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

Export prices have rebounded

The week ahead – economic events in Australia

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

Export prices have rebounded

The week ahead – economic events in Australia

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
    • There is very little economic data released this week, with the trade balance on Thursday the only data of note. The highlight, then, will be the Reserve Bank Board decision tomorrow. All surveyed economists expect the RBA to leave the cash rate unchanged yet again, so the focus will be on the tone of the commentary. Two weeks ago, in the minutes of the previous Board meeting, RBA officials highlighted the importance of developments in the housing and labour markets, so any reference to these tomorrow will warrant attention. There are early signs of cooling in previously hot east coast housing markets, but labour market conditions have been unexpectedly weak of late. The RBA is likely to leave the cash rate steady while officials await more information on both employment and housing.

    • On Friday, the RBA will release a revised set of forecasts on the economy and inflation. The Bank will probably revise up the forecasts for headline inflation but, importantly, will likely leave the forecast for underlying inflation unchanged. The other event of note this week is a speech to be delivered by RBA Governor Dr Phil Lowe at lunch time on Thursday. The Governor is speaking about household debt and housing, so his speech will attract a lot of attention.

    Chart of the week – Inflation finally back above 2%

    Export prices have rebounded

    The week ahead – economic events in Australia

    Last week (starting 17 April) – RBA set out clear policy sign-posts

    • Last week was unusually quiet for economic data, with only the second-tier car sales information released last Wednesday. The stand out event, then, was the release of the minutes of the last RBA Board meeting held two weeks earlier, at which members opted to leave the cash rate steady. The key takeaway from the minutes is that officials expanded the official guidance at the end to include explicit comments about housing and the labour market – the document made clear that both “warranted careful monitoring ”. Recent weakness in the labour market has increased pressure on the RBA to lower the cash rate, but officials will be reluctant to do that because of the strength in housing. With these factors largely offsetting each other, the likely outcome for official interest rates is inactivity, although this could change if there is a shock in the inflation data due for release this week (see below).

    This week (starting 24 April) – influential inflation data the highlight

    • The main event this week is the release of the inflation data on Wednesday, although this will be followed on Thursday evening by a speech by RBA Governor Lowe, an event to keep an eye on. The inflation data is highly-anticipated – RBA policy changes are often made immediately after the release of the quarterly results. Even a middle-of-the-road inflation result of about 0.6%q/q will see annual headline inflation pop back up close to the mid-point of the RBA’s 2-3% target range, which should relieve some of the pressure on RBA officials to do more about the previous persistent undershoot. Governor Lowe’s speech on Thursday is unrelated to domestic economic issues, and there is no Q&A session to follow, so he will probably not be in a position to comment on any inflation surprises.
    • The other data point of note this week is the release on Thursday of the export and import price indexes, from which the terms of trade (the ratio between the two) can be calculated. The terms of trade (ToT) surged in the December quarter on the back of a 12% bounce in export prices, the largest gain in more than six years. The size of this improvement won’t be matched this week, although there will likely have been another rise in the ToT. The bad news is that commodity prices subsequently have fallen in Q2, a reality that points to a probable reversion of the ToT to its previous downwards trend.

    Chart of the week – Export prices have rebounded 

    Export prices have rebounded 

    The week ahead – economic events in Australia

    Last week (starting 10 April) – mixed messages in the latest jobs data

    • The standout event in Australia last week was the March jobs data, which included something for everyone. The “bulls” on the economy will be comforted by the large rise in net jobs over the month (more than 60,000 places), which was underpinned by a surge in full time jobs. The “bears”, though, will point to the elevated jobless rate, which flat-lined at 5.9%, albeit as had been expected by economists. The extended volatility in the month to month jobs gains in recent years, though, again highlights the underlying problems with this particular survey, which is dismissed as all but unusable by many economists.

    • The other prominent data released during the week were the twin confidence reports. Both the business and consumer measures slipped a touch in the latest reports, although there was a simultaneous bounce in business conditions, the contemporary measure that better correlates with economic activity.

    • The other event last week was the release by the Reserve Bank of the latest Financial Stability Review. This statement on financial conditions included more notes of caution on the housing market. Officials from both the RBA and APRA already had “belled the cat” on the issues arising from the hot east coast housing markets, the impact of the tax treatment of housing and relaxed bank lending standards. The commentary again highlighted that vulnerabilities were rising because of elevated household debt and products such as interest only mortgages, which are unusually prevalent here. An important caveat though – Bank officials see these developments as raising macro-economic rather than financial system risks - the commercial banks remain in good shape.

    This week (starting 18 April) – employment data Thursday most important

    • In an otherwise quiet week, the main event this week is the release of the minutes from the RBA Board meeting held two weeks ago, when the RBA left the cash rate steady at 1.5%. The commentary two weeks ago included two main changes relative to previous sentiments. First, there was acknowledgement that conditions in the labour market had cooled. Second, and more importantly, the Bank’s statement again expressed concerns about the risks associated with housing. These anxieties again will be on display in the minutes today, although the Bank again will make clear that the risks are macroeconomic in nature. The only data release this week is the latest motor vehicle sales data, for the month of March.

    Last week (starting 27 March) – regulators targeting home loan supply

    • There was no mainstream economic data released last week, but there was plenty to keep economists occupied. On Friday, for example, the regulator APRA announced refreshed rules on bank lending for housing. Banks now much keep interest only loans to no more than 30% of new lending – the current share is about 40%. Second, while the 10% ceiling for growth in investor lending for housing remains, banks must remain “comfortably below” this benchmark. This is a softer form of imposing a lower ceiling. The changes follow comments from RBA officials earlier this year that betray growing anxiety about heat in the major housing markets in the south east, and accelerating growth in lending to non-owner occupiers.

    • There was an important development overseas, with British PM Theresa May formalising the start of Britain’s withdrawal from the EU. This is the first time any country has triggered such an exit, so we literally are in unchartered territory. It will take at least two years for the UK to negotiate the terms of this “divorce”, probably longer, so there are no changes to the economic outlook for now, outside perhaps an additional layer of uncertainty. There is no turning back now, however, with UK voters having opted last year for less engagement and influence with Britain’s major trading partner. Tensions within the UK are likely to escalate, with Scotland’s Parliament this week calling for a second vote on independence.

    • On this week’s The Dismal Science podcast, I talk more about Brexit and the Government’s draft insolvency law reform.

    This week (starting 3 April) – Reserve Bank policy back in focus

    • The data flow resumes this week after a near-barren few weeks. The February retail sales report later today is likely to be the highlight, but sales growth probably softened a touch from an already underwhelming growth rate in January. The other data is the February building approvals and trade data – the former probably will show a reversal of the decent gain in January, while the trade surplus likely grew, thanks again to higher commodity prices.

    • In addition, the Reserve Bank Board meets tomorrow. Following APRA’s actions on home loans last week, the treatment of housing again will be a major focus for economists. The RBA almost certainly will leave the cash rate steady at 1.5%, but the tone of the Bank’s language on housing necessarily has to step up a bit in the wake of APRA’s moves. This will be a natural extension of the Bank’s guidance so far this year, which has been highlighting growing financial stability risks more assertively than before.

    Last week (starting 20 March) – house price rises back in focus

    • The only economic data release of note last week was the December quarter house price data. It showed fast-paced increases in the major east coast cities, lesser rises elsewhere, and falls only in areas of economic weakness and/or negative migration flows. House prices in both Sydney and Melbourne rose more than 5%q/q last quarter (and by around 10% over the last year), surges closely followed by a decent quarterly rise in Hobart. Prices fell in Darwin, and were flat in Perth, where there had been earlier falls. The national increase was 4.2%q/q, the fastest gain since mid-2015. The continued rises in house prices in the major east coast cities in particular, (see chart below) helps to explain why the national policy focus has returned to the housing affordability dilemma, for which the solutions are necessarily complex.

    • On this week’s The Dismal Science podcast, I talk more about the housing market. Is it a bubble? Should regulators be concerned about risks to the financial system? And what should governments be doing about housing affordability?

    • The other major event last week involved commentary by the Reserve Bank. The minutes from the most recent Board meeting sounded constructive on the outlook for the economy, but also hinted at rising official anxiety about the imbalances in housing and the household sector. This is consistent with what can be interpreted as a shift in the balance of risks in recent RBA commentary - away from concerns about patches of weakness in the economy and what should be done about these to the broader financial stability risks associated with high household debt and surging house prices. It is difficult to make the case for lower official interest rates in this context. The next move in the cash rate probably is up, but not for a while.

    This week (starting 27 March) – credit data the only notable data release

    • This week also is unusually quiet, albeit with the RBA active again tomorrow via a speech by the Deputy Governor. Dr Debelle is speaking at a conference on foreign exchange in Sydney, but such events always present opportunities for officials to speak on other matters, including housing market dynamics, particularly in answer to questions from the floor.

    • In addition, national job vacancies data is released on Thursday, and the Reserve Bank’s own private sector credit aggregates become available on Friday. The credit data for January revealed unexpected weakness (growth over the month of only 0.2%), but the February data probably will reveal a return to average growth in total credit of about 0.5%.

    Last week (starting 13 March) – little cheer in February jobs report

    • The highlight last week was the release of the latest official jobs data. Unfortunately, the results for February were particularly disappointing, with employment unexpectedly falling, the jobless rate rising to a 12-month high, the pool of underemployed workers swelling, and hours worked across the workforce shrinking at the fastest rate in more than a year. There really wasn’t much positive in the report at all. As always, though, it pays not to read too much into one month’s data, but the recent trend is troubling. In particular, the jobless rate has returned to 5.9%, and is at the top-end of the RBA’s forecast range. There was some chatter among economists that perhaps the RBA would be lifting interest rates before year-end, but that is not possible with unemployment rising.

    • For more on the concerning jobs numbers, listen to the AICD’s new economics podcast, The Dismal Science, where I discuss the economic news of the week.

