Last week (starting 25 June) – early signs of a widening credit squeeze

  • Last week was quiet, with just the monthly Reserve Bank of Australia (RBA) credit aggregates the only data release of note. They showed that growth in credit over the month of May (up 0.2%) was half that expected by economists, and much weaker than in prior months. In fact, it was the equal-weakest monthly growth in six years. This may be evidence that recent regulatory changes are having an impact on the availability of credit. Worryingly, business credit shrank for the first time since January, although housing credit growth was steady at 0.4%. The other highlight last week was the speech on cryptocurrencies by Tony Richards of the RBA, which should be essential reading for anyone interested in investing and/or their future use.

This week (starting 2 July) – normal economic service resumed

  • There is more economic activity on the agenda this week, with the RBA Board meeting to consider the level of interest rates, and some key economic data released. The RBA has been inactive on policy for nearly two years – a record-long stretch – so economists have focussed on the tone of the Bank’s statements. The minutes from the previous Board meeting removed reference to the assumption that the next move in official interest rates would be up. Some economists saw the statement’s omission as profound, so it will be interesting to see whether a similar reference returns tomorrow. No surveyed economist expects the RBA to move interest rates in either direction tomorrow.

  • The highlight amid the economic data will be the May retail sales report, due for release on Wednesday. Sales growth has been weak for more than a year now, reflecting a combination of factors. There is, of course, the structural shift towards online spending. But, there are macroeconomic issues in play too, including record low wages growth, a softening housing market, and fragile consumer confidence. Moreover, last week saw a couple of second tier banks raise their mortgage rates, despite the RBA’s policy inactivity. Surveyed economists expect sales growth of just 0.2%m/m in May, even weaker than the soft result for April.

Chart of the week: credit growth continuing to slow

House prices 

economic events in Australia

Last week (starting 18 June) – a change in nuance from the RBA?

  • The economic highlight last week came from an unexpected source. Minutes from Reserve Bank of Australia (RBA) Board meetings have become predictable over the last couple of years, mainly because the RBA has not altered the policy stance since mid-2016. The minutes from the most recent Board meeting, however, released last Tuesday, removed a previous reference to members believing that the next move in official interest rates most likely was up. Some economists interpreted this omission as a sign that RBA officials have become less confident about the outlook. Others concluded that perhaps the timing of the expected hike merely had been pushed out. Others still saw little of substance in the change. Welcome to economists’ uncertain world of reading RBA “tea leaves”.

  • The other economic news last week was the revelation that house prices are falling in the major east coast cities, although they continue to rise elsewhere. Nationally, on a weighted average eight capital city measure, prices for established homes dipped in the three months to March for the first time since 2012. The modest rise nationally over the last year effectively matched inflation at just over 2%. But, the official data dispels the widely-accepted myth that house prices never fall. They do, every seven years or so (on average, see chart), particularly in the larger cities of Sydney and Melbourne, where price rises have been largest.

  • House prices in Sydney dropped for the third straight time in the March quarter and actually are lower now than they were a year ago. Prices in Melbourne fell for the first time in six years, and they also dipped in Brisbane, Perth and Darwin. Prices bounced nearly 5% in Hobart, however, thanks to a turnaround in population growth and favourable affordability. House prices in Adelaide and Canberra rose by around 1% over the quarter.

This week (starting 25 June) – RBA speech on cryptocurrencies the highlight

  • Unusually, there are no major economic data releases this week, nor major policy announcements. Tony Richards from the RBA, however, will deliver a speech on Tuesday on cryptocurrencies and related matters. Bitcoin, among other cryptocurrencies, has been in focus not just owing to the speculative frenzy over its value, but because of the possible implications for e-currencies and the banking system.

Chart of the week: house prices falling in major cities

House prices 

economic events in Australia

Last week (starting 11 June) – still signs of spare capacity in the job market

  • The highlight last week was the release of the May jobs report last Thursday, although the results were a mixed bag. The headline 12,000 gain in jobs over the month fell short of economists’ expectations, as a big rise in part time jobs swamped a fall in full time roles. The jobless rate, however, fell the most it has in two years, to a six-month low of 5.4%. This latest decline extends the trend of recent years, although it has not been a straight line. Moreover, there remains slack in the labour market, with underutilisation rates still elevated (see chart). Wages growth is unlikely to accelerate much further until more of this “slack” has been absorbed. That said, there are signs that isolated labour shortages are emerging, including in healthcare and construction. These pressures are pushing up wage rates in those sectors.

  • Last week’s confidence reports also had something for everyone. Business confidence in the May NAB survey all but halved to a net balance of +6, an 18-month low. The contemporary business conditions result also fell, but remained healthy at +15. Meanwhile, the Westpac Melbourne Institute consumer confidence measure crept up in June, but there remains only a slim majority of optimists over pessimists.

This week (starting 18 June) – house prices falling in the major cities

  • This week is quiet, with just the house price data released tomorrow, alongside the minutes from the most recent Reserve Bank of Australia (RBA) Board meeting. The Board meeting delivered yet another “unchanged” interest rate decision, and there wasn’t much change in the tone of the commentary. So, it’s difficult to make a case for the minutes showing much that is new. Still, they sometimes include unexpected nuances, so always are worth watching. Also, RBA Governor Philip Lowe is appearing on a panel organised by the European Central Bank in Portugal on Wednesday, and may add to his comments of last week. Governor Lowe had mentioned the lack of appetite for reform, but also comfort about modest falls in house prices.

  • The official national house price data should show that prices in the major east coast cities indeed are falling, albeit modestly. There are a number of reasons for this – the supply of homes has increased significantly, particularly apartments, and demand by foreign buyers has been curtailed. Also, credit growth has been squeezed, including by more onerous regulation. Finally, the banks’ response to recent investigations into financial services has resulted in even slower growth in credit and more rigorous loan assessment procedures.

Chart of the week: underemployment rates remain elevated



Last week (starting 4 June) – Australia’s economy growing above trend

  • Last week’s National Accounts revealed that growth in Australia’s economy rebounded in the March quarter. The 1.0%q/q rise in real GDP beat economists’ expectations, was the (equal) biggest gain since 2011, and took growth over the year back above 3%. This means the economy finally is growing above its trend rate, after undershooting since 2012. The upshot of this is that, if this decent rate of growth is sustained, as the Commonwealth Budget forecasts, the economy will absorb more spare capacity. This, in turn, means the jobless rate should fall, and that wages growth should accelerate … eventually.

