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RBA up before estimates as China clouds gather

As noted in an earlier post, the Reserve Bank deputy governor, Michele Bullock, used an evening speech to highlight that inflation is still expected to peak soon, perhaps next month.

That’s even with flood impacts on farming pushing up grocery prices and the full whack of energy price increases still to land for many households and businesses.

The RBA, meanwhile, will appear before Senate estimates later this morning (after the ACCC kicks off proceedings for the Treasury portfolio), so expect more grilling about whether the central bank should have acted sooner to curb inflation so we wouldn’t be jamming the brakes so hard now. (They’re reviewing their models, and rightly note that most economists didn’t pick Russia’s war, etc.)

One thing worth keeping an eye on is the deteriorating Chinese economy amid a sagging property market and rolling Covid-zero policy lockdowns.

As we noted in August, China’s economy was showing signs of a big slowdown.

We shouldn’t lose sight of this notable stat provided by Michael Pettis, an economist at Peking University*: China’s GDP is roughly three-quarters that of the US and Europe, but the value of property assets are double those in the US and triple those in Europe. The mother of all property bubbles, it seems.

Anyway, China’s producer prices fell last month for the first time in almost two years we learnt yesterday, quite at odds with most other parts of the world. Deflation is not a good sign about the health of the local economy.

Not surprisingly, then, Bullock cited China as the top uncertainty in the international economy.

“A significant concern from our perspective is the downside risks in China,” she said, with the real estate woes at the core.

Bullock said:

Residential property sales have declined sharply over the past year, and housing starts have also fallen to be lower than they have been for over a decade.

The way Australia might feel the pinch directly is via lower iron ore prices, but since China is the biggest consumer of most other things dug out of the ground, the implications could end up being a lot wider.

However, a flood of goods that can’t be sold at home should ease price pressures in Australia and elsewhere.

* “Peking University” is the official name in English, in case you’re wondering why it’s not “Beijing University”.