The June trade surplus amounted to an external stimulus equal to 8 per cent or so of monthly national income in nominal or money terms. That makes it even more imperative that the RBA keeps on lifting interest rates to more normal settings – even now it is just easing back towards neutral.
Forecasters got it wrong
The inflation surge underscores just how much even expert forecasters and modellers got it wrong last year. Central banks and governments kept pumping up demand and failed to see early enough how supply-side problems were acute, not temporary, and would force inflationary spillovers. Had Labor been in charge then, it would have kept the JobKeeper support flowing.
Many of the same people, such as Prime Minister Anthony Albanese, now caution the Reserve Bank not to “overreach” on the monetary normalisation, this time claiming higher rates won’t make any difference to supply-side issues such as logistics bottlenecks or Vladimir Putin’s energy blackmail. Yet, returning monetary policy back to something like normal can hardly be characterized as overreach in any sense.
The RBA still believes it was right to err on the side of over-insurance when the medical prognosis during the pandemic was very bleak. But the policymaking lesson, as economics editor John Kehoe suggested this week, is that there wasn’t enough of a reverse gear built into the stimulus juggernaut to back up a bit if circumstances were changing.
However, we now have a chance to get the policy house in order – on monetary settings, as well as fiscal policy in the October budget – while Australians are still in a reasonably strong position.
The contrasts elsewhere could not be greater. On Thursday, the Bank of England – astonishingly for a central bank – forecast the worst stagflationary downturn in Britain since the earlier postwar nadir of the mid-1970s. That experience drove the Thatcher reform revolution.
Recriminations over Bank of England policy in 2022 have become part of the brutal fight for the Tory leadership, but likely winner Liz Truss will need more than Thatcherish soundbites to fix the UK. And the US is already in a technical recession.
However, Australia can’t be complacent. Inflation will peak, but so will commodity prices. The RBA has lowered its growth forecast to 1.75 per cent in 2023 and 2024, which is still a soft landing.
Yet there are still too many disconnects in the public mind about the sources of Australian prosperity. Gas producers are being demonized for allegedly hoarding gas for export, when their sales are propping up the economy.
That detachment from reality doesn’t actually prepare Australia well for the leap to net zero, when some of these money-spinners will have to be replaced.
Politicians who have been cushioned by easy central bank money will also find they have to make unpopular decisions. It is best they start while this tailwind is still there.