  • Most components of the economy expanded last quarter, but there was prominent weakness in the household sector. Households make up 60% of the economy, so subdued behaviour by consumers is important. Annual growth in consumer spending, in fact, was the weakest in a year, partly owing to record-low wages growth. Household spending is being supported by a falling savings rate (see chart), which has slipped to the lowest level in more than a decade. Exports are booming, at least, reflecting the improving outlook for global demand and the massive expansion in production capacity during the resources boom, particularly in liquefied natural gas.

This week (starting 11 June) – more of the same in the May jobs data

  • There is a decent amount of data on the agenda this week, with the business and consumer confidence data due for release, alongside the latest employment report and home loans data. The employment data will attract most attention, but the expectations of economists are that it will be more of the same. Forecasters anticipate a 19,000 increase in net jobs and a dip in the unemployment rate back to 5.5%. This will continue the pattern of the last year or so, with rising participation preventing good employment outcomes from eating even further into the unemployment rate.

  • There are two speeches this week from senior Reserve Bank of Australia (RBA) officials. Governor Philip Lowe speaks on Wednesday, and chief economist Luci Ellis speaks on Friday. The message the RBA delivered last after the Board chose to leave official interest rates steady for a record 20th straight time sounded familiar – it pretty much was a case of “copy and paste” from before. It’s unlikely, then, that the tone of the commentary this week will be much different. The RBA will welcome the return to trend growth, but will not seriously contemplate raising interest rates until inflation and growth in wages have shown sustained improvement.

Chart of the week: lowest household savings rate since 2007!

 Economic graph of the week

Economic events of the week

Last week (starting 28 May) – glacial improvement in business investment

  • The main event in Australia last week was the release of the March quarter survey of business investment. The results were a little underwhelming, but still point to an improving private spending outlook, albeit a slow one. Firms’ spending on investment last quarter was below economists’ expectations, but still rose relative to Q4. Even more welcome was the upgrade to managers’ spending plans for the next fiscal year. The largest improvement was by firms outside mining, as investment in resources continues to dwindle. All that said, the latest survey still implies that economy-wide private investment will fall in the year ended June 2019, partly because large-scale resources projects are being completed. Managers probably are being cautious in their spending plans, so further upgrades are likely.

This week (starting 4 June) – economic growth likely to have doubled in Q1

  • The economic agenda is full this week, with the National Accounts released Wednesday, retail sales data out today, and lots of other data releases as well. Also, the Reserve Bank of Australia (RBA) announces its interest rate decision tomorrow. The building blocks of the GDP result have been falling into place over the last few weeks, and there are more released today and tomorrow. They look like delivering a much better quarter of growth in the economy for Q1. Economists expect real GDP growth of 0.8%q/q, double the underwhelming outcome of the previous quarter. Such a result would see the annual rate of growth in the economy lift to 2.7%, still short of the economy’s trend rate, but a welcome improvement.

  • The retail sales report released later today also will be of interest. The last report for March delivered a very weak result – sales were unchanged, which extended the run of disappointing results. Economists expect a better outcome for April, but the expected 0.3%m/m gain still will be well below the long term average growth rate. There are structural reasons why growth in retail sales has cooled (more on-line spending options, for example), but it also seems that many consumers have become more cautious.

  • The RBA decision Tuesday should not yield too many surprises. Already, the RBA Board meetings have delivered a steady cash rate for 21 consecutive months, a record stretch. Indeed, no economist seriously expects the RBA to move the official cash rate tomorrow, so the focus again will be on the commentary. It was interesting last week that RBA Governor Philip Lowe turned his attention to excesses in China, Australia’s largest export market.

Chart of the week: slow improvement in non-mining investment

 Economic graph of the week

Economic events of the week

Last week (starting 21 May) – China’s debt imbalance in focus

  • The only Australian economic data of note released last week was the construction work information for the March quarter. The headline result disappointed, with total construction work barely growing, against economists’ expectations of a 2%q/q rise. There was a small rise in residential construction, but a large fall in the value of work done in the non-residential space. There was an upside surprise, however, on engineering construction, as several large projects approached their completion dates. The bounce means that engineering construction should have made a decent contribution to growth in real GDP in Q1. The National Accounts including the GDP data are released in the first week of June.
  • Meanwhile, Reserve Bank Governor Dr Phil Lowe delivered a speech on Australia-China relations last Wednesday. One of his themes was that China’s economy, for all is advantages, carries significant excesses. Chief among these is a mammoth debt burden, much of it in what is known as the opaque “shadow”, or unregulated, banking system. Rapid and consistent economic growth has helped mask these excesses for the last decade, but continued growth cannot be guaranteed. Remember, China currently receives one-third of Australia’s merchandise exports and also is a major buyer of Australian services, particularly tourism.

This week (starting 28 May) – an update on firms’ investment plans

  • The main event this week is the release of the March quarter private business investment data on Thursday. The survey includes reports of firms’ actual spending in the most recent quarter, as well as expected spending in the current and next fiscal year. The results from the last survey three months ago were underwhelming. Spending actually dipped in the December quarter – the first fall in a year - and firms’ first estimate of spending for 2018-19 fell short of economists’ aspirations. There was, however, a material upgrade to firms’ spending plans for the year ended June 2018. For the March quarter survey, the consensus among economists is that spending plans for the next fiscal year will be upgraded.
  • In addition, the ABS releases the latest reading on the number of residential building approvals by local councils on Wednesday. This data has been unusually volatile in recent months, so the underlying trend in construction has been difficult to determine. It does seem, however, that housing construction activity is easing, albeit off high levels. Also on Wednesday, the Reserve Bank releases the latest information on growth in credit.

