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Our 'sick economy' and why the RBA and government have let us down

Stephen Koukoulas thinks the RBA should have cut rates earlier. Source: Yahoo Finance

The Reserve Bank of Australia is set to meet next week to determine whether the official cash rate should be slashed once again, after cutting rates to a record low of 1 per cent in July this year.

Economist Stephen Koukoulas firmly believes they should be slashed, telling an audience at Yahoo Finance’s All Markets Summit that the RBA has been failing the economy by being so slow to cut interest rates.

“The economy is pretty sick at the moment,” he said.

“Annual GDP growth is 1.4 per cent. Now that’s one of the lowest since the GFC [Global Financial Crisis]. We’ve got an economy that should be growing at around about 3 per cent.”

Koukoulas said “mass unemployment” and low wage growth were contributing to a lack of consumer spending, and the RBA ‘refuses’ to cut interest rates.

“They’re missing their target,” he said. “I think that’s a big mistake.”

“It’s been three-and-a-half to four years since inflation fell below 2 per cent, but the RBA refused to cut interest rates,” he said.

He said they are trying to catch up now but argues the RBA should have cut earlier.

“Globally, the Fed cut to 0 [per cent], so too the UK, Canada, Japan and Eurozone.”

Earlier this month, Koukoulas wrote, “it’s as absurd as a firefighter unwilling to put out a fire because it might waste water”.

The government needs to intervene

But, Koukoulas acknowledged the RBA can only do so much when it comes to improving the cash-flow of businesses and consumers.

“The Reserve Bank really should be held to account...but the other part of course is policy.”

“Tax policy, fiscal policy - they can tweak those policies a little bit to promote economic growth.”

Koukoulas questioned why, when the economy is so weak, the government wants to run a balanced budget.

“If we’ve got upswings in the economy, yes, run a surplus. But when the economy is weaker, we’re below trend and unemployment is creeping up, to run a balanced budget - to me - is the wrong policy.”

But we’re not having a recession

While there are some headwinds facing the economy - trade tensions with the US and China, and issues in Hong Kong and the Middle East - Koukoulas says “we’re not having a recession”.

“I think there’s almost no chance whatsoever, because our exports are booming - we are running monthly trade surpluses, between $6 and $8 billion.”

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