Each Monday, Stephen Walters provides an update on the economic week that was, and the week that will be. You can follow Stephen’s updates here.
Last week (starting 9 October) – confidence up, business and households
- There was a decent flow of economic data last week, including the latest readings on business and consumer confidence and the August home lending data. Business confidence recovered a little as economists had expected, the headline index lifting 2 points to +7 in September. The contemporary conditions reading stayed at an elevated +14. The bigger news was that consumer confidence, depressed for almost a year, also rose. The headline index, in fact, bounced back above the breakeven 100 mark that balances optimists against pessimists. The index is the highest since last November, so the gap between business and consumer confidence is closing (see chart). The home loans data also revealed good news, with the number of loans rising by more than economists had expected. There also was a rise in the share of loans going to first home buyers to a four-year high, although this reflects policy shifts that encouraged first time buyers in NSW and Victoria.
- On Friday, the Reserve Bank released its Financial Stability Review, its six-monthly assessment of conditions in the financial economy. The main takeaway was that, while the Bank again indicated that the financial system is resilient, it plans to launch new stress tests, which will be in addition to APRA’s usual supervisory activities. Peppered throughout the narrative are hints that the RBA remains concerned about high household debt and what will happen when interest rates inevitably rise. “Riskier”, but popular, interest-only mortgages again receive special mention.
This week (starting 16 October) – another decent jobs gain likely last month
- There is more RBA activity this week, with the minutes of the latest Board meeting released tomorrow and Luci Ellis, the Bank’s head of economics, appearing on a conference panel at precisely the same time the minutes are released. Recent public commentary from the RBA has taken on a more optimistic hue in recent months, particularly in reference to the labour market and private investment outside mining. This theme probably will be maintained in tomorrow’s statements. Financial market pricing still implies that the next move in interest rates will be a rise, albeit not until the middle of 2018.
- The data highlight this week will be the release of the September employment data on Thursday. On the evidence of this official report, the economy has generated 270,000 new jobs this year alone, the fastest employment gains in two years. The jobless rate, though, has flat-lined at 5.6%, reflecting more people entering the labour force in search of work. There probably was a net gain of around 15,000 jobs last month but, as before, the unemployment rate probably will stay where it has been for the last few months.
Chart of the week: consumer confidence has recovered
Last week (starting 2 October) – another dismal retail sales report
- The main event last week was the release of a truly terrible monthly report on retail spending. The report for August revealed another fall in total spending (-0.6%m/m), the fifth decline in the last nine months and the second fall in a row. Sales fell in most categories of spending in August, too, hinting at broad-based weakness. Spending at department stores actually rose, but this follows a big decline in July. Growth in spending over the year dipped to a four year low of just 2.1%oya – long run average growth is about 6%. It seems that heavily indebted households are adjusting to the squeeze on their disposable income caused by a combination of record low wages growth, sharp rises in energy costs and, for many, rising mortgage interest rates.
- Earlier in the week, the Reserve Bank had left the official interest rate steady at 1.5%, where it has been marooned for more than a year now. Yet, mortgage rates are rising because of higher global funding costs for the banks, and because the regulators have wanted a squeeze on the supply of credit to certain sectors and mortgage products, like interest only loans and for investors. The Reserve Bank’s commentary continues to sound constructive, particularly on the outlook for business investment outside mining and the labour market. For the first time, though, last week’s commentary flagged price weakness in Sydney’s housing market. Financial market pricing continues to point to the first official rate hike coming around the middle of 2018.
This week (starting 9 October) – twin confidence readings the highlights
- There is more RBA activity this week, with Deputy Governor Debelle making a speech on Tuesday and the six-monthly Financial Stability Review being released on Friday. The latter usually contains useful information about Australia’s financial system, particularly on issues like bank funding costs, the housing market, and household debt, which has reached fresh record highs. Much attention will focus on any discussion about the impact of the macro-prudential tightening on home lending put in place so far. The Deputy Governor’s speech tomorrow is on FX markets specifics, and is unlikely to include insights on the interest rate outlook.
- The highlights of the data flow this week probably will be the business (Tuesday) and consumer (Wednesday) confidence reports. Business confidence dipped a month ago, but business conditions reached a nine-year high. The conditions measure probably will not sustain that peak this month, but confidence probably will rebound. The ongoing pressures on households make it difficult for the consumer confidence reading to improve too much.
Chart of the week: retail spending still sagging
Last week (starting 25 September) – Better budget outcome for 2016-17
- Last week was quiet in terms of economic events, with only the latest credit data released by the Reserve Bank, the RBA’s deputy governor delivering a speech on central bank independence in London, and the Federal Treasurer releasing updated Budget numbers (see below). The credit data for August revealed that growth in home lending to investors has dipped below that for owner occupiers. This will be a welcome development for the regulators, which had been fretting about previously rapid gains in credit for investors. Indeed, recent actions to curb lending to this segment of the market seem to be working.
- Treasurer Morrison revealed that the Budget position had improved by about $4 billion in the year ended June, the first such improvement since the Budget dipped back into deficit a decade ago. Since then, a succession of Treasurers have had to reveal deteriorations relative to forecast, not improvements. Revenue has grown more quickly than expected, particularly corporate tax collections, and spending has grown more slowly. The Budget deficit for last year still was a whopping $33 billion, albeit below 2% of GDP for the first time in four years.
This week (starting 2 October) – RBA’s commentary sounding more upbeat
- There is a lot of activity this week, including an RBA interest rate decision later today and a decent flow of economic data. The RBA’s commentary increasingly has leaned towards more constructive comments in recent months, particularly regarding the outlook for business investment and the labour market. The commentary that the RBA releases today probably will sound familiar, and similarly upbeat. None of the local economists surveyed by Bloomberg expects any movement in official interest rates today. The consensus of economists, though, now firmly expects the first rate hike by around the middle of 2018. Financial market pricing implies much the same thing (see chart).