Chart of the week: business investment outlook still mixed

 Economic graph of the week

Economic events of the week

Last week (starting 14 May) – labour market data in focus

  • Last week’s economic data provided fascinating insights into trends in Australia’s labour market. The messages were mixed – the April employment data on Thursday revealed another decent jobs gain, but a higher unemployment rate. The wages data the previous day had shown another low result for underlying wages growth, but a solid increase for income including bonuses. Perhaps employers are finding more flexible ways to remunerate their staff, although bonuses more often are paid to workers in the financial services sector. The 0.5%q/q rise in wages excluding bonuses fell short of economists’ expectations, and left growth over the year at a soggy 2.1%. Remember that the Commonwealth Budget, released only the previous week, hoped for a steady acceleration in national wages growth.
  • The physical employment data showed a near-23,000 rise in employment over the month of April, more than economists had forecast, but there was another downward revision to the data for March. The revision means that employment actually fell in both February and March. There was yet another rise in the labour force participation rate, which touched a record high. The influx of new workers and those seeking employment washed through into a higher jobless rate, which nudged up from 5.5% to 5.6%. There have been some important demographic shifts driving up the participation rate. The largest have been more females returning to work, alongside older workers staying in employment for longer. Not until the participation stops rising can the decent gains in employment expected by most economists deliver a meaningful drop in measured unemployment.
  • The other main event last week was the release of the minutes from the Reserve Bank of Australia (RBA) Board meeting, held two weeks earlier. The tone of the commentary sounded familiar, and still indicated that the next move in official interest rates most likely will be up. There was a twist in the tail, though, with RBA officials indicating for the first time that keeping interest rates steady for now will contribute to “stability and confidence”.

This week (starting 21 May) – RBA Governor’s speech the highlight

  • This week is quiet, with the only data scheduled for release being the national construction work data for Q1. There was a plunge in work done in Q4, but this mainly reflected completion of large-scale projects in liquefied natural gas (LNG). There probably was another fall in engineering work in Q1, but work done on housing probably rose. RBA Governor Philip Lowe delivers a speech on Wednesday night. The speech most likely will be on Australia-China relations, but the occasion provides another opportunity to signal that interest rate hikes are not imminent.

Chart of the week: Wages growth still near record lows



Last week (starting 7 May) – Budget forecasts seem optimistic

  • The clear highlight last week was the release of the Federal Budget, the last before the next election. As pre-poll documents go, it wasn’t as profligate as many had feared. As the Treasurer had promised, there were personal and business tax cuts, and additional spending on infrastructure, aged care, health and education. But, Mr Morrison simultaneously pledged to return the Budget to surplus a year earlier than before, and to start paying down debt. This unexpected confluence of good news stems from a forecast revenue windfall worth nearly $26 billion over four years. Indeed, Treasury’s forecasts place the lion’s share of budget repair on the revenue side of the accounts, with the spending share of GDP falling only slightly.
  • Treasury’s economic forecasts, however, still look optimistic – failure of the economy to perform as expected will put the promised return to surplus at risk. The Budget assumes 3% real GDP growth across the forward estimates, but only once in the past decade has this rate been delivered. Similarly, wages growth is assumed to accelerate to a heady 3.5% - the last time this was achieved was five years ago. Another risk is that a cyclical bounce in revenue is being used to fund long-term, structural spending commitments, like the National Disability Insurance Scheme. This is a risky approach proven to have failed in the not too distant past.
  • This week (starting 14 May) – labour market data in focus

    • Things return to relative normal this week, now that the government’s major policy set piece is behind us. The highlight will be the April jobs data, released on Thursday. After a stellar 2017, when more jobs were created than ever before, the job gains so far in 2018 have been underwhelming. Economists, though, expect a decent improvement last month, but they also expect the jobless rate to stay at 5.5%. These outcomes will replicate the pattern of the last year or so – healthy jobs growth, but also rising labour force participation. The product of this is a flatlining unemployment rate.
    • The March quarter wages data is released on Wednesday. Economists forecast a lift in the quarterly growth rate to 0.7%q/q, from 0.6% previously. This will be consistent with leading indicators, including recent enterprise bargaining outcomes, which point to slightly healthier negotiated wage outcomes. If delivered, the annual rate of wages growth will “accelerate” to 2.2%, still unimpressive, but another small step in the right direction. Not until the jobless rate falls in a material way will wages rise more quickly.

    Chart of the week: Budget repair depends on revenue rebound



    Last week (starting 30 April) – some tweaks to the RBA’s economic forecasts

    • Reserve Bank of Australia (RBA) economists made some slight adjustments to the inflation and unemployment rate forecasts in the latest quarterly statement, released last Friday. The RBA raised both the core inflation and jobless rate forecasts, each by a quarter of a percentage point, but left the GDP growth forecasts unchanged. RBA officials still expect the economy to grow by more than 3% from here, but they now expect unemployment to be steady for a time, rather than fall. Earlier, last Tuesday, the RBA Board left the cash rate steady for the 21st straight month, a record. There was little change in the statement, accept for the mention of rising short term US interest rates. This can be expected to push up bank funding costs here.
    • The main economic data released last week were the trade balance and building approvals, both for March. Council approvals for residential building rose 2.6%m/m, more than surveyed economists had expected, but this came after a sizeable fall in February. The trade surplus was bigger than had been expected, and there was a material upward revision to the surplus for February too. Higher commodity prices are doing wonders for the trade accounts.

    This week (starting 7 May) – Treasurer Scott Morrison’s “big day out”

    • The Federal Treasurer will reveal the state of the Commonwealth’s finances on Tuesday evening in the annual Budget speech. The centrepiece will be personal tax cuts spread over the next decade, most likely via increased income thresholds. Also, the Federal Government probably will stick with the remainder of the planned corporate tax relief, and tinker with tobacco and beer taxes. On the spending side, there is said to be more funding for health, education, and infrastructure. There also may be some relief for middle-income families. The Budget bottom line probably will be presentation of smaller expected deficits in the near term, thanks to an unexpected revenue bounty in recent months. Revenue has been running better than expected over this fiscal year to the tune of $5 billion (see chart). There is talk that the promised return to surplus will be dragged forward one year to 2019-20.
    • The main economic data releases this week will be the retail sales and home loans reports for March, and the April NAB business confidence survey. A month ago, retail sales growth was decent for February, with total sales rising 0.6%m/m. Economists expect a much smaller rise in March of just 0.2%m/m, as consumer caution continues. Approved home loans probably fell, but business confidence is likely to have bounced, following a dip in March.