    • The other main data released last week were the twin confidence reports for business and consumers. Business confidence had spiked unexpectedly in the previous report for January, so it was no great surprise to see the headline measure return to the “norm” in the February result. There probably was some seasonal holiday noise in the previous reading. Consumer confidence, meanwhile, edged up a touch to the point where the number of pessimists roughly equals the pool of optimists. The underwhelming result was despite the stellar GDP result released during the week of the survey and further solid gains in house prices. Job insecurity is playing on the minds of many households.

    This week (starting 20 March) – Reserve Bank activity the highlight

    • There is little top-shelf economic data on the agenda for this week, so Reserve Bank activity will attract most attention. Minutes from the most recent Board meeting are released tomorrow, and there are speeches by the Deputy Governor and the head of the economics department. The messages delivered probably will not deviate much from the recent tone of communications, notwithstanding the disappointment of the jobs report. Officials have hinted that the balance of risks between weakness in the economy and financial stability risks associated with the hot east coast housing market are shifting slowly in favour of the latter. This makes it less likely that the RBA will further lower the cash rate.

    • Speaking of housing, the only material data due for release this week is the official house price data. Private industry data already has shown that house prices are rising rapidly in the larger cities, and the official data will probably confirm this. The consensus of economists expects a national rise of 2.5% over the quarter.

    Last week (starting 6 March) – Reserve Bank tweaked the risk profile

    • The Reserve Bank Board left the cash rate steady last Tuesday as all surveyed economists had anticipated. So, no surprise, there, but the Bank did tweak the tone of the communications a little. There was no explicit mention of the stellar headline Q4 GDP result, but officials seem to be elevating the underlying financial stability risks associated with high household debt, relative to patches of weakness in the economy (and persistently low inflation). While the latter might buttress the case for further rate cuts, the worsening financial system risks argue strongly against them. Some economists still expect another rate cut, but this almost certainly would encourage even more borrowing. It seems more likely that the next move in the cash rate will be up, and possibly before the end of this year.

    • For more on the Reserve Bank’s decision, listen to the AICD’s new economics podcast, The Dismal Science, where I discuss the economic news of the week.

    • The data highlight this week was the retail sales report for January. Sales growth rebounded after a few weak months, but there was further softness in department store sales, another sign of consumer caution on discretionary spending. There was, however, a bounce back in spending on household goods, thanks mainly to distortions in the hardware market. The home loans data released Friday showed a resurgence in loans taken out by investors (i.e. not owner-occupiers), which led a 1.5% rise in total loans over the month.

    This week (starting 13 March) – employment data the main focus

    • This week sees the release of the employment data for February. The previous data for January showed a reversion to old trends – a dominance of part time jobs growth over full time, coupled with a lower jobless rate. The February data probably will show a decent enough expansion of total jobs of close to 16,000, and a dip in the jobless rate back to 5.6%, where it sat last October. The leading indicators on the labour market point to improvement ahead but, like with firms’ investment planning, decisions over hiring remain problematic for many firms. All the while, wages growth is at record lows, a symptom of the swollen pool of underemployed – those in a job, but wanting to work more hours.

    • Today sees the release of the latest business confidence reading. The previous release for January showed an unexpected bounce, but this likely was distorted by Chinese New Year activities. There probably will be a reversion today. The consumer confidence data Wednesday probably will show the index moving back up above the break-even 100 mark. Respondents will have welcomed the very strong GDP growth results for the December quarter, as well as the sustained gains in house prices.

    Last week (starting 27 February) – economy easily avoided recession

    • The stand-out event last week was the release of the December quarter National Accounts, which revealed that Australia was not, after all, in recession. There had been idle speculation after the release of the previous Accounts that showed an unexpected fall in real GDP that Australia’s economy was dipping into technical recession. The Q4 accounts abruptly ended this conversation – they showed a much larger than expected bounce in real GDP last quarter. In fact, all of the elements of the “perfect storm” that delivered the fall in GDP in Q3 reversed last quarter, delivering a 1.1% q/q gain over the December quarter. The nominal dynamics were even stronger, including a 9% rise in the terms of trade and the fastest growth in national income in six years.
    • Before we start popping champagne corks, though, the accounts also shed light on the economy’s underlying problems. All of the gains in national income last quarter went into corporate profits – wages in real terms actually fell over the quarter. Also, calculating average real GDP growth across the last two quarters reveals that we continue to grow at a sub-trend pace, so we are still building up spare capacity in the economy. Also, while productivity and investment rose in Q4, growth in each remains below long term averages. So, recession has been avoided easily, but there still is some way to go before we can say the economy’s transition to more non-mining sources has been completed.

    This week (starting 6 March) – Reserve Bank to hold policy steady tomorrow

    • This week is much quieter for economic data, so the highlight will be the Reserve Bank policy decision tomorrow. No mainstream economist expects Bank officials to lower the cash rate tomorrow, but the Board meeting is important nonetheless. The commentary announcing the interest rate decision, in particular, will reveal RBA officials’ thoughts on the Q4 National Accounts and the influential business investment expectations report released a little earlier. The tone of the Bank’s statement is unlikely to deviate much from the February commentary, though, as officials had anticipated a healthy rebound in GDP growth.
    • The main data releases this week are the January retail sales and home loans reports. The retail report today should show a decent rebound in growth in sales for January, after the report for December showed an unexpected decline. The home loans data Friday, though, should reveal a fall in demand for home loans, after a weak result for December, too. Perhaps commercial banks’ latest moves to tighten lending criteria is starting to pay dividends.



    Last week (starting 20 February) – few green shoots in the investment data

    • The stand-out event last week was the release of the December quarter National Accounts, which revealed that Australia was not, after all, in recession. There had been idle speculation after the release of the previous Accounts that showed an unexpected fall in real GDP that Australia’s economy was dipping into technical recession. The Q4 accounts abruptly ended this conversation – they showed a much larger than expected bounce in real GDP last quarter. In fact, all of the elements of the “perfect storm” that delivered the fall in GDP in Q3 reversed last quarter, delivering a 1.1% q/q gain over the December quarter. The nominal dynamics were even stronger, including a 9% rise in the terms of trade and the fastest growth in national income in six years.

    • Before we start popping champagne corks, though, the accounts also shed light on the economy’s underlying problems. All of the gains in national income last quarter went into corporate profits – wages in real terms actually fell over the quarter. Also, calculating average real GDP growth across the last two quarters reveals that we continue to grow at a sub-trend pace, so we are still building up spare capacity in the economy. Also, while productivity and investment rose in Q4, growth in each remains below long term averages. So, recession has been avoided easily, but there still is some way to go before we can say the economy’s transition to more non-mining sources has been completed.

    • The stand-out data release last week was the private sector investment survey, collected during the December quarter. It revealed yet another dip in investment spending last quarter but, more importantly, showed that firms still expect weakness in the next fiscal year. Firms actually raised their spending intentions for the year ended June 2017, but the first glimpse of spending intentions for the year ended June 2018 showed another expected fall. Mining investment is plunging as major projects are completed, but the key weakness is in spending outside mining, where much-needed animal spirits still seem in short supply.

    • Last week was another busy week for the Reserve Bank, with Dr Philip Lowe testifying before Federal Parliament for the first time as Governor. The Bank has been delivering a consistent message so far this year, which seems to imply that interest rates are unlikely to fall again any time soon. While RBA officials still want inflation to return to target, they sound increasingly concerned about the impact even lower interest rates would have on already elevated household debt and a hot east coast capital city housing market. Financial stability risks, it seems, have become even more prominent in the thinking of RBA officials. In this context, it probably would take a lot to get RBA officials to lower the cash rate again.

    This week (starting 27 February) – confirmation that recession was avoided

    • There is a lot of economic data reported this week, but the highlight will be the Q4 National Accounts, released Wednesday. You may recall that the previous accounts for the September quarter showed that GDP dipped 0.5%q/q, the largest contraction in activity since the GFC. This week’s accounts should confirm that the economy did not suffer back-to-back declines in GDP, the technical definition of a recession. Elements of the perfect storm that caused the fall in GDP in Q3, including a fall in government investment and lower net exports, probably will have reversed in the December quarter. GDP probably rose 0.6%q/q over the quarter.

    • The other data includes the latest credit aggregates from the Reserve Bank, residential building approvals, the trade balance, and the building blocks for the quarterly GDP result. The aggregates have shown a welcome lift in business credit, which should herald a rise in business investment – eventually. The building approvals data has shown softness as approvals for new home construction come off record highs. There should have been a small fall in the January data, but the trade data should reveal another large surplus, thanks to high commodity prices and the ramp up in production from recently-completed projects.

    Chart of the week – fall in GDP will not be repeated in Q4

    GDP Growth 

    The week ahead

    Last week (starting 13 February) – something for everyone in the jobs data

    • As is often the case, last week’s employment data contained something for everyone. For the optimists, there was an unexpected dip in the jobless rate to 5.7% in January, a larger than expected gain in total employment, and rise in hours worked by all those employed. For the pessimists, there was a plunge in full-time employment, although this was more than offset by a surge for part-timers. The dip in the unemployment rate probably is the most telling message from the data, but there still is evidence of widespread under-employment – people are working, but a near-record high number of them wish to work longer hours.

    • There was unequivocally good news in the sentiment reports, however. Business confidence in the NAB survey, for example, surged to a multi-year high, and business conditions (a measure of contemporary performance) bounced from already-elevated levels. These improvements match similar moves in corporate sentiment in offshore economies and probably reflect offshore developments rather than domestic news. There also was a rise in consumer sentiment, following several months of decline. There still are slightly more pessimists than optimists among respondents, with a majority also now expecting the next move in interest rates from the Reserve Bank to be a rise.

