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 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
Stephen Walters: Live event
Join Stephen Walters, Omar Khalifa, CEO iAccelerate and Raad Richards, Chairman Bankstown City Credit Union at the upcoming Directors' Breifing: Boost Growth in Challenging Times
in Wollongong on 27 June 2017.
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
Stephen Walters: Live event
Join Stephen Walters, Omar Khalifa, CEO iAccelerate and Raad Richards, Chairman Bankstown City Credit Union at the upcoming Directors' Breifing: Boost Growth in Challenging Times
in Wollongong on 27 June 2017.
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