    Chart of the week: Commonwealth revenue well ahead of forecast




    Last week (starting 23 April) – Inflation anchored below RBA comfort zone

    • Last week’s March quarter inflation report revealed yet another quarter of low inflation. The headline increase was just 0.4%q/q, below economists’ expectations, although the main underlying rates printed as had been expected at 0.5%. Outside the temporary, energy-price-driven CPI rise a year ago, inflation has been tracking below the Reserve Bank of Australia (RBA) 2-3% target range since late 2014. The persistence of low inflation reflects a combination of factors – benign wages growth, intensifying competition in retailing, a lack of global inflation pressures, a broadly stable exchange rate, and lingering spare capacity, including in the labour market. The RBA has signalled that interest rates probably are on the way up, but not before inflation returns to target, which may be some way off yet.

    • The other major economic news last week was the decision by Federal Treasurer Scott Morrison to jettison the planned rise in the Medicare Levy to fund the National Disability Insurance Scheme - the scheme now will be funded from general revenue. The Commonwealth’s finances are in much better shape than was expected just a few months ago, so the hypothecated tax rise announced in the 2017 Budget no longer is needed. The Treasurer also confirmed that the Budget on May 8 will include another round of personal tax cuts, and that the government is sticking with its plan to lower the corporate tax rate over the next decade.

    This week (starting 30 April) – RBA activities back in focus

    • The RBA is back in action this week. Tomorrow, the Board is all but certain to announce an unchanged cash rate for the 20th straight month. Indeed, last week’s inflation data demonstrated that there is no need to rush the planned return to more normal settings of monetary policy. The tone of the RBA's commentary tomorrow around the housing market, global trade, and AUD probably will attract the most interest. The Board’s decision on interest rates will be explained in greater detail on Friday in the RBA’s quarterly statement, which will include updated economic forecasts. In addition, Governor Philip Lowe will make prepared remarks in Adelaide on Tuesday evening.

    • The main economic data releases this week are the trade balance and residential building approvals, both for the month of March. Building approvals plunged in the month of February, so there is scope for them to have improved in March. The trade balance most likely will remain in significant surplus, thanks in part to rising prices for our commodity exports.

    Chart of the week: outside energy…inflation remains low

    Wages growth, % annual change 

    Economic events in Australia

    Last week (starting 16 April) – labour market has lost steam this year

    • The March jobs report, released last Thursday, revealed results that were difficult to interpret. The modest gain in employment was just one quarter of what economists had expected, and there was a downward revision for February, from a decent gain to a small fall. This means that the record run of monthly gains in employment ended at 16 back in January. The unemployment rate “stayed” at 5.5%, but only thanks to more revisions to the February data – economists had expected a fall. The bottom line is that the rate of jobs growth over the first three months of 2018 has been substantially below the record gains of 2017. The jobless rate, though, has flat-lined because of volatility in the labour force participation rate. Business surveys hint at better news on jobs growth in the months ahead.

    • Also, the Reserve Bank of Australia (RBA) released minutes from the Board meeting held two weeks earlier, when interest rates were left steady yet again, but there was little in the discussion that was new. Still, the minutes revealed that the Board, and not just the Governor, now expects the next move in official interest rates to be a rise, rather than a fall. But not yet! Indeed, officials want to see inflation back within the 2-3% target range before acting.

    This week (starting 23 April) – CPI data to reveal another low result

    • Given this, the Q1 inflation data released tomorrow will attract a lot of attention. The data is likely to reveal another quarter of inflation below the RBA’s comfort zone, the fourth in a row. This should mean that RBA officials will remain under no immediate pressure to lift interest rates. Economists expect 0.5% quarterly rises in both the headline and underlying inflation indexes, which will leave the annual rates tracking at 1.9% and 1.8%, respectively. The only other material data release this week is the export and import price data on Thursday. They should reveal a decent bounce in the terms of trade (the ratio between the two indexes), thanks to a welcome rise in commodity prices.

    • Federal Treasurer Scott Morrison MP delivers a speech on Thursday, two weeks out from the release of the Budget. It’s unlikely the Treasurer will reveal too many Budget goodies this week, but it will be interesting to see the extent to which he reinforces the broad objectives of the government’s fiscal strategy. These include the planned return to surplus by 2020-21 and maintenance of the nation’s AAA credit rating.

    Chart of the week: run of consecutive monthly job gains ended at 16

    Wages growth, % annual change 

    Economic events in Australia

    Last week (starting 9 April) – confidence sliding after decent start to year

    • Last week saw evidence that both consumer and business confidence is weakening, after a decent few months, particularly for businesses. The Westpac Melbourne Institute index of consumer confidence slipped another 0.6%, meaning the average level of the index is back to its long term average. The measure of family finances fell sharply, perhaps because of growing anxiety about rising interest rates. It was a similar story with the NAB business measure, with the previously-elevated confidence reading also dipping back towards its long term average. The more contemporary conditions measure also slipped, but this index is coming off the peak for this economic expansion, so remains at a healthy level.

    • The Reserve Bank of Australia (RBA) was active last week, with Governor Philip Lowe delivering a speech in Perth and the RBA releasing the six-monthly Financial Stability Review (FSR) on Friday. One message from Governor Lowe’s speech was that diversity in regional economic performance has diminished, with unemployment rates, for example, converging. He also suggested that wages growth was improving, albeit off record lows, and noted that measured wages growth had increased in all states and territories. The FSR on Friday was upbeat, although it did flag the same issues that have worried officials for some time. One is the early signs of distress in some commercial property. RBA officials, however, retain a generally sanguine view of financial risks, despite increased market volatility this year, and adverse geopolitical developments.

    This week (starting 16 April) – jobs data on Thursday to show another gain

    • The main event this week is the release of the March jobs report on Thursday. A month ago, in the data for February, jobs growth was slightly underwhelming, and the jobless rate rose to 5.6%. But, February’s was the 17th straight monthly gain in employment, a new record. The record probably will be extended this week, with economists expecting a 20,000 jobs gain over the month. This should see the unemployment rate drop back to 5.5%.

    • The RBA releases minutes from the most recent Board meeting tomorrow. RBA officials have maintained a steady line on their communications about the decent state of the economy, and this probably will be sustained tomorrow. Officials expect a constructive combination of GDP growth approaching 3%, the jobless rate sliding, wages growth improving, and inflation returning to target. On this, one other thing that Governor Lowe said last week was that official interest rate hikes are unlikely until inflation rises back above 2%, the floor of the official target zone.