- There also is data to be released over the next few days, including the latest information on home building, international trade, and retail sales. The highlight should be the retail sales report for August. Monthly sales growth has been unusually weak over the first half of 2017, averaging just 0.3%, about half the long term growth rate. This reflects the confluence of headwinds for households, including weak wages growth, low confidence and, most recently, steep rises in energy prices. Next year could become even more problematic for households if interest rates do, in fact, rise. By mid-next year, though, wages growth at least should have lifted, thanks to a further likely decline in underemployment.
Chart of the week: interest rates likely to rise in 2018
Last week (starting 18 September) – RBA – “rates more likely to rise than fall”
- The highlights last week were the communications for the Reserve Bank, and there were plenty of them. Governor Lowe delivered a speech in Perth that all but confirmed that the turning point in the interest rate cycle had passed, and the RBA’s chief economist spoke on the improving global outlook. Earlier, the minutes from the Board meeting held three weeks ago hinted that conditions both here and overseas had taken a decisive turn for the better. The minutes added a specific reference to the high indebtedness of the household sector as a risk, but generally sounded constructive, particularly about developments in the labour market. Remember that national jobs growth currently is the strongest in two years.
- The speech by the RBA Governor on Thursday was instructive because he signalled that interest rates here were more likely to rise than fall. The majority of local economists already assume as much, but there still are some expecting rate cuts. The recent turn in the local data had made this unlikely, and even more so now that Dr Lowe has made his thoughts clear. The Governor indicated that rising interest rates overseas did not necessarily mean they would rise here, but it now seems increasingly likely that the RBA will join the US Fed and the Bank of Canada in lifting official rates, albeit probably not until the first half of 2018.
- The only economic data release of note last week was the latest official house price data for the capital cities (see chart). The data showed that recent trends have continued, with house price rises in Sydney and Melbourne outstripping those elsewhere. Prices rose 3.0%q/q in Melbourne in the June quarter, and by 2.3% in Sydney. The next largest gain was 1.8% for homes in Hobart while nationally, the rise was a healthy 1.9%q/q, after a 2.2% rise in the March quarter. The worst performing market remains Perth, where house prices dipped another 0.8%q/q, the sixth decline in the last eight quarters.
This week (starting 25 September) – credit data the highlight
- This week is quieter, with just the August credit data to be released on Thursday and the RBA Deputy Governor speaking in London later the same day. The previous credit data for July still showed credit for housing (up 6.6% over the year) growing more quickly than other categories. Growth in business credit, however, is improving (up 4.4%oya), another sign that firms are ramping up their investment plans. The RBA’s Guy Debelle is speaking on central bank independence at a Bank of England conference, so his comments will attract attention.
Chart of the week: House price rises mainly a Sydney/Melbourne story
Last week (starting 11 September) – another stellar jobs report
- Another month, another great jobs report. The August jobs data, released last Thursday, revealed yet another unexpectedly large net gain in employment over the month (more than 54,000 positions), of which most were full time. While the jobless rate stayed at 5.6%, this was mainly owing to a big rise in people re-entering the labour force, usually a good sign of underlying health of the labour market. Another positive sign was the increase in hours worked across the workforce. There have been more than 270,000 new jobs created so far this year, three quarters of them full time, the best results for two years. Moreover, the leading indicators of employment point to further healthy gains in the months ahead.
- The stellar employment data continues the recent run of positive news on Australia’s economy. The release of the NAB business survey last Tuesday saw business conditions remain the highest in a decade, with the indicators of employment rising. The forward-looking business confidence measure dipped from a high level, but consumer confidence rose on Wednesday, although pessimists still outnumber optimists. Households are having a tougher time than businesses, partly because of weak wages growth and higher energy costs.
This week (starting 18 September) – house prices and RBA Board minutes
- The week ahead looks quieter, with just the release tomorrow of the minutes from the most recent Board meeting and the latest data on house prices in the capital cities. The commentary from the Reserve Bank two weeks ago didn’t contain many surprises, so the minutes are unlikely to include any unexpected rhetorical flourishes. You never know, though. Recall that back in July, financial markets quivered when the minutes revealed that Board members had discussed the neutral cash rate, which officials estimated to be a long way above the prevailing rate of 1.5%. The neutral rate, though, had been a special topic of interest for the Board, and did not signal any intentions on policy. This month’s special topic of discussion was China’s economy, so we should expect comments on the excesses in Australia’s largest export market, and an assessment of the prospects for reform, among other things.
- The quarterly house price data always attracts attention, and it will be interesting to see if the recent rising trend has been extended. Prices have been falling in Perth, but rises have continued elsewhere, particularly in the larger east coast cities. The RBA Governor recently warned of looming problems in some higher density housing markets, but this data doesn’t provide a sufficient breakdown to mark progress here.
Chart of the week: best jobs growth since 2015
Last week (starting 4 September) – rate of economic growth improved
- The clear highlight in a busy period for economic data last week was the release of the June quarter National Accounts, 88 pages of detailed statistics on the performance of Australia’s economy. GDP growth more than doubled to 0.8%q/q last quarter, thanks mainly to a bounce in government investment and more debt-funding spending by households. The rate of real GDP growth over the year, though, stayed at an underwhelming 1.8%oya, the weakest since 2009. This is an unflattering comparison, because that was in the wake of the immense damage done during the GFC. Australia’s economy clearly still is not firing on all cylinders, even eight years on from the crisis, although favourable base effects alone should see the annual growth rate rebound to about 3% in Q3.
- There also was an avalanche of other economic data released last week, and an RBA interest decision thrown in too. The highlight of this data was the July retail sales report, although the result was disappointing. Sales didn’t grow at all over the month, with the more discretionary areas of spending, like department stores, particularly weak. This followed news in the National Accounts that households have further run down their rate of savings (see chart). The RBA decision was uneventful, with the cash rate left at a record low 1.5% for the 12th straight Board meeting. There was no clear guidance on the likely direction of policy, either, which hints that the RBA will be “on hold” for some time yet.