    This week (starting 20 February) – firms’ investment report the highlight

    • The highlight of the data releases this week is the December quarter business investment report. Business investment remains a prominent missing piece of the domestic growth jigsaw, so the report will be an important sign post on progress. There was probably another fall in spending over the quarter as investment in the resources sector continues to run down. Firms’ all-important forward looking estimates will extend to June 2018, and should reveal signs of improvement. The plunge in mining investment from record highs looks to have almost run its course, and a lift in investment outside mining looks overdue – firms cannot delay replacement of plant and equipment indefinitely.

    • The Reserve Bank is active again this week, with the Bank releasing minutes from the recent Board meeting tomorrow, and Governor Lowe delivering a speech on Wednesday and then testifying to a parliamentary committee on Friday. The message from all of this communication probably will be that conditions offshore, in particular, have improved, and that there are sufficient green shoots in the domestic data to convince officials that further interest rate cuts are not needed. In fact, the next policy move from the RBA is more likely to be a rate hike, although not until early 2018.

    Chart of the week – investment by sector

    Retail sales, monthly growth rate

    The week ahead - economic events in Australia

    Last week (starting 6 February) – RBA officials sounding content

    • The Reserve Bank was unusually active last week. The Board met last Tuesday and decided to leave the cash rate steady at 1.5%, as all surveyed economists had anticipated. The surprise was that the commentary announcing the decision was more upbeat, particularly in reference to the global outlook. Governor Phil Lowe then spoke Thursday night in a speech that sounded similarly upbeat, as did the Bank’s quarterly statement released on Friday. The statement revised down the economic growth forecasts, but this reflected the unexpected drop in real GDP in Q3, not a reassessment of the future. The inflation forecasts were left unchanged.

    • The data release of most interest last week was the December retail sales report. Sales actually dropped over the month (down 0.1% - the weakest outcome since last July), but the fall was concentrated in a plunge in hardware sales. There has been unusual volatility in this space of late owing to closure of a major industry player, which prompted aggressive discounting. Abstracting from this, sales growth in other categories was not too bad. The softer trend in sales over recent months, though, is clear – see the chart below.

    This week (starting 13 February) – employment data due Thursday

    • The highlight this week is the release of the January jobs data on Thursday. Job growth was unexpectedly strong during the fourth quarter (averaging net gains of more than 22,000 jobs per month), but increased participation in the labour force nevertheless saw the jobless rate rise from 5.6% to 5.8%. There was likely a more modest gain of around 10,000 jobs in January, which should be sufficient to keep the jobless rate steady. Beneath the surface, the other good news last quarter was that most of the jobs created were full-time, reversing the trend of much of the previous two years, when part-time job creation dominated.

    • The other economic data to be released this week is the business and consumer confidence reports. Consumer confidence has been sliding in recent months, particularly in the wake of the US presidential election, but probably rebounded in the February release. The likely improvement in part reflects the decent job gains last quarter. The forward-looking business sentiment measure has been broadly stable, although there was a surge in contemporary business conditions in the December report. Firms reported a sharp improvement in trading conditions, although the gauge of employment remained soggy.

    Chart of the week – retail sales growth losing steam

    Retail sales, monthly growth rate

    The week ahead - economic events in Australia

    Last week (starting 30 January) – low inflation … but no more RBA rate cuts

    • The main economic news last week was that Australia registered the largest ever trade surplus in December, thanks mainly to the surge in commodity prices. The monthly surplus in December was more than $3.5 billion, much more than economists had anticipated. The huge boost to export growth means it now is almost certain that Australia avoided a technical recession last quarter. Remember that the Q3 GDP data released back in December showed that the economy had contracted, but another fall in real GDP in Q4 now looks extremely unlikely. Domestic demand has been firmer, too, evidenced by the fact that jobs growth was unexpectedly decent in Q4.

    • The other news last week was that the number of approvals by local councils for new home construction dipped to a two-year low. There is a near-record amount of construction work underway now, but the dip in approvals for new work in recent months (the fall for December was the fifth in the last seven months) means there is a moderation on the way. The fall has been largest in high density dwellings such as units and apartments, where approvals now are 13% below the level of a year earlier.

    This week (starting 6 February) – building approvals data the highlight

    • This week, the highlight will be all the Reserve Bank activity. The Board meets tomorrow to consider the level of interest rates for the first time since early December. Also, Governor Lowe delivers a speech Thursday night, and the Bank releases its updated forecasts Friday. The Board meeting tomorrow is likely to deliver a steady cash rate, which already is sitting at a record low of 1.5%. There are some economists still calling for lower interest rates, but even the most pessimistic do not expect a rate cut tomorrow. A key concern of Bank officials is the strength of the housing market, which would get another boost from another rate cut.

    • The highlight of the flow of economic data will be the retail sales report released later this morning. Sales growth has been softening over the last few months, but there should be an improvement in the results for December, which includes the all-important holiday period spending. The other data released is the latest home loans data on Friday. The fact that much of the recent strength in bank lending has been to non-owner occupiers (that is, investors), will be another source of anxiety for Reserve Bank officials, and a key point of interest in this week’s data.

    Chart of the week – high density dwelling approvals still high

    Retail sales, monthly growth rate

    The week ahead - economic events in Australia

    Last week (starting 23 January) – low inflation … but no more RBA rate cuts

    • Last week brought an update on inflation in Australia, with the release of the data for the December quarter. The report revealed that the sequential rate of inflation dipped a touch last quarter (to 0.5%q/q), but that the annual rate lifted to 1.5%. This outcome means inflation remains below the Reserve Bank’s target range of 2-3%, but nevertheless that it has probably bottomed-out for this cycle. Indeed, annual inflation reached a low of just 1% through the middle of last year, but has now risen for two straight quarters. This probably argues against the RBA having to respond to the persistent inflation undershoot with further interest rate cuts, although they can’t be ruled out.

    • The other data released last week were the trade price indexes. These generally get little attention, but they reveal the direction of the terms of trade (the ratio of the two trade prices), which goes a long way to determining Australia’s national income and, therefore, our standard of living. Export prices bounced more than 12% last quarter, the biggest rise since 2010, while import prices were broadly flat (up 0.2%). This means the terms of trade surged 12.2%q/q, the third straight increase. The terms of trade are far below the heady record-high levels reached back in 2011, but at least are not still falling.

    This week (starting 30 January) – building approvals data the highlight

    • This week is relatively quiet, with the Reserve Bank Board not meeting until next week, and the data flow modest. The highlight will be the residential building approvals data released Thursday. There was an unexpected bounce in approvals in the November data released a month ago, but the December data this week will probably reveal some softness. The chart below shows there has been a plunge in approvals for higher density dwellings (units, apartments, townhouses, etc.) but, even then, approvals for this type of dwelling remain elevated. The surge in high-density approvals has contributed to pockets of over-building in Australia, which should contribute to price weakness. Prices for detached houses, however, are likely to continue to climb.

    • The only other data point this week is the trade balance, also released on Thursday. This data produced an unexpected surplus when it was released a month ago, thanks to the strength of commodity prices, in particular. The size of the trade surplus probably shrank in December, but remained in the black, a rarity for modern Australia.

    Chart of the week – high density dwelling approvals still high

    Retail sales, monthly growth rate

    The week ahead - economic events in Australia

    Last week (starting 16 January) – unexpected rise in the jobless rate

    • The resumption of meaningful data-flow after the holiday period included the release of the latest monthly employment data. The December report revealed a slightly larger than expected lift in the number of new jobs created (13,500), but also a small rise in the jobless rate to a six month high of 5.8%. The rise in unemployment, though, owed much to a rise in labour force participation, which normally is a positive sign of momentum in the labour market. There also was a rise in the number of hours worked across the existing workforce, another good sign. Completing the constructive picture was news that most of the jobs created last month were full time, extending the trend of recent months.

    • Other economic news last week was more sobering. The widely-watched Westpac Melbourne Institute index of consumer sentiment barely moved in January, following the plunge in December. That earlier fall was largely attributable to the unexpected US election win for President Trump, and the uncertain consequences for Australia. The inactivity in the January confidence reading stemmed from higher energy prices and rising mortgage rates, despite the RBA leaving the cash rate steady. Other data last week revealed a bounce in demand for new home loans, led by a fresh surge in activity by investors, as opposed to owner-occupiers.

    This week (starting 23 January) – Q4 inflation data in focus

    • The clear highlight in the week ahead is the December quarter inflation data, released Wednesday. It seems likely that inflation pressures will have been subdued, with the annual rate of price change probably lifting only slightly to 1.6%oya. The Reserve Bank targets inflation to average between 2% and 3% over the course of the business cycle, so the numbers this week should reveal the persistence of the inflation undershoot. The quarterly rise in the CPI probably will be 0.6%q/q, down slightly from the 0.7% reported for the previous quarter. A key driver of this will be a 6% rise in petrol prices, but the measure of food prices probably will be broadly unchanged.

    • In terms of what the inflation data means for interest rates, it may be instructive that the Reserve Bank’s two rate cuts last year followed closely on the heels of the release of inflation data. That’s unlikely to be the case this time, with the RBA’s public commentary late last year revealing a degree of comfort with the outlook for the economy and the policy settings. The RBA Board does not meet again until the first week of February. The Bank releases its updated forecasts a few days after the board meeting – these will reveal whether there has been any change in the thinking of our central bankers. We suspect not.

    Chart of the week – jobless rate back at 6-month high

    Retail sales, monthly growth rate

    The week ahead - economic events in Australia

    Week starting 9 January – retail statistics the highlight in quiet week

    • The holiday period was quiet for economic data, with the highlight being the release last week of the retail sales figures for November. They showed that sales grew at an unexpectedly sluggish rate, albeit after a decent few months. It seems that the two-year long period of slowing growth in retail turnover has ended (chart below). There was no Reserve Bank board meeting last week, with members not scheduled to meet again to consider the level of interest rates until the first Tuesday in February. Most economists now expect interest rates to be held steady, with the next move probably a rise later this year.