    Chart of the week: Wages growth starting to lift … finally

    Wages growth, % annual change 

    Economic events in Australia

    Last week (starting 3 April) – RBA officials flagged growing trade tensions

    • The Reserve Bank of Australia (RBA) last week left the official cash rate on hold for the 18th straight time, which set another record for extended policy inactivity. The outcome of the RBA Board meeting was unsurprising – all economists had forecast an unchanged cash rate – but some of the RBA’s commentary raised eyebrows. The statement, for example, mentioned rising US short term interest rates and growing trade tensions. Indeed, this week saw China impose tariffs of its own on imports from the US, a strategic retaliation that ups the protectionist stakes. Neither these nor the US tariffs announced earlier apply yet, but the odds of an escalating trade war will rise if this trend continues. As we have said before, there are no long term winners from trade conflict – only the relative degree of loss matters (see chart).

    • The main economic data release was the retail sales report for February. After a weak outcome for January, sales nationally rose by twice as much as economists had forecast. And, discretionary areas like spending at department stores and on clothing and homewares rose fastest. In fact, all categories of spending increased over the month. The robust job markets probably explains the good retail result, as well as an influx of tourists for Chinese New Year celebrations. The retail sector is not yet out of the woods, however, with wages growth still near record lows, interest rates staring to rise, and consumer confidence fragile.

    This week (starting 10 April) – businesses feeling more upbeat than consumers

    • We receive another read of the mood of consumers this week, with the release of the Westpac Melbourne Institute confidence gauge. Confidence had risen towards the end of 2017, but slipped over the last couple of months. Households enjoying the strength of the labour market probably are having their optimism tempered by sluggish wages growth and still high energy prices. The latest business confidence reading also is released this week. The NAB survey has shown much better outcomes than for consumers, with the more contemporary conditions reading, in fact, rising recently to the highest level for this cycle. It seems the concerns of households are not shared by the captains of industry.

    • The latest home loans data also is released this week. The number of loans approved by financial institutions slipped over the last two months, and in four out of the last five. Economists expect another fall in the month of February, though, despite looser lending standards and stabilisation of demand for housing, which had been softening. Still, total growth in home loans has cooled significantly, meaning the regulators should be feeling a little more comfortable than before.

    Chart of the week: no winners from trade wars – projected falls in GDP

    Projected economic impact of 15% tariff rises 

    Economic events in Australia

    Last week (starting 26 March) – economy-wide credit growth still weak

    • Last week was quiet, with the only event of note being the release of the latest credit aggregates by the Reserve Bank of Australia (RBA). Growth in total credit was slightly better than economists had expected, growing by 0.4%m/m in February. There was, however, a small downgrade to the previously reported growth rate for January, which partly offset the good news. The improvement was led by firmer growth in owner-occupier housing credit. Credit in the economy expanded just 4.9% over the year to February, the slowest rate of expansion since 2014. This reflects softening demand, particularly for housing purposes, modest rises in interest rates, and moves by the regulators to curb riskier types of borrowing, such as interest only home loans.

    This week (starting 3 April) – economists expect extended RBA inactivity

    • The RBA Board meets today to decide whether to leave interest rates where they are, or otherwise. All economists surveyed by Bloomberg last week expect interest rates to stay at 1.5%, where they have been already for the last 19 months. This is the longest stretch of policy inactivity since the RBA became independent in the 1990s. In fact, economists expect the cash rate to be steady for another year, at least, although futures market pricing implies a decent chance of a quarter point rate hike before then. Inflation is at the bottom of the 2-3% target zone, and growth in the economy disappointed in the most recent National Accounts, so RBA officials can afford to take their time.

    • The data flow is more impressive this week, with the latest retail sales, home building approvals and trade data set for release. The highlight will be the retail sales report on Wednesday. Growth in sales generally has disappointed expectations for the last year or so, as many households adjust to the weakest wages growth in a generation and rising interest rates and energy bills. Economists expect sales to have risen just 0.3% for the month of February, following an even weaker outcome in January. The discretionary areas of retailing – like department stores and clothing sales - have been hardest hit.

    • Volatility returned to financial markets last week, with most share markets, including our own, tumbling again as fears of the outbreak of global trade war intensified. Markets stabilised towards the end of the week, but it is clear that investors are worried about retaliation, following the imposition of tariffs by the US. The good news is that AUD has dipped back below 77 US cents, which should help support our exports – tariffed or otherwise.

    Chart of the week: credit growth still treading water

    cash rates 

    Economic events in Australia

    Last week (starting 19 March) – new record for monthly employment gains

    • The major economic development in Australia last week was the release of the February jobs report on Thursday. Although the headline outcome of a 17,500 net monthly gain in employment was a touch below economists’ expectations, this brought the number of consecutive months that employment has increased to 17. This is a new record for the period since 1978, when this monthly data was first collected. The gain last month was underpinned by a huge rise in full time jobs – extending the trend over the last year or so - as part time employment dived, albeit after a big rise in January. Annual growth in total employment in the year to February was 3.5%oya, the fastest rate since 2005.

    • The bad news was that the jobless rate unexpectedly rose in February to 5.6% - economists had expected no change at 5.5%. This, however, was because the percentage of people engaged in the labour force increased. That is, the growth in jobs last month was insufficient to absorb the number of people entering (or re-entering) the job market. Rising participation generally is a sign of health, though, because people usually seek work only when there is decent chance of landing a job. The aggregate participation rate, in fact, is at a record high, with the female rate still rising as the rate for males continues to slide (see chart).

    • The main international news last week was that the US central bank lifted interest rates for the sixth time in this cycle (starting in late 2015), as virtually all economists had expected. The quarter point rise to 1.75% took US official interest rates above those in Australia for the first time in 17 years. The Federal Reserve signalled more rate hikes to come – two more this year and another three in 2019 – so the interest rate gap over Australia is certain to widen. Indeed, futures market pricing implies that our own Reserve Bank of Australia (RBA) will be on hold for some time yet.

    This week (starting 26 March) – quiet week ahead – credit data the highlight

    • This week is very quiet for economic data, and there are no RBAs speeches or announcements, either. The modest highlight will be the release of the latest credit aggregates on Thursday. Credit growth slowed to just 0.3% in January, and economists expect the same outcome for February. This will leave total credit growth over the year at just 4.9%oya, the same rate of expansion as in the year to January.