This week (starting 11 September) – focus on the August jobs data
- There is more data released this week, too, including the August employment data and the latest business and consumer confidence readings. The previous jobs data for July showed a huge gain in part time employment (reversing the previous month’s decline), but a large fall in full time positions. This ran contrary to the theme of the first six months of this year, which was dominated by gains in full time employment. Thursday’s data for August should show a decent monthly gain of 20,000 jobs, but an unchanged jobless rate at 5.6%.
- It will be interesting to see if the confidence reports for business (Tuesday) and consumers (Wednesday) extend the recent trend of improvement for corporates, but deterioration for households. Consumers are suffering from weak growth in incomes and rising energy prices, but many firms are enjoying rising profits and better offshore economic conditions. Dispersions between the consumer and business readings usually are not sustained for long, but this one already has persisted for more than a year.
Chart of the week: Household savings rate still falling
Last week (starting 28 August) – investment outside mining lifts…finally
- It’s here! Finally, after years of waiting, the data released last week revealed that private business investment outside mining finally has started to recover. Not only did firms boost spending last quarter, the investment intentions data showed the largest uplift in seven years. The long-awaited rotation in the sources of growth in the economy away from investment in resources, then, seems to be progressing. It still is early days, and the wheels could still fall off. It must be said, though, that conditions for improvement in firms’ investment intentions have been falling into place for a while now - rising confidence, interest rates at record lows, better news on the global economy, and higher AUD.
This week (starting 4 September) – RBA decision and Q2 GDP results
- To say that there is an avalanche of economic data released this week is an understatement. The ABS releases quarterly data on GDP, the current account, profits and inventories, and monthly data on home lending, international trade, and retail spending. The Q2 National Accounts on Wednesday will be the highlight. The lingering damage from Cyclone Debbie is a potential left field event, but the building blocks of GDP released so far indicate that growth in the economy probably picked up in the June quarter. Recall that growth in Q1 was unexpectedly soft at only 0.3%q/q, and not just because of the impact of the cyclone. The rate of GDP growth should have accelerated to around 0.7%q/q last quarter.
- The highlight among the monthly data should be the retail sales report for July. The previous report for June revealed sales growth of just 0.3%m/m, although the volume of sales was better. The July report should show a similarly sluggish rise of only 0.2%m/m. Households already are pulling back on discretionary spending, in particular, in the face of rising mortgage interest rates, higher energy prices, record low wages growth, and deteriorating confidence. There probably are more soft retail sales reports ahead.
- Tomorrow sees the interest rate announcement by the Reserve Bank Board. No economist expects a change in official interest rates just yet, but the majority expects the next move to be a hike, albeit not until the first half of 2018. The main attention tomorrow will be on the tone of the RBA’s statement. Decent reports on employment, business confidence and, now, investment, mean the tone of the statement probably will become more upbeat, although officials will remain concerned about AUD hovering close to 80 US cents.
Chart of the week: investment intensions lifting outside mining
Last week (starting 21 August) – more companies missing profit expectations
- The past week was unusually quiet, with no mainstream economic data released nor speeches by senior policymakers. Most attention, then, focussed on progress in the company reporting season. The results so far are skewed more towards the weaker side, with a higher share of companies reporting having missed profit expectations, rather than beaten them. Market reaction in a number of cases has been swift and dramatic, with sharp price falls in a number of high profile listed companies. The broader market, though, has managed to avoid serious potholes. While Australia’s share market index has trailed far behind that of the US this year, it has managed to hold on to the gains made earlier this year, despite evidence that Australia’s economy still is not yet firing on all cylinders.
This week (starting 28 August) – Q2 investment data the highlight
- The economic dataflow resumes this week, with important releases on private business investment, home construction and credit. The highlight will be the June quarter investment data. The previous data for March revealed that investment by firms had stabilised, but the long-awaited rise remains elusive. In fact, the forward looking expectations component of this data indicated that firms still expected to trim investment spending in the year ended June 2018, including those outside mining. The expected rate of decline at least has been pared back, but the much-anticipated recovery in the wake of the end of the resources investment boom remains some way off, on this evidence, at least.
- The Q2 investment data should show that private sector firms expect to trim investment spending only by about 12% in the year ahead, after a 15% fall in the year to June 2017. Firms in mining will continue to reduce investment, but those elsewhere should be in better shape. Indeed, conditions for improvement are falling into place, with business confidence at the highest level in a decade, global economic conditions improving, interest rates still very low, and the higher AUD helping to bring down the price of imported equipment.
- The rest of the dataflow this week will show the extent to which construction activity added to growth in the economy and how credit conditions are changing. The construction data on Wednesday should show a small rise. The monthly building approvals data for July (also released on Wednesday) probably will show a steep decline, but this will follow the surprise double-digit percentage gain for June.
Chart of the week: Non-mining investment still flat-lining
Last week (starting 14 August) – plenty of jobs... very little wages growth
- The data released last week featured important information on the labour market and extended the recent pattern. The monthly jobs data on Thursday revealed another better than expected outcome, but Wednesday’s quarterly wages data had extended the period of record-low growth. The two developments are related, of course, but there needs to be further sustained drops in the jobless rate before underlying wages growth recovers. Growth in wages will probably improve in the current quarter, but mainly because of the lift in the minimum wage from 1 July. For now, faster growth for other employees remains elusive.
- On the employment data, there was another decent increase in net jobs growth (nearly 28,000) in the month of July – more than economists had expected. The disappointing news was that all of the gains were in part-time positions as full-time employment fell, but there had been strong growth for full-timers in recent months. Also, hours worked across the workforce dipped, but at least the jobless rate fell to 5.6%, albeit only after an upward revision for the month of June.