    Week starting 16 January – employment data in focus on Thursday

    • This week is busier, with plenty of economic data on offer. The highlight will be the release of the monthly employment data for December. The November data showed an unexpectedly large rise in full time employment, after a similar-sized bounce in October, but the gain for the month of December likely will be smaller. Economists expect a net gain in employment of around 12,000 positions, but this should be sufficient to see the jobless rate tick down a notch to 5.6%. The unemployment rate rose to 5.7% in November, despite the big gain in net job creation, as people re-entered the workforce, swelling the participation rate.

    • The other data this week includes the monthly consumer confidence report and some housing-related data. Consumer confidence as measured by Westpac-Melbourne Institute tumbled nearly 4% in the December report, but probably steadied in January. The previous survey revealed heightened levels of household uncertainty about both the domestic economy and international developments, including any implications from Donald Trump’s largely unexpected Presidential election victory.

    • The housing related data this week includes data on the number of dwelling commencements and demand for home loans. The quarterly construction activity data revealed a plunge in the number of homes started in Q2, but this should have been partly reversed in Q3. The clamour for home loans by owner-occupiers dipped in the October data, but the November report probably will show another rise. High auction clearance rates heading into summer indicated that demand for new loans was on the rise again.

    Chart of the week – retail spending has firmed

    Retail sales, monthly growth rate

    The week ahead - economic events in Australia

    Last week – better than expected jobs growth in November

    • The release of the unexpectedly good November employment report was last week’s clear highlight. There was a bounce in full time employment (the second straight monthly rise), but no gain at all for part timers, after a large fall in this category in October. The total net jobs gain of nearly 39,000 in November was much larger than surveyed economists had expected. The jobless rate rose a touch to 5.7% last month, but this owed much to a rise in the labour force participation rate, which usually is a positive sign. This may be because previously discouraged workers re-joined the search for work, but the ABS does not ask for reasons. The under-utilisation rate dipped slightly, but remained elevated at above 14%.

    • Earlier in the week, there was generally bad news on business and consumer sentiment. Business conditions in the NAB survey, in fact, slipped to the lowest level in 19 months, with a particularly heavy drag coming from profitability, although there was a small rise in the forward-looking business confidence net balance. The Westpac Melbourne Institute measure of consumer confidence, though, plunged, with respondents reacting negatively to news last week that the economy went backwards in the September quarter. The near 4% drop in the headline consumer sentiment index is one of the largest in recent years.

    This week – Treasurer to unveil Budget update today

    • This week, with no economic data due to be released, the focus will be on policy as Treasurer Morrison updates the federal budget position later today and, tomorrow, the Reserve Bank releases minutes from the Board meeting held two weeks ago. The minutes are unlikely to reveal much new information – the Board’s decision to leave the cash rate steady at 1.5% was anticipated by all surveyed economists, and the statement announcing the decision revealed few surprises. RBA officials seem pretty content with the way the economy ended the year, the unexpected drop in GDP last quarter notwithstanding.

    • Treasurer Morrison’s Budget update at 12pm today, then, will be the week’s highlight. The Midyear Economic and Fiscal Outlook (MYEFO) document should reveal a slightly larger projected deficit for the year ended June 2017. The government has failed to have all of its spending savings pass the Parliament and the economy has been weaker than expected, so will be a drag on revenue. Ratings agencies have called for the government to stick to a coherent plan to return the budget to surplus, so material slippage on the headline budget estimates could have consequences for Australia’s coveted AAA credit rating. Some analysts expect a credit rating downgrade as early as today, but this looks unlikely.

    Chart of the week – full time growth rebounding

    Stephen Walters weekly update

    Stephen Walters weekly update

    Last week – a rare step backwards for Australia’s economy

    • The obvious low-light last week was the revelation that Australia’s economy went backwards in Q3, a rare occurrence. Indeed, GDP has fallen in real terms only four times in the last 25 years. The 0.5%q/q dip in GDP is the second worst since the early 1990s recession and was the product of a confluence of unfortunate circumstances. Some of the one-offs that had helped produce decent growth in earlier quarters unwound, bad weather affected construction activity, lumpy government investment spending plunged, and consumers pulled back. That said, unlike the previous three declines in GDP since 1991, there is no obvious excuse this time. In the earlier dips of 2011, 2008 and 2000, officials could blame a cyclone, the GFC and the GST, respectively. But not this time – there was broad-based disappointment. The silver lining was that real per capita disposable income – the best measure of living standards – rose again (see chart), thanks mainly to rising commodity prices.

    • Earlier, on Tuesday, the Reserve Bank board had opted for inactivity in its last gathering for 2016 – no surveyed economist had expected another interest rate cut, even with the assumed knowledge that the GDP data the following day would be weak. The Bank’s commentary announcing the decision revealed few surprises. The statement indicated that after the likely weak GDP data (like the rest of us, the Board did not have the data to hand), growth in the economy would rebound in the current quarter, thanks in part to a bounce in LNG exports. This probably means the chances of the RBA providing further interest rate support to the flagging economy are slim. The next Board gathering is not until February.

    This week – employment data the highlight in week ahead

    • This week, the highlight will be the November employment data, released on Thursday. There was probably a net gain of 12,000 jobs over the month, a slight improvement on the near 10,000 jobs created in October. This gain, however, will probably be insufficient to absorb the number of new entrants to the workforce (assuming a small rise in the participation rate), so the unemployment rate will probably rise slightly to 5.7%. The underlying theme in the labour market, though, will remain one of weak income growth. Underemployment remains high and economy-wide wages growth has never been weaker.

    • The other data released this week will be the latest revelations on capital city house prices and sales of new motor vehicles. The former will get a lot of attention, the latter not so much. Next week will be more interesting, with Treasurer Morrison poised to release his Budget update (MYEFO) on Monday. The RBA also will release the latest Board minutes.

    Chart of the week – living standards finally rising!

    Last week – firms’ investment intentions improving … only slowly

    • The Q3 business investment report last week showed there was another large drop in investment spending last quarter – the third straight fall – with firms in mining again leading the decline. The good news is that the expected decline in spending in the year to June 2017 was trimmed modestly to -15%, from -17% in the previous survey three months earlier. The main messages are that private investment will be a large drag on GDP growth in the quarter (see below), but at least conditions are not getting worse. Hopefully, record low interest rates and improving business confidence will underpin some improvement in the months ahead.

    • The other data releases last week included updates on residential building approvals and retail spending. The former showed an unexpected 13% plunge in local council approvals for new construction in the month of October alone, after a 9% fall in September. As before, the dive was driven by a large fall in approval of higher density dwellings (mainly units, flats and apartments), but approvals for detached dwellings also fell. The oversupply of apartments in key urban areas is starting to affect approvals, but is yet to show up in prices, although the anecdotal evidence suggests this is coming. The retail sales report was decent, with sales growth beating expectations.

    This week – GDP growth and the year’s final RBA decision

    • This week is busy, with the Reserve Bank announcing its interest rate decision today and the Q3 National Accounts released Wednesday. The GDP data will be the highlight. It looks as though growth in the economy weakened significantly last quarter, based on the pieces of the GDP jigsaw already in place. Consumer spending was very soft and construction activity dived, as did business investment spending. Growth in export volumes also are likely to have cooled last quarter, although the nominal side of the economy probably looks better, thanks in part to rising commodity prices. In real terms, however, the economy probably grew only 0.3% q/q, dragging down the annual growth rate from the previous 3.3% to around 2.5%.

    • The Reserve Bank Board meeting today should result in a steady cash rate at 1.5% – no economist seriously expects another rate cut today. Officials have made clear lately they are balancing the need to support economic growth with low interest rates against longer term financial stability risks that leaving the policy stance so accommodative may accentuate. We suspect the needle has shifted slightly towards the financial stability concerns, meaning the case for the provision of further policy support has weakened. Moreover, AUD has been falling, doing more of the work for the Bank in easing financial conditions. The commentary announcing the decision later today probably will sound very familiar.

    Chart of the week – GDP growth weakening

    Mining investment

    The week ahead

    Last week – construction activity a larger drag on GDP growth

    • The main news last week was that construction activity was an even larger drag on growth in the economy last quarter than economists had expected. The construction work done data on Wednesday showed unexpected falls across all categories, including home building, which had been booming. This provides another weak addition to Q3 GDP, which is scheduled for release on December 7. Consumer spending is known to have been soft last quarter as well, so some economists actually are forecasting that the economy contracted in Q3. This has happened only three times previously in the last 100 quarters. There is a lot more data available before the GDP release, so forecasts still are a bit rubbery, but a weak outcome is all but assured.

    • The other highlight last week was the speech delivered by the Reserve Bank’s chief economist, Chris Kent, in which he revealed stark differences in economic performance across the states. He didn’t venture into the domain of the outlook for interest rates, but did highlight how the regions in the south east of the nation are outperforming those to the west and north, in particular. The complication, however, is that RBA has only one interest rate instrument at its disposal, so must set policy based on the “average” performance. Interest rates now probably would be higher if not for the weakness in the resource-based states.

    This week – firms’ investment intensions to be updated on Thursday

    • There is a lot of economic data scheduled for release this week, with the Q3 investment report Thursday the highlight. The report will provide the latest reading of firms’ spending intentions in the months ahead. Investment outside mining has been unexpectedly weak in recent years, as investment within mining slides, meaning the long-awaited transition has stuttered. The report probably will show more “green shoots” for firms in non-resource based sectors, but uncertainty remains high and is a headwind for many corporate decision makers. Managers seem particularly anxious about the global outlook (the survey was collected before the US election) and domestic policy settings.

