump to cut rates.

    What happened:

    US President Trump sent mixed messages on the health of the US economy. The president continued his campaign for more rate cuts from the US Fed, combining criticism of Fed Chair Powell (‘He’s like a golfer who can’t putt, has no touch) with calls for a ‘big cut’. Trump also said on Tuesday that the administration was considering ‘various tax reductions’ to deliver some stimulus to the US economy before apparently changing his mind the following day and saying that a strong US economy didn’t need additional tax support.

    There have also been mixed messages on the relationship with Beijing. After the Congressional Budget Office warned that changes in US and foreign trade policies since January last year were likely to shave 0.3 per cent from US GDP next year, Trump told reporters that he still thought a trade deal between the two sides was possible, but that he was the ‘chosen one’ to take on China. Washington has also announced a US$8 billion arms deal with Taiwan while giving China’s Huawei an extra 90 days grace to buy components from US firms before a security ban comes into force, even as the Commerce Department said that Huawei would be joined by more than 45 new businesses on its blacklist.

    And just to keep things interesting, the US President cancelled a planned visit to Denmark after the Danish Prime Minister had dismissed the idea of selling Greenland to the United States.

    Why it matters:

    A key challenge for the global economy this year has been the high level of policy uncertainty that has served as a headwind for business confidence and investment sentiment. That policy uncertainty doesn’t seem likely to dissipate any time soon.

    What I’ve been reading: articles and essays

    In the AFR, Stephen Grenville doesn’t buy the case for an Australian version of Quantitative Easing.

    The Grattan Institute has released a new report on intergenerational fairness, claiming that ‘Today’s young Australians are in danger of being the first generation in memory to have lower living standards than their parents’ generation.’ Grattan worries that an ageing population and government fiscal settings (particularly higher health and pension spending per person but also generous tax concessions) that tend to skew toward the elderly together imply a rising burden on younger generations. Proposed policies to address this include some familiar and some less familiar initiatives designed to reform the tax and benefit system (including: replacing inefficient taxes with more efficient ones, broadening the GST base and/or raising the rate to fund lower income tax rates and higher welfare payments, moving from a profit-based business tax to a destination-based cash flow tax, introducing investment allowances, increasing the pension age and increasing childcare rebates, and winding back age-based tax breaks).

    A group of leading US CEOs have released a statement (pdf) declaring that the purpose of a corporation is deliver value to all of its stakeholders. Their implicit rejection of the primacy of maximising shareholder profits has met a mixed response.  

    An FT Big Read on the coal industry and carbon capture.

    Two McKinsey analysts ask, is Asia heading toward a debt crisis? Potential signs of trouble include high debt service obligations and financial system vulnerabilities, although a look at the supporting charts shows (unsurprisingly) some significant cross-country variation.

    A leaked official report on the UK’s contingency planning for a no-deal Brexit suggests that preparations are not all they should be. According to the British government, the report only applies to ‘the worst-case’ and is anyway out of date.

    The UK isn’t the only European risk story in the news. John Authers is surprised by financial markets’ so-far sanguine reaction to political developments in Italy.

    The Economist warns that the world is not ready for higher sea levels.

    Singapore’s Prime Minister Lee Hsien Loong guesses that it could cost Singapore at least S$1 billion a year over 100 years to protect the country against rising sea levels.

    One to listen to: Econtalk’s Russ Roberts in conversation with Tyler Cowen. The ostensible focus is a discussion of Cowen’s recent book in defence of US big business, but they also cover Cowen’s optimistic and often contrarian take on a range of issues, including why parties may be more damaging than social media and the case for crony capitalism to improve urban planning outcomes.

    1 Sadly, the ABS are not able to publish equivalent data on exporters of services.

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