RBA readies for a double Dutch smack

The RBA has made the right call with Australia needing to batten down the hatches for a double dose of the dreaded Dutch disease as well as a potential unemployment explosion.

Behind the Reserve Bank commentary that went with the lower interest rates decision is a horrible truth – Australia is set to get a double dose of the the so called 'Dutch disease'.

And, as I will explain below, unemployment is set to rise sharply.

In my view it would have been irresponsible for the Reserve Bank board not to cut rates. The good news is that their commentary indicates they are on top if what is really happening. They will need to do cut rates again this year and keep going in 2013.

Unfortunately, while lower rates will boost house prices and kindle some extra home building activity it will not enable us to avoid a double dose of the Dutch disease.

The Dutch disease describes what happened to Holland after it discovered natural gas in the 1950s. The economic Dutch disease is caused by the higher currency that comes with the exploitation of natural resources which creates a decline in the employment-creating non-resource economy lead by manufacturing, tourism, education, etc.

Australia is being hit hard by the conventional Dutch disease. Our double dose is caused by the sudden decline in our natural resource prices which is not causing a fall in the currency as would normally happen. As a result our miners are also being affected by the Dutch Disease – hence the double dose.

Lower interest rates will help lower the currency but the LNG and other mineral construction contracts are so big that money will keep following in for a year or two so artificially boosting the currency. Around 2014-15 the investment will come to a sudden halt because most unstarted new projects have now been cancelled thanks to lower prices, labour costs boosted by industrial relations rules, the high currency and the carbon tax.

In the non-mining economy the effect of the Dutch disease on unemployment is being temporarily hidden.

Thanks to the work of Brian Redican of Macquarie Bank we now understand why our official unemployment has not increased when clearly there have been enormous retrenchments (see Invisible cuts to the middle class, September 18 and Marching orders for middle income exiles, September 19).

The Reserve Bank has effectively recognised this work and pointed to weakness in the labour market that has not come out with the official figures. The hidden unemployment is masked partly because of the way the statistician asks the questions in his labour surveys. Morgan Research is picking up the trends isolated by Redican and there has been a sudden jump in people unemployed in the Morgan data.

image

In time this will boost the official unemployment figures especially as lower interest rates boost the fortunes of those with mortgages but ravage the returns of those relying on investments. Many mortgagees are frightened of their jobs so are lifting their savings. It is the retirees who are the spenders and they are being hit.

Related Articles