    • The other data includes the October reports for retail spending, building approvals and bank credit. Retail sales growth probably moderated from the unexpectedly decent results revealed a month ago for September, which were underpinned by an unexpected boom in spending on household goods. Meanwhile, residential building approvals probably rose slightly last month after a couple of monthly falls, but growth in credit probably flat-lined at an underwhelming 0.4%. The other activity this week will be in the Federal Parliament, with the Government still wrangling to get key legislation passed before the end of the sitting year.

    Chart of the week – private investment by industry

    Mining investment

    The week ahead

    Last week – mixed news on employment … again

    • The October employment report, released last Thursday, revealed a weaker than expected 9,800 net gain in jobs over the month (economists had expected a gain of closer to 20,000 positions), but an unchanged jobless rate at 5.6%. There was a big gain in full-time employment over the month, but this did not make up for the alarming plunge in September. Indeed, the annual growth rate of total employment slipped below 1% for the first time in two years. In a surprise, however, hours worked across the entire workforce increased strongly, but there is still evidence of a high degree of under-utilised labour. That is, many people currently working want to work more hours, but are unable to. This is making labour market conditions weaker than the headline results otherwise suggest.

    • This underlying weakness in the labour market was reflected in the outcome of the other major economic release of last week, the September quarter wages data. This revealed another dive in annual growth in economy-wide wages to a fresh record low, this time below 2%. That is, wages growth barely matches the prevailing rate of inflation. The softness in wage outcomes in turn is feeding into low inflation, because many firms are under no pressure to push through price rises to fund wage gains. The weakness in wages seems pretty entrenched, despite recent reports of isolated large increases in negotiated wage settlements.

    This week – important speech by the RBA’s chief economist

    • This week is unusually quiet for Australian economic data, with only the quarterly nation-wide construction work done data scheduled for release. This data, however, is an important early building block for the September quarter national accounts, which are scheduled for release in early December. GDP growth last quarter will probably be materially weaker than growth in the June quarter, which was supported by decent growth in export volumes and a big bounce in dwelling construction. Consumer spending was weak, though, and likely remained so last quarter, given recent indifferent employment growth.

    • The highlight in the week ahead, then, probably will be the speech tomorrow night from the Reserve Bank’s chief economist Chris Kent, who will speak on the topic of Australia’s economic transition – state by state. It sounds as if he will highlight the marked differences in regional performance, with the resource-based states falling behind the former rust-belts of the south east. Last week’s speech by RBA Governor Phil Lowe once again highlighted the importance of Australia having “buffers” against adversity. These buffers include a healthier Commonwealth Budget position and a more modest household debt ratio, the latter of which, at a record high, is a particular source of anxiety for RBA officials.

    Chart of the week – wages growth still sliding

    Wages growth

    The week ahead

    Last week – The Donald … and what it means for Australia’s economy

    • Without doubt, the main event last week was the unexpected Presidential election victory for Donald Trump. His largely unexpected win means big changes for the US, obviously, but there are also potentially profound implications for Australia’s economy. There are positives, including a probable boost to demand for commodities, thanks to the promised boost to infrastructure spending. Also, AUD likely weakens on the back of USD strength, which should help our economy’s transition. There are material negatives, though, with the biggest being the likely constriction of global trade if the US turns inwards. The TPP trade deal is probably dead. In the near term, there is also a likely loss of business and consumer confidence, owing to the onset of more uncertainty over policy and the economic outlook.

    • Last week’s flow of economic data saw falls in the latest business and consumer confidence measures, and these surveys were collected before the volatility in financial markets caused by Trump’s unexpected election victory. The dip in consumer confidence comes after rises in the previous three months, so is not that worrying. The business confidence measure, though, has been treading water for much of this year, and reveals that many firms remain reluctant to hire and invest. Last week’s data also revealed a big bounce in investors’ demand for home loans, not what policy makers want to see.

    This week – Reserve Bank officials back in action

    • Tomorrow is an important day for Reserve Bank activity, with the minutes of the most recent Board meeting being released, and Governor Lowe speaking tomorrow night. The Bank left the cash rate steady at the November Board meeting and didn’t deliver any material surprises in the commentary. The minutes, then, probably won’t deliver much that we didn’t already know. The same can’t be said of Governor Lowe’s speech but, coming so soon after the latest Board meeting and the release of the quarterly statement, it’s unlikely he’d want to tip over the policy apple cart, particularly with so much uncertainty out there already.

    • The highlight in the data this week is the October employment report, released Thursday. Total employment has fallen in each of the last two reports, but the October data should reveal a modest gain. A small rise in labour force participation, however, should see the jobless rate rise slightly to 5.7%. As has been the case for some time, there probably will be more evidence of underemployment – people employed, but wanting to work longer hours. The rise in underutilisation of labour has made worse the extended income compression caused by the fall in the terms of trade since 2011.

    Chart of the week – confidence slipping

    Business and consumer confidence

    The week ahead

    Last week – Reserve Bank seemingly relaxed and comfortable

    • The Reserve Bank was unusually active last week, with Tuesday’s interest rate announcement followed by the release of the quarterly statement on Friday. Drawing a simple conclusion from 60-odd pages of detailed commentary is not easy, but Tuesday’s page-long interest rate announcement was pretty clear. The Bank seems in no rush to trim the cash rate again, partly because the previous policy stimulus is still filtering through, but also owing to renewed concerns about “brisk” rises in house prices. In fact, the next move in the cash rate in our view, is probably up, not down, albeit not for some considerable period of time. Friday’s statement included the Bank’s refreshed forecasts for inflation and growth. Inflation was unchanged, and GDP growth saw a small downward revision, though only for 2018.

    • Last week also saw a decent suite of economic data released. The highlight was the September retail sales report, released on Friday. Sales growth was unexpectedly firm at 0.6%, the best result since mid-2015, thanks to the release of the new iPhone, but also because of a bounce in sales of household goods. It seems consumer spending is finally responding to record low interest rates and the impact of higher house prices and home construction activity. The more sobering news is that sales volumes in Q3 fell, which gets the arithmetic of the quarterly GDP growth calculations off to a soggy start.

    This week – another score check on confidence levels

    • This week is much quieter, with no public RBA activity scheduled and a dearth of mainstream economic data. The highlight will be the business and consumer confidence readings, released Tuesday and Wednesday, respectively. Business confidence slipped a little in the September survey, but probably held its ground in October. Consumer confidence has risen for three straight months, but will likely have softened in November. The RBA Board chose not to lower the cash rate early in the month, equity markets have been sliding, and there are renewed concerns about job security, given a series of weak labour market outcomes.

    • The biggest event of the week though, unequivocally, is the US presidential election, the results of which will become available Wednesday afternoon, Australian time. The outcome of the election could have material impacts on Australia’s economy, and not just via the financial markets channel. Both candidates have raised reservations about the TPP trade pact, from which Australia is set to yield significant benefits. There also could be changes to the US’s engagement with Asia, the destination for 70% of Australia’s exports.

    Chart of the week – Retail sales improving

    Anuual Headline Inflation

    The week ahead

    Last week – something for everyone in the inflation data

    • The inflation data released last week had something for everyone. Those hoping the RBA will trim the cash rate tomorrow can point to low underlying inflation (i.e. the measure excluding volatile items), which slipped to a record low. But, those calling for no change from the Bank will highlight that headline inflation was unexpectedly high, albeit mainly because of a flood-induced spike in fresh fruit and vege prices. The bottom line is that inflation remains subdued, well under the RBA’s 2-3% target range, but there are signs that the low-point may have passed. The annual rate of inflation, after all, lifted from 1.0% in Q2, to 1.3% in Q3.

    • Last week also saw the release of the terms of trade data. The export and import price indexes often fail to get the attention they deserve, but they feed directly into calculations of the terms of trade, a key driver of national income. The terms of trade bounced more than expected last quarter, rising 4.5%q/q. The ToT now has risen in consecutive quarters for the first time since 2011. It follows that there is a decent chance of real per capital national income rising too, as it did in the June quarter. Higher commodity prices are driving this improvement, and will do wonders for state and federal government budget balances.

    This week – no change from the RBA … but it will be a close call

    • Tomorrow’s interest rate decision by the Reserve Bank is this week’s clear highlight. Financial market pricing implies only a slim chance of the RBA easing policy, and the most likely outcome is “no change”. The main arguments in favour of another rate cut are that inflation is below target, the labour market is weak, and AUD remains too high. On the flipside, though, these arguments should be neutralised by the fact that the level of economic activity is decent enough, commodity prices have rebounded, and there already is stimulus in the pipeline from the RBA’s two rate cuts earlier this year. All that said, the Board’s decision tomorrow will be debated with some vigour. The Bank releases its updated forecasts on Friday in the quarterly statement, and likely will retain what economists call “an easing bias”.

    • There is a lot of economic data released this week, too, with the highlight the September retail sales report on Friday. Higher food prices should see the value of sales growth accelerate a little, but there probably will be underlying weakness outside the food category. Household income growth is weak, and households seem to be anxious about possible job losses, concerns that have been weighing on retail spending. The other data this week includes the RBA’s credit aggregates, the trade balance and home building approvals.

    Chart of the week – terms of trade finally recovering

    Anuual Headline Inflation

    The week ahead

    Last week – “considerable uncertainty” about labour market conditions

    • There was interesting Reserve Bank activity last week, with new Governor Dr Phil Lowe delivering his first speech and the Bank releasing minutes from the recent Board meeting, Dr Lowe’s first at the helm. The minutes were uneventful, but Dr Lowe’s speech was instructive. He explained the three main reasons for unexpectedly low inflation outcomes in recent years (i.e. economic slack, falling commodity prices, weak pricing power), but also launched another spirited defence of the Bank’s 2-3% “flexible” inflation target. The Governor also explained the reasons behind the twin rate cuts earlier this year, which included not only low historical inflation, but the expectation that the inflation undershoot would persist.