- On the June quarter wages data, growth for private sector workers grew only 1.8% over the year, the slowest rate of growth in the history of this wages survey, which dates back to the 1990s. Growth for public sector workers stayed at 2.4%, close to the lowest ever for this pool of workers. There are many reasons for slow wages growth, including the fact that many labour markets now are more global, that demand for labour is being cruelled by automation, that productivity growth has been weak, and perhaps even the decline in organised labour, although that trend has been evident for decades.
This week (starting 21 August) – usually quiet week ahead
- This week is unusually quiet for economic data and RBA activity. Market attention may be on the federal parliament, where there are renewed questions being raised over the eligibility of upper and lower house members. It still is too early to speculate about longer term implications should the government’s wafer-thin majority in the lower house disappear, but instability is assured. The latest opinion polls suggest there would be a change of government if there is an election, which carries significant implications for tax policy, in particular.
Chart of the week: wages growth still slip-sliding away
Last week (starting 7 August) – businesses and consumers going separate ways
- The release of the latest business and consumer confidence reports last week showed further divergence - firms are upbeat, but consumers even more downbeat. The business community is happy with rising profits, record low interest rates, higher commodity prices and an improving global economic outlook. Households, though, are saddled with high debt, soaring energy prices, and record low wages growth. It is unusual for divergences in business and consumer confidence to last for an extended period, because the interests of both groups usually are aligned. The current deviation, though, has persisted for the past year.
- RBA Governor Philip Lowe testified to a federal Parliamentary committee on Friday. He delivered an opening statement that echoed the sentiments contained in the Bank’s detailed communique released just a week earlier, then took questions from MPs. A key takeaway is that Governor Lowe thinks the next move in official interest rates will more likely be up than down (in line with futures market pricing), but not any time soon. He also implied that the equilibrium interest rate will be lower than in the past. The Governor’s comments on the global and domestic outlooks did not deviate materially from those delivered earlier.
This week (starting 14 August) – plenty of labour market data on offer
- The main event this week is the release of jobs data (Thursday) and wages data Wednesday. The latter has shown annual growth slipping to an all-time low - wages actually are falling in real terms. The monthly jobs data, though, has shown solid growth in full time employment in recent months, rising hours worked, a shrinking pool of under-employed workers, and a steady jobless rate. These positive signals eventually should lead to faster wages growth… but not yet. The consensus of economists’ forecasts is that a net 20,000 jobs were created in June, and that the jobless rate was steady.
- The minutes of the last RBA Board meeting will be released tomorrow. The previous minutes a month ago caused a stir by revealing that RBA officials had discussed the neutral cash rate during the meeting which, at an estimated 3.5%, is a long way above the current rate. Tomorrow’s minutes are unlikely to attract such attention – there was no unusually contentious subject debated at this month’s board gathering.
Chart of the week: businesses are upbeat... consumers are not
Last week (starting 31 July) – RBA officials more anxious about higher AUD
- The main news last week is that Reserve Bank officials sounded more anxious about the higher AUD. Before, officials had said AUD appreciation would complicate the economy’s adjustment. Now, they have had to admit that the recent rise (AUD is up 4% since the previous Board meeting) has done some damage. Inflation will be lower for longer and the expected return to trend GDP growth slightly later. The latter, in fact, was reflected in the modest downgrade to the near-term GDP growth forecasts in the RBA’s statement on Friday. Meanwhile, the headline inflation forecasts were lifted, albeit to reflect higher energy prices. Lower than expected growth and higher inflation is not a happy mix. Earlier, the RBA board had left the cash rate steady at 1.5% – no market economist had expected a change.
- There was a lot of economic data released last week, and most of it printed on the better side of economists’ expectations. The highlight was the retail sales report on Friday, which showed a slightly faster than expected gain in sales values in June, and a huge rise in sales volumes in Q2, albeit mainly because of soft prices. Earlier, there had been a bounce in approvals for home construction in June, and faster than expected growth in credit issued to business. The only material wrinkle was that the trade surplus for June was not as big as had been hoped, owing to lower prices for iron ore. All up, the economy seems to be going along OK, albeit with some unwelcome lead still weighing down the saddle bags.
This week (starting 7 August) – RBA Governor to face questions from MPs
- The main event this week is the testimony by RBA Governor Lowe to a Commonwealth parliamentary committee on Friday. Governor Lowe spoke publicly only a couple of weeks’ back, so we already have a good idea of what he thinks about the economy and the policy stance. MPs will listen intently to Governor Lowe’s opening statement, which will echo his recent speech, but then have several hours to ask him questions. The topics of most interest probably will be the impact of higher AUD, has income inequality really worsened, why wages growth has been so low, impact of the Trump administration’s latest troubles, “bubble-trouble” in the housing market, and domestic energy prices and policy
- The flow of data slows this week – only the latest home loans data will be released. Still, it will show the extent to which the regulators’ tightening of the screws on the supply of investor credit is progressing, and whether the share of home loans issued to first time buyers has fallen further. The business and consumer confidence reports also will be released.
Chart of the week: RBA still upbeat on growth
Last week (starting 24 July) – RBA Governor hints at interest rate stability
- The main event last week was the speech by RBA Governor Phil Lowe. Dr Lowe’s prepared comments on trends in the labour market and implications for interest rates were instructive, but his comments in the Q&A session included some unexpected gems. He said that rising interest rates offshore did not “automatically” mean that interest rates here had to rise. But, he also hinted that interest rates here are unlikely to fall again, despite the persistent undershoot on inflation (see below) and the absence of accelerating wages growth. Dr. Lowe pushed back against assessments made about his previous comments that some interpreted as him encouraging wage earners to rise up against the capitalists. He said merely that he thought faster wages growth would be a good thing.
