Where are the banks getting their money?

Today's credit aggregates for March (table d03) include a number of data items on money with the banks. These funds are available to banks for making loans.

First we have current deposits with banks, which have been growing steadily. These are the everyday accounts that allow money to be deposited and withdrawn at any time.

Next we have have certificates of deposits issued by banks. Growth in these instruments has been fairly steady since the onset of the GFC. 

But growth in term deposits with banks has been dramatic since the onset of the GFC.

Other deposits with banks have grown at much the same rate since the GFC as before the GFC.

And finally, growth in offshore borrowings by all financial intermediaries has flat-lined since the GFC.

RBA Credit Aggregates

Today, the RBA released the credit aggregates for March (tables d01 and d02).

Really nice to see growth in the monthly series for business investment.

But the overall credit growth rates are well below that experienced in the past.

GDP Astrology

Today was one of those perfect Autumn days in which I found myself pondering: I wonder what the Q1 2012 print for GDP will look like?

So I fished out my calculator to see what it would tell me. I feed it the data (in log format) and asked it to find the best seasonal, autoregressive, integrated, moving average model it could. The auto.arima() function is such a marvel. In seconds it said it was an ARIMA(1,1,2)(2,0,0)[4] with drift. Before I knew it, I had the following graph in my hands.

If my ARIMA model is to be believed, the most likely print for Q1 2012 GDP growth is 1.1 per cent, quarter on quarter. The through the year result is a fabulous, faster than trend growth figure of 3.8 per cent. Though to be fair, the through the year figure benefits from Q1 2011 dropping off with its -0.3 per cent. Indeed, we need to do worse than -0.3 quarter on quarter for the through the year GDP result to decline from its Q4 2011 read of 2.3 per cent (an unlikely result according to the confidence intervals from the ARIMA model).

Do I believe it? Well ... it is as good a guess as any. It is remarkably close to the Government's pre-budget guess for 2012-13.

But ARIMA models are just a sophisticated way of saying the whether tomorrow will be much like the weather today. They're right most of the time, but they can miss the big turning points. They do a bit better during the storm, because they know the storm will eventually clear up and the weather will return to what it is like usually at this time of the year.

Notwithstanding their naivety, ARIMA models often do a reasonable job at predicting the next GDP print. It takes quite some hard work (and some devilish statistics) to beat them.

Nonetheless, I am up for the challenge of developing an unobserved components model with Kalman filtering. It is just going to take me a little longer that dropping the data into the auto.arima function.

Rate cut anticipation

From RBA table f01.

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Are bond yields presaging a low-growth Australia

Over the long-run, inflation-indexed bond yields appear loosely correlated with trend real GDP growth.

With bond yields as low as they are, the question has to be asked: Is Australia heading for a low-growth future? Are we heading to a future where GDP trend growth is (perhaps) well below 2 per cent per year? This would be down from the long-term trend of 3.7 per cent prior to the global financial crisis (or Great Recession as it is known elsewhere).

In today's chart I have plotted the inflation-indexed bond yields (from the RBA's table f02), and through the year real GDP growth (with a 41-term Henderson Moving Average). The TTY GDP growth rates and the moving average are calculated from ABS National Accounts data.

CPI Q1 2012 - supplementary charts

Some additional charts on top of yesterday's ... all data sourced from the ABS (6401, tables 12 and 13). We will start with the 11 expenditure groups that make up the CPI.

It should be noted that the quarter on quarter changes for health and education are the result of typical seasonal behaviour.

The alcohol and tobacco result was also pretty typical of the past decade.

And now for the killer charts that look at all of the sub groups and expenditure classes. Please note, there are some (usually self evident) double counts here. For example, there is a row for fruit and vegetables as well as an individual row for fruit and another row for vegetables.

CPI Q1 2012

Wow! Was that the sound of the CPI hitting the floor? Headline CPI grew at 0.1 per cent Q/Q to be 1.6 per cent higher through the year (tty). Core inflation, grew at 0.35 per cent Q/Q to be 2.15 per cent high through the year. [Source: ABS Consumer Price Index for Q1 2012].

Ladies and gentlemen, I think it safe to say that we have a rate cut come the first Tuesday in May. Big question is: How much of a rate cut?