    • Last week also saw the release of the latest employment data for September, which ended up being a mess. There was another plunge in full-time employment (partly offset by a surge for part-timers), but also a dip in the jobless rate to a fresh 3-year low. There was a rise in hours work, but a fall in underemployment. Drawing conclusions from this dog’s dinner is fraught, but the underlying message was one of weakness – this was the second straight fall in total employment, and the jobless rate fell only because of a shrinking labour force.

    This week – it’s all about inflation (oh … and interest rates)

    • The clear highlight in the week ahead is the release on Wednesday of the next quarterly inflation result. As Governor Lowe said last week, the outcome of the data will be important in determining whether the Bank lowers the cash rate again. An increase in headline measure of 0.4% looks likely, which will leave the annual inflation rate at close to 1%, well below the RBA’s 2-3% target zone. The trimmed mean measure of underlying inflation probably will come in close to 0.5%, lifting the annual rate to 1.8%. The main drivers of inflation last quarter probably were higher prices for food and health services, partly offset by falling prices for petrol, clothing and footwear and telecommunications equipment.

    • In terms of what the CPI data might mean for official interest rates, another material undershoot on Wednesday could trigger another rate cut (the two cuts this year both followed close on the heels of downside inflation surprises), but the hurdle for a surprise is pretty high. Indeed, extrapolation from the RBA’s published forecasts indicates that the Bank’s staff expects a quarterly inflation rate of only 0.4% over the second half of 2016 (the same outcome as in Q2), which already is pretty benign. It probably would take a very low reading to shock the RBA into providing further policy support, particularly with the earlier cuts already having stoked the flames under an already hot housing market. The more the RBA cuts, the greater the longer term financial stability risks, as the RBA’s commentary hinted last week.

    Chart of the week – inflation low and falling!

    Anuual Headline Inflation

    The week ahead

    Last week – improving confidence … weakening housing

    • There was clear divergence in the outcomes of the various economic indicators released in Australia last week, with surveyed measures of confidence showing resilience, but indicators of housing slumping. Consumer confidence rose for the third straight month in October, which is the best run of consecutive rises since mid-2014. The improvement probably has much to do with the recent fall in the jobless rate to a 3-year low. Business confidence for September was steady at a net balance of +6, but business conditions, which have a better correlation with economic activity, rose a point to +8. Firms reported broad-based improvement, although the gauge of employment slipped a touch, as did the rate of capacity utilisation. Still, these were generally constructive outcomes.

    • The same cannot be said, however, of the indicators of housing. Dwelling commencements tumbled nearly 10% in the June quarter, albeit after an 8% rise in Q1, which took starts to a record high. Despite this latest fall, housing supply (construction) is running well ahead of demand, which helps to explain the weakness of rents of late. Similarly, demand for home loans dipped another 3% in August, after a 4.5% fall in July. The weakness in approvals for new loans is explained by the growing caution of the banks, tighter capital requirements by the regulators, which constricts the supply of funds, and waning demand.

    This week – increased RBA activity and the latest jobs data

    • Reserve Bank activity should dominate the week ahead. Recently appointed Governor Phil Lowe delivers a speech tomorrow morning in Sydney and, a few hours later, the Bank will release the minutes from the most recent Board meeting, at which officials left the cash rate steady. That Board meeting was the first with Dr Lowe at the helm, and there were tweaks in the language announcing the interest rate decision. The statement sounded slightly more downbeat than had the tone of the last announcement by outgoing Governor Stevens, but tomorrow’s speech should clarify whether we are reading too much into a single statement.

    • The data highlight this week will be the release of the September employment data on Thursday. The previous report for August showed an unexpected fall in aggregate employment, but also a drop in the jobless rate to 5.6%. These trends should be reversed in the September data. The economy is growing at an above trend rate of more than 3%, so underlying employment growth is decent enough, but an expansion in the labour force should see the unemployment rate return to a still far-from-embarrassing 5.7%.

    Chart of the week – part time job still dominating


    The week ahead

    Last week – new Reserve Bank Governor … same outcome

    • Last week’s (expected) highlight turned out to be nothing of the kind. The Reserve Bank Board meeting was the first with new Governor Phil Lowe at the helm, following the retirement of Glenn Stevens. But, the interest rate decision was the same as the last under the old regime, with the cash rate left steady at 1.5%. There were some tweaks in the language of the statement announcing the decision, but none of them was profound. There is a perception that Dr Lowe is more upbeat on the prospects for the economy than was his predecessor, but the tone of the language, if anything, sounded more cautious. Still, it would take a material undershoot on the CPI data at the end of this month to trigger another rate cut this year.

    • The dataflow last week also hinted that the Australian economy is doing OK, cruelling the chances of the RBA providing further policy support any time soon. Retail spending in September was the firmest for some months, rising 0.4% over the month, driven by a big bounce in sales at department stores, which usually are very discretionary. Similarly, there was only a small dip in local authority approvals for new residential construction in September (economists had expected a large fall), following a 12% surge in August. This hints that the two interest rate cuts this year have helped stir housing construction.

    This week – twin confidence measures to test the mood

    • The week ahead includes the release of the twin private sector confidence reports (the NAB business measure for September and the October WMI gauge of consumer confidence), alongside some more housing indicators. Business confidence rose in the previous result, and probably will be supported by the recent good news on the economy, and the unexpected speed of policy resolution in Canberra. The previous consumer sentiment measure held on to recent gains. The latest news that the jobless rate had fallen to a three-year low likely will underpin household confidence in this coming week’s release.

    • The housing data includes the latest dwelling commencements data and demand for home loans. There was a large fall in demand for loans in August, despite the Reserve Bank’s interest rate cut early that month. The September data probably will reveal a rebound. Housing starts reached a record high in the March quarter at nearly 60,000 dwellings (see chart). This is substantially more than the underlying level of demand, particularly for higher density dwellings, which have dominated recent approvals. The overshoot helps to explain falling rents in some cities, and ultimately could undermine house prices.

    Chart of the week – dwelling commencements at record high!

    House prices

    The week ahead

    Last week – credit data the sole highlight in quiet week

    • In a quiet week for economic data in Australia, the main event was the release of the Reserve Bank’s latest credit aggregates, which measure the amount of debt outstanding for households and businesses. The August aggregates showed that credit expanded by 0.4% over the month, slightly below economist’s expectations but unchanged from the growth rate in July. Housing credit expanded by 0.5%, also as in July. Personal credit declined 0.1% over the month after a 0.3% contraction in July. Business credit grew only 0.1%. Growth in total credit over the year has now slipped below 6% for the first time since late 2014.

    This week – RBA Governor Lowe’s first Board meeting in charge

    • The highlight in the week ahead will be Tuesday’s RBA Board meeting, at which members will decide whether to lower the cash rate again, or not. There almost certainly will be no change to the cash rate on Tuesday, given the balanced commentary that new Governor Lowe delivered to a parliamentary committee only last week. It would be jarring for the Board to opt for even easier policy so soon after that. The key interest in the Board meeting will be that it will be the first chaired by new Governor Phil Lowe. The tone of his statement announcing the rate decision will be important, but it’s unlikely to deviate much from the statement delivered a month ago, which hinted at steady policy from here.

    • The data flow next week includes the August monthly results for residential building approvals, retail spending and the trade balance. The retail spending report on Wednesday should be the highlight. Sales growth has been weak for the last three months, with total sales barely growing at all, with discretionary areas of spending particularly weak (see chart below). There likely was an improvement in August, with department store sales bouncing back after a very weak July. Total spending in retail stores probably grew 0.4% in July which, if realised, would be the fastest rate of growth since January.

    • The residential building approvals report (released Tuesday) also will be worth watching. In the previous report, approvals unexpectedly bounced more than 11% over the month on the back of a surge in high density approvals (i.e. units and flats), as approvals for detached homes slipped. There likely was a reversal in August, with approvals for flats and apartments, which can be very lumpy given the nature of these developments, falling sharply. Total approvals across all categories probably fell by around 5% over the month.

    Chart of the week – retail spending softening

    House prices

    The week ahead

    Last week – employment data for August was underwhelming

    • The main game in Australia last week was the release of the employment data for August which was a little disappointing. There was a net loss of nearly 4,000 positions last month, despite the boost to part time employment from the collection of the Census. This came after a 26,000 gain in July, which was the best result this year so far. The loss in August was well short of the 15,000 gain expected by economists. Part-time employment dipped, but full-time jobs increased. The jobless rate, however, slipped to 5.6%, a 3-year low, but hours worked by the entire workforce fell, unwinding the small gain over the previous month. All up, the results were mixed, with the impact of the Census muddying the waters.

    • Last week also saw the release of the latest confidence readings for business and consumers. The rise in consumer confidence was a bare 0.3%, but this followed a decent rise in August – some feared there would be slippage in the September result. August saw another rate cut from the RBA and an extension of the rally in share markets, which consumers welcomed. Also, AUD climbed - another source of support. There was a larger rise in the business confidence reading (for August), but the gauge of contemporary conditions slipped. There was general weakness in the details, although the measure of employment held its ground. Business sentiment has now returned to the soft(ish) levels experienced earlier in 2016.

    This week – RBA Board minutes and house price data

    • In a quiet week ahead, the highlight will be the release of the minutes from the last Reserve Bank Board meeting, retiring Governor Glenn Stevens’ last. The Board left the cash rate steady as all surveyed economists had expected, and delivered a commentary that also delivered few surprises. It’s doubtful that the minutes will reveal much that we didn’t already know about these deliberations, but you just never know. The public speech and commentary last week by the RBA’s chief economist sounded pretty upbeat, which may hint that the internal debate is taking a turn for the better.

    • The quarterly national house price data is released on Tuesday. In the previous release for the March quarter, there was a small fall in national house prices (-0.2%), thanks to a large dip in prices in Perth and a smaller fall in Sydney. The next data release should show a modest rise in prices nationally, albeit with prices in Perth still falling. The latest rate cut by the RBA seems to have reignited activity in some parts of the market, with auction clearance rates in Sydney, for example, soaring back above 80%. Other segments of the housing market are softening, though, particularly in key inner city apartment markets, owing to looming oversupply.