- The Q2 inflation data revealed yet another undershoot on core inflation relative to the RBA’s target of 2-3% – the sixth straight shortfall – and a downside surprise on headline inflation. The latter was driven largely by falling prices for fresh fruit and petrol, with the recent sharp rises in energy prices to be captured in the September quarter data. Headline inflation over the quarter was only 0.2% q/q – half economists’ expectation – but core inflation rose 0.5% q/q, as had been anticipated. Still, these quarterly increases left both annual rates below 2%.
- For more on the Governor's speech and the June quarter inflation data, listen to the latest episode of The Dismal Science, the AICD's economics podcast.
This week (starting 31 July) – another big week for the Reserve Bank
- The week ahead includes more central bank activity. The RBA Board announces its decision on official interest rates tomorrow. No market economist expects a change, so the focus will be on the tone of the language. Given what Governor Lowe spoke of last week, though, the main interest, as before, will be on his assessment of conditions in the labour market and in housing. Any policy action now aimed at improving employment conditions risks adding to financial stability risks, with household debt already at a record high. The Bank releases its updated forecasts in its statement on Friday – there should be no material changes.
- The flow of economic data this week includes the latest news on retail spending, building approvals, credit and trade. The highlight will be the retail sales report for the month of June. Recent retail reports have shown unexpectedly decent outcomes, but households continue to face headwinds from slow wages growth, softening conditions in housing, fears of job insecurity and rising energy prices.
Chart of the week: real wages are falling again
Last week (starting 17 July) – RBA's "revelation" trumps June jobs data
- The main data released last week was the employment report for June, but the activities of the Reserve Bank attracted most attention (see below). The jobs data showed a net gain of 14,000 jobs, in line with economists’ expectations, but beneath the surface was a very large gain in full-time jobs, albeit at the expense of part-timers. The jobless rate stayed at 5.6% (after revisions – it was previously reported to be at a three-year low of 5.5% in May, but that now never happened!), but hours worked across the workforce rose. On balance, coming after two strong reports for April and May, the June jobs report hinted that conditions in the labour market have taken a turn for the better. This should eventually herald a lift in wages growth, although that still seems some way off in the middle distance.
- The focus on the RBA’s activities came unexpectedly via the release of the minutes from the previous Board meeting – minutes usually don’t elicit much new “news”. This time, though, the Board mentioned that the “neutral” cash rate – the rate consistent with GDP growth at trend and stable inflation – was 3.5%, a full 2 % points above its current level. This was not a revelation to those who have been watching the RBA over the years, but was enough to trip financial markets into pricing a greater chance of a rate hike, including for later this year. AUD spiked in sympathy to a two-year high close to 80 US cents, a drag on the economy that may, in fact, compel RBA officials to wait even longer before starting to normalise policy.
This week (starting 24 July) – Inflation data and RBA speech loom large
- Utterances from the central bank probably will attract a lot of attention this week as well. Governor Lowe is scheduled to speak at an event in Sydney on Wednesday and, with canny timing, has decided to speak on the labour market and monetary policy, the very two issues that attracted most attention last week. There is next to no chance of Dr Lowe providing clear direction on the path of official interest rates from here, but he at least will deliver clues on how the official thinking is evolving.
- The ABS will have released the June quarter inflation data just 90 minutes before the Governor stands up to speak. Recall that in the last data, annual headline inflation popped back up into the RBA’s 2-3% target range for the first time since 2014. The June quarter data should show that inflation pressures remained modest, with core inflation staying below the target zone. The sharp rises in retail energy prices suffered by households in recent weeks will be captured by the September quarter data.
Chart of the week: AUD at highest level in 2 years
Last week (starting 10 July) – households and businesses feeling better
- The business and consumer confidence results, both released last week, revealed good news. The NAB’s forward-looking business confidence measure rose two points, alongside a rise in contemporary business conditions to their highest level in a decade. This was followed on Wednesday by a small lift in consumer confidence, the first in four months, although there remain more pessimists than optimists. The business community is enjoying improving conditions offshore and is seeing early signs of life in previously dormant parts of the domestic economy. Households, though, still face headwinds in the form of weak wages growth, the softening housing market, fears of insecure employment and rising mortgage interest rates.
- The other main data release last week was the home loans data for May. The aggregate rise of 1.0% over the month was about half the gain surveyed economists had expected, but it came after a near-2% drop in April. There was clear divergence in trends beneath the surface, with the number of loans for investors falling as loans approved for owner-occupiers rose. The regulator has encouraged the commercial banks to cool growth in lending to non-owner occupiers, and the effect now is clear in the data.
This week (starting 17 July) – RBA activity and the June jobs report
- This week, most attention will focus on the release of the June jobs report on Thursday. The last two reports have shown very healthy gains in net employment (an average gain of 44,000), with the May report also showing a dip in the unemployment rate to a four year low of 5.5% (see chart). The June report this week should show a more modest gain in jobs nationally of around 15,000, which probably means the jobless rate rises slightly. Recent reports also have shown a rise in hours worked across the workforce and a shrinking pool of under-employed workers. These trends, although still in their infancy, imply that the long, slow decline in the pace of wages growth finally may be coming to an end.
- The Reserve Bank is active this week. Tomorrow, the Bank releases minutes from the Board meeting held two weeks ago. There was, of course, no change to the cash rate at that meeting, and the commentary announcing the decision was all but a cut-and-paste from prior public commentary. There are unlikely to be any material surprises in the minutes, then, but you never know. The Deputy Governor and the Bank’s chief economist make public speeches later in the week, events that have potential to include new information.
Chart of the week: lowest jobless rate since 2013
Last week (starting 3 July) – no sudden moves from the RBA
- There was speculation ahead of last Tuesday’s Reserve Bank Board meeting that the Bank may become more upbeat in its commentary. Some economists expected the RBA’s commentary to reflect the trend by other central banks, which had hinted at more urgent policy tightening. Instead, there was little change in the tone of the statement that RBA officials used to announce a steady cash rate for the 10th straight time. All of the economists surveyed ahead of the decision had expected “no change”, so there was no surprise there. Recent data on the domestic economy has been encouraging, so financial market sentiment is shifting in favour of the next policy move by the RBA being a hike, although not for a while. The commercial banks, meanwhile, are raising their mortgage rates in response to higher funding costs and the urging of regulators, who want curbs on lending to investors.