    Chart of the week: divergent trends in labour market participation

    cash rates 

    Economic events in Australia

    Last week (starting 26 February) – more green shoots for the capex outlook

    • The only economic data of note released last week was the private business investment survey for the December quarter. The headline result was disappointing, with total spending unexpectedly falling in Q4, but the forward-looking expectations component was upbeat. Firms upgraded their spending plans for the year ended June 2018, and their initial expectations for spending in the year ended June 2019 were decent, although they fell short of economists’ expectations. The swelling private investment pipeline is happening alongside record levels of infrastructure spending by the public sector and validates the record jobs growth in calendar year 2017. A previously missing piece of the economy’s growth jigsaw seems to be falling into place.

    This week (starting 5 March) – Q4 GDP data to be released on Wednesday

    • This week is packed with economic data and Reserve Bank of Australia (RBA) activity. The highlight will be the Q4 GDP data scheduled for release on Wednesday. Before then, however, the building blocks of the GDP result will continue falling into place. The inventories and company profits data hit today, followed by the current account and government spending data on Tuesday. Later tomorrow, the RBA almost certainly will announce another “on hold” decision on the official cash rate – the eighteenth time in a row. Governor Philip Lowe delivers a speech on Wednesday morning that probably will explain the RBA’s thinking in more detail.

    • The GDP data should show that Australia’s economy has extended its unprecedented and unbroken run without recession for another quarter. This impressive run without back-to-back falls in quarterly GDP (in real terms) already extends for nearly 27 years. The main contributors to growth in the economy last quarter probably will have been a solid rise in export volumes, thanks to the oncoming stream of more production from new resource industry capacity. Consumer spending also likely will have been decent, along with expansions in government infrastructure spending. Economists expect real GDP to have expanded 0.5%q/q, taking growth over the year at 2.5%.

    • The other data releases this week include the latest readings on retail sales, building approvals and the trade balance. The highlight of this batch will be the retail sales data for January. Recall that the data for December showed a shock fall in total spending, although drag forward of spending to November for the release of the new iPhone had something to do with that. Sales in January probably will have recovered, with economists expecting a 0.4%m/m rise.

    Chart of the week: growth in wages seems to have turned

    bond yields 

    Economic events in Australia

    Last week (starting 12 February) – calm restored to global equity markets

    • The main economic event last week (outside the stabilisation of financial markets – see below) was the release of the January employment data last Thursday. Employment over the month rose by a net 16,000 positions, broadly in line with economists’ expectations. The jobless rate dipped to 5.5%, also as had been expected. The other data releases last week were the twin confidence readings for business and consumers. Business confidence rose for the month of January, but consumer confidence slipped a little in February. That said, this drop follows two months of solid gains. Optimists have outnumbered pessimists for four straight months.
    • The Reserve Bank of Australia was active last week, with chief economist Dr Luci Ellis delivering a speech on the economy on Tuesday and Governor Philip Lowe later providing testimony to Federal Parliament. Dr Ellis emphasised the official narrative that wages growth eventually will rise as the orthodox forces of demand and supply in the labour market play out…but not yet. Dr Lowe continued the upbeat theme last Friday, talking about pockets of tightness in the labour market. He also mentioned, however, the likelihood of subdued growth in household spending as consumers adjust to rising debt servicing costs. Dr Lowe again indicated that the next move in official interest rates is up…but not yet.
    • Meanwhile, there was a return to relative stability in world financial markets, with major share indices rising over the week, following steep falls the previous week. More telling, though, was that government bond yields also climbed, with the 10-year yield in the US rising above the corresponding yield in Australia for the first time since 2000. The spike in US yields followed the release of an unexpectedly high inflation print, a shock result that followed the lift in wages growth the week before.

    This week (starting 19 February) – wages growth Wednesday the highlight

    • This week is quiet by comparison, but there is an important economic data release on Wednesday. The Australian Bureau of Statistics releases the Q4 wages data but, unfortunately, it probably will not reveal a lift in wages growth. Surveyed economists, in fact, expect economy-wide wages to have risen just 0.5%q/q over the quarter. This will leave growth over the year at just 2.0%, unchanged from the previous quarter, and barely matching inflation. There is much debate about what is causing the persistence of record low wages growth. Technological change, insecure employment, record-low trade union representation, global supply chains, record high levels of university graduates, and low inflation all are in the explanatory mix.

    Chart of the week: Aust-US bond yields equal for first time since 2000!

    bond yields 

    Economic events in Australia

    Last week (starting 5 February) – world share markets in correction mode

    • Last week was dominated by extreme volatility in financial markets, which suffered from an oversupply of good economic news. That is, investors suddenly realised that accelerating rates of economic growth at a time of limited spare capacity means inflation and, ultimately, higher interest rates. The major central banks have been responding to this unfolding return to economic normality with rate hikes for some time, but bond markets had not … until now. Bond yields, therefore, soared, challenging lofty equity market valuations. The US market has fallen 10% in a week, albeit from record highs after a stellar 2017, with the falls here more modest. Measured market volatility has vaulted from previously unprecedented lows.
    • The economic data flow in Australia was dominated by the December retail sales report last Tuesday, which revealed that the release of the new I-phone had had a larger than expected effect in inflating spending in November. Spending on electronic items plunged in December, but there was broad-based weakness elsewhere too, a calamity of gloom that saw total spending sink 0.5% over the month. It seems that households in Australia already are adjusting their spending patterns to a harsher new world of rising debt servicing costs, one that is wholly unfamiliar to many home-owners. The booming job market, at least, is providing a comfy cushion against the record-high debt burden.

    This week (starting 12 February) – January job numbers the week’s highlight

    • The degree of comfort to households provided by the more than 400,000 new jobs created in calendar year 2017 – the most ever – will be re-evaluated this week, with the release of the January employment numbers on Thursday. The great news last year was that, not only were more jobs than ever before created in a single year, but three-quarters of them were full time positions. These gains helped drag down the unemployment rate. Wages growth has yet to accelerate, but constructive public comments from RBA officials last week were consistent with faster growth in wages over time, albeit gradually. Economists this week expect another 15,000 net jobs to have been created in January, but for the jobless rate to stay at 5.5%.
    • RBA officials are back in action again this week after a busy time last week. Dr. Luci Ellis, the Bank’s chief economist, speaks Tuesday morning, and Governor Lowe appears before a federal Parliamentary committee on Friday. Their commentary probably will sound similar to last week’s comments, which indicated official expectations of decent growth in the economy, rising wages and inflation and, eventually, higher interest rates.