    Chart of the week – capital city house prices

    House prices

    The week ahead

    Last week – decent GDP growth…and encouraging details

    • There were encouraging signs in last week’s June quarter National Accounts that key parts of Australia’s economy, those that have been struggling, may finally be turning a corner. Not only did GDP growth over the past year accelerate to 3.3% – a rate of growth that is the envy of other developed economies – but the underlying details were decent too. Productivity lifted, the terms of trade rose for the first time in three years, and real income per person also gained – previously, these had been in free-fall. There was still a massive drag from plunging business investment and consumer spending wilted, but there was a huge lift in government investment. All up, the report card on Australia’s economy was pretty good and incidentally, officially ticked off 25 consecutive years without a technical recession.

    • Earlier, the Reserve Bank had left the cash rate steady at 1.5%, a record low. The gathering was the last of Governor Glenn Stevens’ 10 year reign, and didn’t deliver any major surprises. All surveyed economists had expected an unchanged cash rate and the commentary announcing the decision was pretty much as expected too. There was no explicit policy guidance at the end, which leaves new Governor Dr. Phil Lowe with a clean slate with which to work. The main game from here will be for the Bank to encourage AUD to fall, given monetary policy is already pretty much maxed out.

    This week – modest employment gain revealed for August

    • The highlight in the week ahead will be the August employment data, scheduled for release on Thursday. The previous gain in employment was an unexpectedly strong 26,200 positions, and the jobless rate stayed at 5.7%. The disappointment was that all of the job gains were in part-time positions – full-time employment plunged. In August, the gain in employment will probably be smaller at 14,000 in net terms, despite the positive impact of the Census collection, which will have boosted part-time, casual employment over the month. The jobless rate probably stayed at 5.7%.

    • Also, RBA Assistant Governor Chris Kent, whose team is responsible for forecasting and tracking the performance of the economy, delivers a speech tomorrow. His sentiments will probably echo closely those contained in last week’s policy statement. That is, the economy is doing OK, but it retains vulnerabilities, including a housing market that the RBA’s most recent rate cuts seem to have reignited. On the flipside, the business investment outlook remains disappointingly weak.

    Chart of the week – income per person finally rising

    Real net nat disp income

    The week ahead

    Last week – Firms still plan to trim investment in 2016-17

    • The “highlight” in Australia last week was the quarterly business investment report, but the news was sobering. There was another plunge in investment spending by the miners, although at least there were rises in other parts of the economy. Still, private investment remains a material drag on growth in the economy. The update of firms’ spending intentions showed some improvement, but investment will still be a headwind for GDP growth over the remainder of this year. The July retail sales report was also underwhelming, with spending unchanged over the month. This is the third straight month in which consumer spending has disappointed, owing partly to the compression of income growth across the economy.

    This week – A fond farewell to the RBA’s Glenn Stevens

    • The Reserve Bank board gathers tomorrow to decide whether to cut interest rates again and to wave farewell to Governor Stevens – this will be his final meeting. The RBA trimmed interest rates only a month ago, so it is almost certain that they will not lower the cash rate again tomorrow. The impact of the second rate cut this year has barely been felt and although news on the economy since the last cut has been mixed, there is insufficient evidence in favour of another adjustment so soon after the last. The statement released by the Bank likely will be an echo from the one a month ago, which left the door open for more rate cuts … but not yet.

    • There is an avalanche of domestic economic data scheduled for release this week. Paramount among these are the National Accounts on Wednesday. GDP growth was a healthy 1.1%q/q in Q1, but the economy probably expanded at less than half that rate in Q2. Much of the surge in growth in Q1 came from a lift in net exports, but it is unlikely to be that replicated in the most recent quarter. Most of the growth will have come from household spending on services, but there also will be handy positive contributions from home construction and government spending. Engineering construction will be a substantial drag on growth as investment in mining continues to slide. In summary, GDP probably expanded 0.4%q/q in Q2.

    • The other data this week includes the monthly trade balance and the latest read on demand for home loans. The whopping trade deficit in June will likely have improved by July, thanks mainly to a bounce in export values. Demand for home loans likely dropped sharply in July, with approvals weighed down by the timing of the federal election and the lull in activity in the housing market. Activity has bounced back since then, so the drop in demand will probably be short-lived.

    Chart of the week – Economic growth

    GDP growth 

    Last week – Treasurer’s speech highlighted extent of our fiscal problem

    • The highlight in Australia this week was the speech by federal Treasurer Scott Morrison, in which he laid out the extent of the fiscal problems confronting the nation. The Treasurer highlighted the yawning gap between government spending and revenue as a share of GDP, and the resulting lift in public debt to fill the void. He also spoke about the economic challenges confronting China, Australia’s major export partner. After the speech, however, in answer to a question, the Treasurer said he was open to the government borrowing more to invest in infrastructure, which generates economic dividends over time. Ending the “bad” borrowing to bridge the budget shortfall will allow more scope for this “good” public debt.

    • The construction work data for the June quarter was the sole economic data release of note last week. The outcome was much weaker than expected, with total spending plunging more than 4%. This was caused by yet another dive in mining-related engineering construction, now that the investment boom is over. The data provides a soggy start to calculations for GDP growth over the quarter, following an unexpectedly good outcome for the March quarter.

    This week – first sitting of the 45th Federal Parliament

    • There is plenty of economic data released this week (see previews below), but the clear highlight will be tomorrow, when the 45th Federal Parliament sits for the first time. The Government plans to present a broad range of legislation, including its so-called “omnibus” bill of budget savings, bills to lock in lower taxes for companies and personal income earners, and the industrial legislation used to trigger the recent “Double-D” election. The Opposition will be keen to test support in the House on issues like the proposed banking royal commission and the Coalition’s contentious superannuation changes that Treasurer Morrison announced on budget night back in May.

    • There is a swag of economic data released this week, including the retail sales report for July and the June quarter business investment survey, both on Thursday. The latter is most important, given the lack of meaningful lift in investment outside the mining sector. This disappointment has been somewhat puzzling given interest rates have been trimmed to record lows, and the under-investment of recent years. The survey will include firms’ spending intentions for the year ahead – there no doubt will be another plunge in spending intentions in mining but, hopefully, better news on investment across the rest of the economy. Earlier in the week, the ABS will release the residential building approvals report, while the RBA on Wednesday will release the latest economy-wide credit aggregates.

    Chart of the week – sagging business investment intentions

    Weekly update


    Last week – unexpectedly decent employment report for July

    • The highlight in Australia last week was the release of the July employment report. There was a huge bounce in part time employment that swamped another big fall for full timers. The net result was a gain of more than 26,000 jobs over the month, the best since late in 2015. The fact that jobs are being created is great, but the fact that virtually all of them are part time is much less so – they involve fewer hours worked, so contribute less to household income. At least hours worked across the whole workforce (not just the new entrants) rose last month, reversing a small fall in the previous month. The federal election and collection of the Census may have boosted part time job creation, but only at the margin.

    • In the same report, the ABS reported that the unemployment rate unexpectedly ticked down to 5.7% in July, from 5.8% - economists had expected an unchanged rate. The 5.7% unemployment rate matches the cycle-low reached earlier this year. The problem from here is two-fold. First, it may be difficult to sustain the 3%+ rate of growth in the economy reported earlier this year – growth more recently almost certainly has slowed. Second, from here, much of the growth in the economy will be underpinned by additional LNG output. By its nature, additional resources output is capital, not labour, intensive, so the old metrics between GDP growth and employment are unlikely to hold. This means we probably need to get used to a stable jobless rate from here, at best.

    • Last week also saw the release of the minutes from the most recent Reserve Bank Board meeting, at which officials decided to lower the cash rate for the second time since May. Reading through the minutes, though, one easily could have assumed that the cash rate had been left steady. The Bank’s staff expects steady commodity prices, decent growth in the economy, and a falling jobless rate. Yet, they trimmed the cash rate. The reasons are three-fold – risks associated with a hot housing market have eased, low inflation was confirmed by the recent CPI results and, according to the Bank, there now is scope for even faster growth in the economy. Officials also probably hope for a lower AUD, but that’s hard to achieve when other central banks are up-scaling their QE programs.

    This week – first building block for Q2 GDP report

    • The week ahead is quiet, with little economic data scheduled for release, and no public activities by the RBA. We do, however, receive the construction work data, the first building block of the Q2 GDP data, which is scheduled for release on 7 September. The construction data should show another fall as the mining-related engineering boom subsides.

    Chart of the week – part time jobs dominating

    Weekly update


    Last week – mixed results in the confidence surveys

    • Business and consumer confidence readings moved in opposite directions last week, partly reflecting the timing of when the data was collected. Business confidence slipped for July (the survey was collected late in the month), but the August consumer reading showed improvement. The business survey was collected before the RBA’s recent rate cut, and while the make-up of the post-election senate was still unclear. The consumer confidence result captured the positive impact of the rate cut, even though the banks did not pass on the RBA’s cut in full. Consumers still reacted positively, and optimists now outnumber pessimists.

    • In other data, there was a modest rise in the number of home loans issued for the month of June, but the rise was much smaller than economists had forecast. The outcome reflects both supply and demand factors, with demand for finance cooling somewhat while, at the same time, the banks have been restricting supply, partly owing to more stringent regulatory requirements. First home buyers continue to struggle to gain access to the housing market, with the share of loans to this cohort staying close to all-time lows.

    • Last week also saw the final, landmark public speech by outgoing RBA Governor Glenn Stevens, who leaves his post next month after a ten year term. Governor Stevens has presided over an inflation targeting regime that has seen inflation average 2.48% over the period of his term, bang in the middle of the RBA’s 2-3% target range (see chart below). This is despite the severe global financial crisis of 2008-09, the biggest commodity price and mining investment booms we have ever seen, and the subsequent unwinding of these excesses. Nailing the inflation target despite all this is an impressive achievement.