- The main data releases last week hinted that Australia’s economy is having a decent run. Retail sales, for example, rose 0.6%m/m in May, more than surveyed economists had expected. The upside surprise came after a very strong result for April (see chart). Also, the trade surplus was much larger than anticipated as coal exports bounced back from the drag of Cyclone Debbie in Queensland. Approvals for home construction, however, sank nearly 6% in the month of May, dragged lower by a plunge in approvals for higher density dwellings. The epicentre of the weakness was NSW, where there is evidence of oversupply.
This week (starting 10 July) – confidence measures to attract attention
- This week, attention will be on the twin business and consumer confidence results. Consumer confidence (out Wednesday) has been sliding as households struggle with the combined difficulties of rising energy prices, high under-employment, weak wages growth, and a softer housing market. Business confidence (out Tuesday) softened in the most recent results for May, but had been at elevated levels in previous surveys. Corporates, meanwhile, are enjoying the improvement in domestic economic conditions, the reduction in tax rates for smaller businesses, and the recent weakening in AUD. It is unusual for trends in business and consumer confidence to move in opposite directions for extended periods, so this week’s data will be watched to see if the recent divergence continues.
- The other release this week is the official home lending data for May, released tomorrow. The consensus expectation is that the number of loans approved will have rebounded, following a weak result for April. Banks have responded to calls by the regulators to cool lending for investors, but there probably still is residual heat in the owner-occupier market.
Chart of the week: Retail turnover has rebounded after weak patch
Last week (starting 26 June) – Much to like about Census 2016 results
- The economic dataflow last week was minimal, but the ABS did release the results of the 2016 Census. Despite the controversy associated with its collection, extensive testing indicated that the Census results were as reliable as those from 2011. One of the interesting takeaways is that the share of homes owned either outright or with a mortgage continued to fall, while the share of renters increased (see chart below). This is not surprising given the deterioration in housing affordability, particularly in recent years, but at least we now have confirmation. These tenure ratios move only very slowly over time, and it still is the case that around one third each of all homes are occupied by renters, by “owners” with a mortgage, and by owners without a mortgage. In 1991, 27% of homes were rented, compared to 31% today.
- The only material data release this week was the RBA’s private sector credit, released on Friday. The headline growth in credit was 0.4%m/m as economists had expected, but there were some interesting developments underneath. Growth in total housing credit was slightly firmer at 0.6%, with rise for owner-occupiers beating that for investors. Growth in business credit, though, was sluggish, with the gain over the year staying at a three-year low.
This week (starting 3 July) – RBA to leave interest rates steady tomorrow
- This week is busier, with the Reserve Bank board meeting tomorrow (see preview below) and the flow of data resuming. The highlight will be the retail sales report tomorrow, given fears that rising interest rates and higher energy prices are crimping household spending. Consumer sentiment has slipped for three straight months in anticipation of harder times ahead.
- The RBA interest rate decision tomorrow will be uncontroversial. As has been the case with recent Board gatherings, no market economist expects a change in the cash rate tomorrow, so the focus once again will be on the tone of the statement announcing the decision. The commentary from a month ago sounded more upbeat on the international outlook, but more cautious about things domestically. Conditions in the labour market and in housing remain the key drivers of policy. On housing, some markets remain “hot”, with auction clearance rates still elevated. On the job market, the latest data showed the jobless rate dropping to a four-year low, so the commentary tomorrow probably will sound constructive.
Chart of the week: more renters...fewer home owners
Last week (starting 19 June) – RBA wants power shift in favour of workers
- Last week was quiet in terms of domestic economic data, with only the national car sales and home price data released (see below). This meant that the clear highlight was the speech by RBA Governor Phil Lowe, who urged workers to put aside their anxiety about automation and robotics and lobby for higher wages. This is against the backdrop of the wages share of the economy having slipped to multi-decade lows (see chart below), so it makes sense for the Governor to want the balance relative to corporate profits to shift a touch. The comments also highlight the underlying optimism of RBA officials, who expect growth in the national economy to bounce back above 3% in the years ahead, which should lift jobs growth and further lower the jobless rate. This glass-half-full approach, which may prove to be well-founded, was one of the messages embedded in this week's minutes from the latest RBA Board meeting, which otherwise revealed little that was new.
- The house price data revealed some interesting dynamics. There were further increases in house prices in Sydney and Melbourne, with the latter this time leading the way. There was more evidence, though, that prices for apartments and other higher density dwellings have started to fall, as many economists have expected for some time. The worsening supply overhang in some of the major cities means prices for higher density dwellings probably will continue to slide, while prices for so-called detached dwellings continue to rise. There still is a shortage of detached homes in key markets, although the pace of price growth should slow.
- Two states released their Budgets last week. New South Wales revealed another healthy surplus only just short of the record balance revealed last year, thanks in large part to booming stamp duty revenue. South Australia, by contrast, revealed a wafer-thin projected surplus underpinned by a contentious new levy imposed on the big banks operating in the state. This piggy-backs on the Commonwealth's legislated levy that also starts from July 1.
This week (starting 26 June) – more commentary from the RBA
- This week is unusually quiet, with only second tier economic data scheduled to be released, including the latest credit data (see calendar below). The highlight then, will be the speech on Thursday by the Reserve Bank's deputy governor, although he is unlikely to deviate much from the official script, which has been very consistent of late.M
Chart of the week: new low for the wages share of GDP
Last week (starting 12 June) – weaker confidence, but lower unemployment
- Last week saw some important economic data releases, including the latest consumer and business confidence surveys, plus the May employment data. The confidence data showed falls on both measures, a sign that the recent Federal Budget may have missed its targets. The fall for corporates at least comes after steady rises in recent months – the dip for households was the third straight. Corporate leaders are emboldened by better news on the global outlook and prospects of a weaker AUD – they seem untroubled by global political uncertainty. Consumers, though, many of whom are saddled with record-high debt, are stumbling along in the long tail of the steady decline in commodity prices, amid record low wages growth.