Let's start with the charts of most interest to the RBA: the core inflation rate.

The headline result ... note the impact of seasonal adjustment ...

Goods versus services ... bit of a spider here if the AUD falls significantly ...

Tradable versus non-tradable ... the "what happens if the AUD declines significantly spider" is even more evident here ...

 
CPI growth by city

Anticipating a rate cut

Markets are anticipating a rate cut (again). Perhaps not in vain this time ... depends on today's CPI print.

PPI Q1 2012

The final stage Producer Price Index (excluding exports) for Q1 2012 was -0.3 percent Q on Q and 1.4 per cent through the year.

Last Friday's print of the Import Price Index for Q1 2012, was -1.2 per cent Q on Q and 2.1 per cent through the year. On these two results, I suspect most pundits are anticipating a benign (0.6 per cent Q on Q or lower) print for tomorrow's underlying Consumer Price Index (ie. the average of the weighted median and trimmed mean results). The argument might even be whether the RBA cuts official interest rates by 25 or 50 basis points come the first Tuesday in May.

Even the domestic inflation pipeline is looking benign.

Inversionary jitters in bond yields

In the usual course of business, investors expect more compensation for greater risk. All other things being equal, long-term bonds carry more risk than short-term bonds from the same agent. As a consequence, investors typically expect a greater yield on long-term bonds than short-term bonds.

When yields for longer-term bonds are lower than short-term bonds, you need to ask why. Some consider yield curves a canary in the economic coal mine. One explanation might centre on short-term expectations around official interest rates. Another might focus on the underlying health of the economy.

Bloomberg publishes a regular report on the latest Australian Government bond yields. In the current report, the yields from 3 months through to 3 years are clearly declining. We have a partially inverted bond yield curve. This decline is broadly consistent with the ASX target rate tracker implied yield curve.

However, those of you with a keen eye will note that the ASX implied yield curve is trending up from around 12 months out, but bond yields are dropping through to 3 years. The difference suggests that while the short-term inversion in bond yields is about market downward expectations on official interest rates, the inversion at 2 years and 3 years is driven by other considerations.

In the following charts we look at yield curve inversion in these longer-term bonds. In part, we are looking here because this data is readily available from the RBA (table f02d). But in part, yield inversion in these medium term rates can demonstrate significant nervousness in the long-term prospects for the real economy.

In these charts, we accumulate the absolute difference in percentage points when the three year Australian Government bond yield rate is less than the two year rate; when the five year rate is less than the three year rate; and/or when the ten year rate is less than the five year rate.

While no where near the scale of nervousness that preceded the GFC, we are seeing slight inversions (perhaps micro-lumpiness might be the better term) in medium-term bond yields at the moment.

Another look at the Federal Budget

Another chart on which it appears that the problems with balancing the Federal Budget are more on the expenditure side than then revenue side when compared with historical levels.

Revenue is close to returning to its pre-GFC level of 23 per cent of nominal GDP. If things continue at their current pace, it might be achieved by the middle of 2012.

Without a change to the current rate of change, government expenditure will get down to the rate of 23 per cent of nominal GDP towards the end of 2014.

Of course, to balance the Federal Budget, the Government could be looking to a new balance point a little higher than the pre-GFC rate of 23 per cent. It might be closer to (say) 24 per cent of GDP and achieved through adjustments to both arms of fiscal policy: by increasing taxation (or reducing tax expenditures) and further reducing expenditure.

How stimulating!

Today's chart looks at government spending under the Howard boom years (from January 2002 to December 2007) and compares it with the post-GFC spending of the Rudd and Gillard governments (ie. since January 2010).

The two expansionary budgets were the last Howard Budget (2007-08) and the first Rudd Budget (and subsequent responses to the GFC in 2008-09). 

Update 20 April: In today's SMH, Malcolm Turnbull observed that the Howard Government let fiscal discipline slide a little in its final years of plenty.  

Australian Government Budget - February 2012

Because I have been asked ... the complete set of Australian Government financial tables.

We will start with the expenditure items.

Total expenses

And on to the revenue tables, starting with the individual tax items.

Other income tax ...

A sub-total for income tax.

Plus indirect tax and another total tax sub-total

Three non-tax revenues and a sub-total

Total revenue ...

And the balance items