    This week – employment data due for release on Thursday

    • The highlight of the week ahead will be the release of the July employment data on Thursday. The June report showed only a modest net gain in jobs and a small rise in the unemployment rate. The July data probably will show similar-sized job creation and an unchanged jobless rate at 5.8%. The week ahead also sees the release of the latest quarterly data on wages, which should show annual wages growth staying at the lowest in more than two decades.

    • Tomorrow sees the RBA release minutes from the recent Board meeting, at which officials opted to lower the cash rate for the second time this year. The decision was explained in great detail in the Bank’s latest quarterly statement, released the week before last, so it’s hard to imagine the minutes shedding much new light on the Board’s deliberations.

    Chart of the week – inflation during Glenn Stevens’ reign at the RBA

    Weekly update


    Last week – Last public speech by outgoing RBA Governor Stevens


    • Last week was an unusually busy week in Australia. The Reserve Bank interest rate decision was announced on Tuesday, Friday saw the release of the Bank’s latest forecasts, and there was lots of economic data released in between. The RBA decision was the clear highlight, with the Board deciding to lower the cash rate for the second time this year to a new record low of 1.5%. The staff forecasts released later in the week essentially explained the reasons for the cut – the Bank staff forecasts that the undershoot of inflation relative to target will persist for some time. Board members are also probably hoping the latest rate cut will help push AUD down. Officials have previously said that further AUD strength could complicate the rotation in the sources of growth in the economy away from mining. There was little in the way of forward guidance from the RBA statement, but many economists expect further rate cuts.


    • In terms of the data last week, the underlying theme was one of disappointment. Retail sales for June barely rose (up just 0.1%), although much of the weakness came from falling food prices. There was a big fall in approvals for home construction in June, although this came after a large rise in May. In summary, the economy looks to be on track for somewhat weaker GDP growth in the second quarter, after the unexpectedly firm rate of expansion in Q1.

    This week – RBA poised to lower cash rate again


    • The highlight this week will be the last public speech by outgoing RBA Governor Glenn Stevens, who leaves the post in September. There is much to discuss. Economists will be hoping the Governor expands on the reasons for last week’s interest rate cut, and will want to hear his views on conditions in the housing market in particular, and the level of AUD. There is a Q&A session after the speech, so the Governor probably will be asked for his views on major offshore events and conditions in Australia’s major trading partners.


    • The data highlights will be the release of the latest business (Tuesday) and consumer (Wednesday) confidence readings. The main point of interest in the business results will be that these are the first to reflect the outcome of the federal election – the June readings seemed to shrug off the fallout from the UK “Brexit” vote. The consumer confidence survey will take account of any impact of last week’s rate cut and the decision by the major banks not to pass it on in full to mortgage rates. The only other data of note to be released this week is the home loans data for June, on Wednesday. The main messages will be that increased macro-prudential scrutiny has slowed growth in home loans but that first home buyers remain a very small share of borrowers (chart).

    Chart of the week – many first home buyers priced out!

    Weekly update


    Last week – inflation print leaves RBA decision a close call


    • Last week’s June quarter inflation data was important in the lead up to this week’s Reserve Bank Board meeting, at which members will decide whether to lower the cash rate again. Unfortunately, though, the inflation data didn’t give clear guidance on what the Board may do (see preview below). Headline inflation was in line with economists’ expectations at 0.4%, but the underlying measure, which adjusts for volatile items, was slightly elevated at 0.5%. Still, annual headline inflation fell to a 17-year low of just 1.0% in Q2, despite a sharp rise in petrol and tobacco prices. This rate of inflation is well below the RBA’s 2-3% target range, so the door is open for Bank officials to lower the cash rate again.


    • The terms of trade (ToT) – the ratio of Australia’s export prices to import prices – bounced 2.4% in the June quarter, the first meaningful rise for some years. In fact, the ToT has been sliding since the peak back in 2011, owing mainly to falling commodity prices. The rise last quarter was due to a 1.5% lift in export prices, alongside a 1% drop in import prices (caused in large part by recent AUD strength). The earlier falls in trade explain much of the weakness in national income, which makes conditions in the economy feel weaker than the reported 3% plus real growth in GDP.

    This week – RBA poised to lower cash rate again


    • The data highlight this week will be the RBA Board meeting on Tuesday. Market pricing now is split 50/50 between another rate cut and an “on hold” decision, but almost all market economists expect another cut. In favour of a rate cut are the fact that inflation is below target, the jobless rate is rising, confidence is soggy, and national income continues to fall. Another rate cut also may help lower AUD. Arguing against another cut, though, is the fact that as the cash rate approaches zero, the impact of the moves wanes, and that it could lift activity in housing which has been cooling. Perhaps officials will want to keep their interest rate powder dry for later use? The RBA releases its updated forecasts on Friday.


    • Another data highlight this week will be the retail sales report for June, released on Thursday. The last report for May was unexpectedly weak, with sales across all categories rising just 0.2%, despite the RBA having trimmed the cash rate earlier in the month. Sales in June are likely to be slightly firmer, and should grow by 0.5%. The delayed start to winter weather on the east coast would have pushed clothing purchases from May into June, and the impact of the rate cut probably took some time to be felt. Confidence rose strongly after the last rate cut, which probably would have led to a lift in households’ discretionary spending in June. The latest data on building approvals and the trade balance will be released on Tuesday.

    Chart of the week – terms of trade have been sliding

    Cash rate

    Last week - RBA Board members open-minded on further rate cuts


    • Last week was quiet in terms of economic events and data in Australia, with only the release of the minutes from the recent Reserve Bank (RBA) Board meeting keeping economists interested. The Bank’s commentary on global events and the performance of the domestic economy sounded very familiar – there was little change relative to the statement the Bank had released two weeks earlier. The main takeaway on global conditions is that RBA officials believe the fall-out from the UK’s unexpected vote to leave the EU will take some time to become clear. On domestic matters, the Board seems most worried about higher AUD, which they claim could “complicate” the economy’s rotation towards non-mining sources of growth.


    • However, there were some interesting tweaks to the Bank’s guidance on where policy rate might go from here. The Bank’s staff made clear that upcoming data releases on inflation (due this week), housing and the labour market will in large part determine whether “any adjustment to the stance of policy” may be appropriate. When they say “adjustment”, Bank officials are talking about possible rate cuts, not rate hikes. Therefore, we can conclude that if there are material surprises on any or all of these key data releases in the next week, another rate cut will most likely be delivered. The next RBA Board meeting is scheduled for 2 August – futures market pricing implies a quarter point rate cut that day is more likely than not.


    This week – inflation data this Wednesday the main focus


    • The clear highlight in Australia in the week ahead is the June quarter inflation data, due for release on Wednesday, and given what the RBA said last week, this data could have a big impact on whether interest rates are trimmed again. The consensus of economists is that headline inflation will have been 0.6% last quarter (quarterly change), and that the trimmed mean core measure, which removes volatile items, will print at a more modest 0.4%. These outcomes will leave both measures of annual inflation below the lower bound of the RBA’s 2-3% target range. The anticipated quarterly changes will represent a marked lift from the previous quarter, when prices actually fell, but this will probably still mean that the RBA will lower interest rates again - most likely in early August.


    • Friday this week will see the release of the latest credit data. The RBA’s aggregates, which measure the stock of outstanding credit in the economy, showed an unexpected rate of advance of only 0.4% in May, with weak growth in credit to business the main drag. The June aggregates will likely show a slightly firmer rise of 0.5% over the month, led by a rebound in business credit. Growth in household credit for purposes other than investment in housing is likely to remain very weak.


    Chart of the week


    Annual Headline Inflation


    The week ahead

    Last week - Coalition government returned…but vote counting continues


    • Vote counting continues following last weekend’s federal election. However, it is now clear the Coalition government will be returned, albeit with a substantially reduced majority in the lower house, where there is still a chance that it will need the support of independents. As for the prospects for a meaningful reform agenda, the outlook is not promising. The splintering of the minor party vote will make it difficult for the government to have its legislative agenda passed, let alone prosecute longer-term reform measures. The promised return of the budget to surplus looks to be receding into the middle distance.


    • Reflecting this, ratings agency Standard & Poor’s last week announced that the outlook for Australia’s AAA credit rating had been downgraded from stable to negative, meaning the chances of an actual rating downgrade have increased. The possibility of parliamentary resistance to planned budget repair measures helped to prompt the downgrade. This should serve as a warning to federal MPs: Australia depends of foreign capital and the AAA credit rating is one of the key attractions for offshore investors, alongside our high yields.


    • Also last week, the Reserve Bank left the cash rate steady at 1.75%, as all surveyed economists had expected. There wasn’t much change in the tone of the Bank’s statement announcing the decision, although there was acknowledgement that the negative implications of the UK Brexit vote may take some time to emerge. There was vague policy guidance at the end, but it didn’t really hint that interest rates could fall further, merely that upcoming data will be important. This is particularly so for the inflation data due later this month.


    This week – focus returns to the economic data


    • The highlight this week will be the employment data released on Thursday. This is the June data, and should show that only around 10,000 jobs were created in net terms over the month, after nearly 18,000 were created in May. This will be insufficient to absorb all new entrants to the labour force, so the jobless rate probably will tick up to 5.8%.


    • Tomorrow sees the release of the latest survey of business investment from the NAB. This survey was collected back in June, so will not show any impact from the election uncertainty. Confidence dipped back in May, and probably will stay at a net balance of +3 in the June survey. However, going forward, the election uncertainty will likely be a material drag on confidence and may even see some businesses delay hiring and investment. There was already enough to worry about, and now we are faced with policy uncertainty.


    Chart of the week


    Government bond yields

    Economic events in Australia