- The jobs data for May, however, turned out to be unexpectedly good. There was a large rise in full-time employment, alongside a modest fall for part-timers. The net gain of 42,000 jobs saw the jobless rate slip to 5.5%, the lowest in four years. Underemployment, recently at a record high, also fell. Rounding out the good news was the revelation that hours worked rose, hinting that perhaps things are turning up in the labour market. It is early days, though, so it probably pays not to read too much into one month’s data.
This week (starting 19 June) – official house price data the highlight
- This week sees some Reserve Bank activity, but is quieter for economic data releases. Governor Lowe spoke this morning and the minutes from the most recent Board meeting are released tomorrow. Recall that the Bank’s commentary two weeks ago became more upbeat on the global outlook, but more cautious on the domestic narrative. Board members did not have to hand the detail on the weak Q1 GDP data (released the day after the Board meeting), so it will interesting to see how the minutes treat the subdued output data. The RBA statement two weeks ago predicted growth returning to about 3%, but the National Accounts showed the economy struggling along at barely half that rate. Officials are nowhere near capitulating on their optimism, but their views are being challenged.
- The highlight of the economic data flow will be the release of the March quarter house price data for the capital cities. The previous data for Q4 revealed a stellar 4% gain over the quarter, the steepest rise since mid-2015. The Q1 data probably will reveal much more modest growth, particularly in Sydney and Melbourne. There are a host of reasons for this - foreign demand has cooled, housing supply has increased, interest rates are rising, and the regulators are making life more difficult for the banks. Sustained house price falls are unlikely, but there will be weakness in key sectors in the quarters ahead.
Chart of the week – House prices – a tale of two cities
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Last week (starting 29 May) – bounce in retail sales…investment still weak
- There was a decent flow of domestic economic data last week, including important releases on residential building approvals, credit, business investment and retail spending. The outcomes for approvals and credit were largely as had been expected, but the retail spending report showed an unexpectedly large bounce for the month of April. There was the positive impact from additional spending associated with the aftermath of Cyclone Debbie in Queensland (hardware spending bounced) and from the shifting seasonal effects of Easter. The result nevertheless is welcome after two very weak outcomes for the prior two months.
- The Q1 business investment report was looked to by most economists as the highlight of last week’s calendar but, unfortunately, the result was underwhelming. Firms did increase their spending on investment by more than had been anticipated last quarter – just the second rise in the last 10 quarters – with even investment by the retreating miners rising. The all-important forward looking estimates of future spending, though, improved only modestly. This was despite business confidence having risen to multi-year highs, the emergence of more green shoots of optimism about the global outlook, and interest rates in Australia still sitting at record lows. The investment estimates are moving in the right direction, but at glacial pace.
This week (starting 5 June) – Q1 GDP report due Wednesday
- The week ahead is unusually busy, with the Reserve Bank Board meeting tomorrow and plenty of economic data being released. The RBA is widely expected to be inactive on policy, with economists not expecting much change to the official language on the economy, either. Over the next few days, more building blocks for the Q1 GDP result (released on Wednesday – see preview below) will be released, including data on inventories, company profits, government spending and trade. The bottom line is that these pieces should add up to only sluggish growth in real GDP last quarter, following the healthy bounce in Q4.
- Indeed, the consensus of economists is that the economy grew by just 0.2%q/q in Q1. Remember that GDP contracted in Q3 last year, before rebounding 1.1% in Q4. Given this volatility, an outcome close to that expected by economists will not look too bad, but nevertheless will highlight that the economy is not running on all cylinders. There is a material risk of real GDP actually having fallen in Q1, which would set up the prospect of Australia’s economy dipping into technical recession for the first time in 26 years.
Chart of the week – sluggish economic growth expected in Q1
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Last week (starting 23 May) – weak signals ahead of the Q1 GDP report
- The building blocks for the Q1 GDP report (released on 7 June) started falling into place last week. The news was not great, with construction work dipping more than had been expected last quarter. Construction activity undertaken during the quarter dipped 0.7%q/q, with residential construction alone plunging nearly 5%. This is something of a surprise given the surge of approvals for new building work in recent quarters, but reflects the lumpy nature of this particular data set. The silver lining in the construction data was news that engineering work, which has been a perennial laggard, bounced more than 2%q/q, signalling that the bottom of the mining investment cycle may be approaching.
- There are other GDP components to be released this week (see previews below) but, even now, it seems that growth in the economy last quarter was pretty sluggish. Remember that GDP in real terms dipped unexpectedly in Q3 last year, before rebounding strongly in Q4. But most economists expect GDP growth in the March quarter of no more than 0.4%q/q. Economists' forecasts will be refined this week as the data comes to hand.
This week (starting 29 May) – Q1 business investment report the highlight
- The highlight this week will be the release of the business investment report on Thursday. The survey results have been gathered over the last two months, which during a period when business confidence rose to multi-year highs and as the global economic outlook brightened. It follows that firms probably became more upbeat about their investment intentions, meaning the expectations component of the report should show a decent rise, particularly for 2017-18. The historical component of the report though, will probably reveal another fall, albeit a modest one as the long descent of mining investment spending comes closer to ending.
- The other data releases this week are for building approvals, credit and retail spending. The retail spending report is probably the highlight of these. Recent monthly reports have shown spending falling, but there will probably have been improvement in the month of April. Rising consumer caution this year probably helps to explain the demise of some high-profile retail outfits in recent months. If anything, the retail environment will become even tougher in the quarters ahead as interest rates rise and wages growth stays sluggish.