    Chart of the week: up the stairs…down the elevator

    consumer confidence 

    Economic events in Australia

    Last week (starting 29 January) – CPI undershoot to delay RBA hikes

    • The surprise in the economic data flow last week was that inflation over the December quarter was lower than economists had expected. This was despite the steep price rises for tobacco, petrol and airfares playing out pretty much as had been anticipated. This mismatch implies that underlying price pressures in other parts of the economy remain subdued. Indeed, annual inflation continues to track below the Reserve Bank of Australia’s (RBA) 2-3% target range (see chart). The latest CPI report signals that inflation may have bottomed out for this cycle, but very few economists expect a rapid increase from here. The persistence of low inflation means the RBA needs to be in no rush to lift interest rates from the current record low of 1.5%.
    • The other data last week also revealed surprises, with residential building approvals slumping 20% in December, twice as big a fall as had been expected. Admittedly, the drop comes after a big rise in November, but nevertheless was driven by a dive in approvals for new apartments. The trade prices data for Q4, though, revealed a better than expected outcome, thanks to a large rise in commodity prices. The terms of trade then, an important driver of national income, rebounded, indicating that the national income recession is over! Earlier in the week, the National Australia Bank business survey showed a decent rise in business confidence.

    This week (starting 5 February) – RBA officials back from their summer break

    • The RBA returns to the spotlight this week with a bang. There is the interest rate decision tomorrow, a speech by RBA Governor Lowe on Thursday and the release of the monetary policy statement Friday. No market economist expects an interest rate change tomorrow, particularly after the low-ball CPI outcome. As always, then, the focus will be on the tone of the statement. It will be similar on Friday with the longer statement, which will include updated forecasts. The title of the Governor’s speech on Thursday has not yet been released, but his sentiments are unlikely to have changed over the summer. One new element may be Dr Lowe’s view on AUD, which hovered above 80 US cents in recent weeks.
    • The highlight of the economic data will be the retail sales report on Friday, which will include spending outcomes for the all-important Christmas period. Recall that the previous report for November revealed a surprise surge in spending, helped by earlier discounting and the release of the new iPhone. There probably will be a pullback in discretionary spending in the December report, but anecdotal evidence from larger retailers indicated that holiday spending in most areas was decent. Economists forecast a small fall in total spending.

    Chart of the week: inflation still undershooting target

    consumer confidence 

    Economic events in Australia

    Last week (starting 15 January) – more good news for the consumer

    • More positive developments for the consumer emerged in last week’s economic dataflow. There was the release of yet another better than expected jobs report, this time for December, and evidence that first home buyers are returning to the housing market. The mood of many first time buyers has been lifted by state governments beefing up concessions and grants, and also the softening of the market, which has improved affordability. These favourable events culminated in a rise in consumer confidence, the second in a row, which followed news the previous week that retail sales had boomed in November.
    • The December employment report was the stand out event of the week. Total employment rose nearly 35,000 over the month, with new full time and part time roles about roughly split. Annual growth in employment rose to 3.3%, the fastest since before the GFC in 2008. More than 400,000 jobs were created across all of 2017, with three quarters of them full time. This is a marked turnaround from the recent past, when part time roles dominated. The only downside was the small rise in the unemployment rate to 5.5%, but this reflected more people looking for work. The latter usually is a healthy sign – displaced workers usually only seek a job when they perceive a decent chance of finding one.
    • The Westpac Melbourne Institute Consumer Sentiment report last Wednesday showed that the headline measure rose to a four-year high, the survey having languished with a surplus of pessimists over optimists as recently as last September. The sustained improvement in the labour market explains much of the lift in confidence, with the favourable news outweighing lingering concerns about low wages growth and soaring energy costs. A key test for many households will be how they cope with the expected spike in mortgage payments as previous interest only loans revert to principal and interest payments over the course of this year.

    This week (starting 22 January) – all quiet…but plenty happening overseas

    • The week ahead is quiet for economic data, with no major releases scheduled. Moreover, there are no major speeches by policymakers on the agenda, so most observers will be looking overseas for guidance. The context here is interesting – the US share market reached another record high last week, the central bank of Canada raised interest rates again, and global bond yields continued to rise. Meanwhile, the traded price of many crypto-currencies collapsed on fears that regulators will curb, or even ban, trading. Also, the US government suffered a partial shutdown on Friday night over budget and other disputes.

    Chart of the week: Crypto-currency boom unwinding

    consumer confidence 

    Economic events in Australia

    Last week (starting 8 January) – retail boost helped by iPhone splurge

    • Many senior policymakers remain on holidays, so the highlight in an otherwise quiet week was easy to find. The November retail sales report last Thursday showed the strongest growth in spending in nearly five years. To be fair, two major factors helped drive the 1.2% rise over the month, which was four times economists’ expectations. First, was the release of the new iPhone X. Second was the move towards so-called ‘Black-Friday’ sales, a phenomenon imported from the US. These added the lion’s share of the rise over the month, and both probably are one-offs. That said, anecdotes from retailers about Christmas-related spending were decent, so perhaps the consumer finally has turned the corner.

    • If the consumer indeed is “back”, the return will represent an important piece of the growth jigsaw falling into place. The household sector has been under pressure in recent years, owing mainly to rising energy costs, weak wages growth, softening housing markets and fragile confidence. But, perhaps the underlying strength of the physical labour market, which has seen sustained and healthy gains in employment for more than year now, and a lower jobless rate, is playing a more material role than analysts previously thought.

    This week (starting 15 January) – December jobs data the highlight

    • It’s almost back to normal this week, following the holiday season lull, with a decent suite of economic data scheduled for release. The main event will be the release of the December jobs data on Thursday. The consensus of economists expects job growth of 15,000 over the month, a decent enough result that should be sufficient to keep the jobless rate steady at 5.4%. The experience of strong jobs growth over the past year or so has been matched by rising labour force participation, which usually is a sign of an improving market. But, these forces have conspired to limit the fall in the jobless rate.

    • The other interesting data point this week will be the consumer confidence reading on Wednesday. The previous reading for December revealed a healthy rise, so much so that there once again were more optimists than pessimists responding to the survey, after the brief dip below the 100 breakeven level in November. The January survey results may shed light on the extent to which the good news on employment growth is overshadowing the bad news on energy prices and wages growth.