Chart of the week – mining investment still falling
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Last week (starting 8 May) – “Plan B” for the government on Budget strategy
- The undoubted highlight last week was the release of Treasurer Scott Morrison’s second federal Budget. It revealed adoption of “Plan B” by the government, with the burden of fiscal repair now falling even more heavily on the revenue side of the accounts. The government has all but abandoned further spending restraint, with the “walking dead” savings from the 2014 Budget finally put to rest. The increased reliance on a bounce in revenue leaves the Budget vulnerable to disappointment, with Treasury’s forecasts for wages growth and nominal GDP looking optimistic. There were some worthy policy measures revealed last Tuesday night, but the promised return to surplus remains a mirage at the end of the forward estimates. At least it no longer is receding, as it has for previous Treasurers.
- This week on the Dismal Science podcast we do a full run down of the Budget, the prospects for the surplus and all the measures announced.
- In our Leaders’ Pulse survey sent out immediately after the Budget, directors were generally positive with just over half (55.6%) rating it positively up from 40.5% last year and again a little over half (52.3%) seeing it as positive for business, though this was down from 68.4% last year. Nearly two thirds (63.9%) saw the budget as positive for the community. The biggest disappointments in the budget for directors was the lack of tax reform (cited by 30.7%) and the pace of budget repair (17.7%). The biggest positive was infrastructure investment (cited by 59.9%).
- The economic data released last week was a mixed bag. Job advertisements rose, and there was a surge in the NAB business confidence index to the highest level for 8 years. This improvement mirrors the bounce in the AICD’s own measure of business sentiment the week before. There was, however, a plunge in approvals for new home construction. The biggest disappointment last week, however, was another fall in retail sales over the month, the second straight decline. It seems households are pulling back on spending because of the weakest wages growth in a generation and rising mortgage rates.
This week (starting 15 May) – Wages growth the highlight in quiet week
- The most important economic event this week is the release on Wednesday of the latest quarterly wages data. The wages information often does not get the attention it deserves, but the previous data for Q4 showed growth in wages slipping to the lowest rate since this data was first reported in 1997. There likely will have been a modest improvement in Q1, but a marked acceleration is unlikely while the pool of underemployed workers continues to grow.
- The other important event this week is the release of the minutes from the latest RBA Board meeting. The Board meeting two weeks earlier had left the cash rate steady at 1.5% as had been expected, and the commentary revealed no major surprises. The minutes, then, probably will have few revelations, but you just never know. The previous minutes, for example, included additional guidance on policy, and inserted a statement that officials were watching developments in the housing and labour markets, in particular.
Chart of the week – Budget surplus still expected in 2020-21
Last week (starting 1 May) – RBA officials still anxious about housing excesses
- Australia’s Reserve Bank was active last week. The Board gathered on Tuesday to consider the level of interest rates, and Governor Lowe made an important speech on housing and household debt on Thursday. Then, on Friday, the Bank issued a refreshed set of forecasts that revealed increased confidence that inflation will return to the Bank’s 2-3% target range over time. The Board meeting Tuesday was uneventful, with officials leaving the cash rate steady at 1.5% as all surveyed economists had expected. The commentary announcing the decision sounded a little more upbeat than before, but there was no clear policy guidance at the end. It seems the Bank will leave policy unchanged for a good while yet.
- This week on the Dismal Science podcast, I talk more about the RBA decision and preview the federal Budget.
- Governor Lowe’s speech on what are fast becoming his pet topics – housing and household debt – always was going to attract a lot of attention. Dr Lowe repeated his recently ventilated thoughts that the excesses in housing and elevated debt make Australia’s economy more vulnerable to shocks. His main concern is not the stability of the commercial banks, but the likely impact on household spending once interest rates normalise. Higher mortgage payments inevitably mean that households will have less money to spend on other things.
This week (starting 8 May) – Federal Budget to reveal infrastructure boost
- The clear economic highlight this week is the release of the federal Budget tomorrow night, the government’s most important policy set-piece each year. Much of the detail already has been announced or leaked. It seems there will be a significant boost to spending on infrastructure (now viewed through the good and bad debt prism), reforms to education (both tertiary and schools) and healthcare, and measures to improve housing affordability. There also will be initiatives to aid welfare compliance. There probably will have been a worsening of the headline Budget balance in the near term, but improvement expected later. The planned timing of the return to surplus will remain in the middle distance of 2020-21.
- The economic data releases this week include the retail sales report Tuesday (including both the monthly and quarterly outcomes), the latest building approvals data today, and information on job advertisements. The highlight will be the retail report – the previous result for February revealed an unexpected fall in the value of sales.
Chart of the week – planned return to budget surplus still 2021
Last week (starting 24 April) – inflation data not a game-changer for RBA
- The clear highlight last week was the release of the March quarter inflation data. The headline CPI change of 0.5%q/q was a touch below market expectations, but nevertheless drove the annual rate back up to 2.1%oya, the first time that inflation has been within the RBA’s 2-3% target range since late 2014. The bounce was driven by big price rises for petrol, electricity, and several administered products (e.g. school fees), but there was little evidence of underlying price pressures. Indeed, once adjusted for volatile items, the core measure of inflation also rose only 0.5% over the quarter, but the annual rate stayed below 2%. Low wage growth and weak pricing power probably mean that inflation will stay subdued for a while yet.
- This week on the Dismal Science podcast, I talked about the Treasurer’s good debt/bad debt speech and inflation coming back within the RBA’s target range.
- The other major economic news last week was that the terms of trade (the ratio between export and import prices) rose another 8% in Q1, after a 12% bounce in Q2. The recent rises mean that about half the decline in the terms of trade since its peak in 2012 has been reversed. The rebound will do wonders for growth in national income and the federal budget bottom line. The bad news is that commodity prices have weakened in the current quarter, so the recent gains in the terms of trade will probably not be sustained.
This week (starting 1 May) – RBA Board decision on Tuesday the highlight