    Chart of the week: consumer confidence recovering

    consumer confidence 

    Economic events in Australia

    Last week (starting 1 January) – quiet start to an otherwise busy year

    • Unsurprisingly, given the season, last week’s sparse economic releases contributed to a quiet start to 2018. Senior Reserve Bank of Australia officials and other policymakers are on holidays, so there was no public commentary, and nor did the RBA board meet. The board’s first gathering to consider the level of official interest rates is not until the first week of February, and no surveyed economist expects any change in rates, anyway. It probably will be “as you were” on monetary policy, then, as it was through all of 2017. Interest rate stability for an entire calendar year is an infrequent occurrence, and some economists expect a repeat in 2018!

    • The only data release of note last week was the trade balance for November. It revealed an unexpected deficit for the month, and significant downward revisions to the previously reported trade surplus for October. The material miss relative to forecast reflected a collapse in gold exports and a bounce in imports. Exports of gold are volatile month to month, however, and could bounce back quickly, so we shouldn’t stress too much that the trade account suddenly is back in the red.

    This week (starting 8 January) – November retail sales data the highlight

    • The dataflow picks up a little this week with the release of the official retail sales and building approvals reports for November, as well as the ANZ job ads series for December. The highlight will be the retail sales report, even though it won’t illuminate holiday spending patterns – the December report is released in a month’s time. The October retail sales results were decent, but this followed a dismal period through mid-year, when spending barely rose month to month. Consumer confidence has been subdued, reflecting anaemic wages growth, rising energy costs and entrenched disappointment at the quality of political discourse. The forecast of surveyed economists is that retail sales probably rose by 0.4%m/m in November.

    • The labour market was the stellar performer of 2017, so it will be interesting to see whether this optimism was maintained in job advertisements for December. Jobs ads have been climbing steadily, in keeping with the best run of actual employment growth since the upswing after the last recession in the early-1990s. Firms also have been upgrading their investment spending plans – employment and investment typically move together – so the recovery seems sustainable, at least for now.

    Chart of the week: retail sales – early signs of renewal?

    retail sales 

    Economic events in Australia

    Last week (starting 4 December) – economy maintained momentum in Q3

    • The Q3 National Accounts last Wednesday revealed mainly good news on the performance of Australia’s economy. Growth in real GDP was slightly lower than economists had expected at 0.6%q/q, but growth over the year rebounded a full percentage point to 2.8%oya, the best rate of expansion in more than a year. The growth last quarter was led by a surge in private business investment and more government spending on infrastructure. The dark lining on this otherwise silver cloud was that growth in household spending was the weakest since the darkest days of the GFC a decade earlier. Consumer spending did rise in Q3, but many households are confronting the perils of low wages growth, soaring energy costs and the prospect of rising interest rates next year. At least exports rose, thanks to the mammoth expansion of mining capacity during the investment boom.

    • The other main news last week was that the Reserve Bank left official interest rates steady at 1.5% on Tuesday, as all surveyed economists had expected. This may not seem like news, but the “on hold” decision means the Bank went through all of 2017 without adjusting the cash rate. This is rare – it has happened only three times previously since the cash rate was adopted in 1990 - in 1995, 2004 and 2014. Futures market pricing implies that 2018 will be another year of inactivity on the cash rate, but this looks unlikely. Indeed, if the RBA’s macroeconomic forecasts are realised, interest rates will have to rise, as they already have been overseas.

    This week (starting 11 December) – jobs and confidence data this week

    • The highlight this week probably will be the release of the November jobs data on Thursday. Stellar employment growth, most of it full time, has been one of the clear highlights of the Australian economy’s performance over the last year or so, although the most recent report was a little underwhelming. Jobs growth in October was disappointing, but at least the jobless rate dipped to a four and a half year low. The unemployment rate should stay at 5.4% in the November data on Thursday, thanks to a better outcome for jobs growth.

    • The other data releases this week include the national house price data and the business and consumer confidence reports. The business sector is feeling the most upbeat for years, with business conditions last month soaring to a record high. Among consumers, however, there once again are more pessimists than optimists. Also, Reserve Bank Governor Lowe speaks on the intriguing topic of an e-AUD on Wednesday.

    GDP Growth 

    Economic events in Australia


    This week (starting 4 December) – data deluge plus an RBA decision

    • This week is the busiest for some time in terms of economic activity. There is a Reserve Bank decision tomorrow, plus a flood of economic data, including the latest score-check on the performance of the national economy. The Reserve Bank of Australia (RBA) meeting tomorrow should deliver another unchanged policy rate (no local economist expects a change), but there is an intriguing debate going on beneath the surface that reveals competing views on the outlook. Some economists, including those from the OECD, believe the RBA should raise interest rates soon to help curb credit growth. Most local economists, though, forecast no rate hikes for some time. The AICD assumption still is that official interest rates probably will rise in the second half of 2018.

    • The highlight of the dataflow this week will be the Q3 National Accounts on Wednesday. Growth in the economy is likely to have been decent at 0.7%q/q, following a similar rate of expansion in Q2. The incremental building blocks for the GDP data will be released later today and tomorrow. The other data point of interest this week will be the October retail sales report tomorrow. There was no sales growth at all in the month of September, but most economists expect a modest rise for the month of October. That said, it’s still a tough environment out there for retailers, with mortgage stress growing and consumer confidence falling, alongside record low wages growth and soaring energy costs.

    Last week (starting 27 November) – businesses upgraded investment plans

    • The most important economic data release last week was the Q3 private business investment survey. There was a decent increase in economy-wide investment spending in Q3, despite another fall in investment by the miners but, more importantly, a larger than expected upgrade to firms’ spending intentions. Firms outside mining expect to raise investment in the year ended 30 June next year, an increase that will all but offset another expected plunge by the miners, albeit mainly as large resources projects are completed. The outlook for business investment clearly has improved – business conditions in the NAB survey are at record highs, interest rates remain at record lows and the global economic outlook has brightened. Also, firms can delay upgrading their aging plant and equipment only for so long.

    • The other data released last week was the latest readings on building approvals and credit. The building data beat economists’ forecasts, with total approvals rising 1% against expectations of a similar-sized fall. Credit growth, meanwhile, was in line with expectations at 0.4%m/m, having improved a little from the sluggish rate of expansion in September.

    Chart of the week: mining investment drag is close to ending

    Mining investment

    The week ahead