Last week (starting 12 June) – weaker confidence, but lower unemployment

  • Last week saw some important economic data releases, including the latest consumer and business confidence surveys, plus the May employment data. The confidence data showed falls on both measures, a sign that the recent Federal Budget may have missed its targets. The fall for corporates at least comes after steady rises in recent months – the dip for households was the third straight. Corporate leaders are emboldened by better news on the global outlook and prospects of a weaker AUD – they seem untroubled by global political uncertainty. Consumers, though, many of whom are saddled with record-high debt, are stumbling along in the long tail of the steady decline in commodity prices, amid record low wages growth.
  • The jobs data for May, however, turned out to be unexpectedly good. There was a large rise in full-time employment, alongside a modest fall for part-timers. The net gain of 42,000 jobs saw the jobless rate slip to 5.5%, the lowest in four years. Underemployment, recently at a record high, also fell. Rounding out the good news was the revelation that hours worked rose, hinting that perhaps things are turning up in the labour market. It is early days, though, so it probably pays not to read too much into one month’s data.

This week (starting 19 June) – official house price data the highlight

  • This week sees some Reserve Bank activity, but is quieter for economic data releases. Governor Lowe spoke this morning and the minutes from the most recent Board meeting are released tomorrow. Recall that the Bank’s commentary two weeks ago became more upbeat on the global outlook, but more cautious on the domestic narrative. Board members did not have to hand the detail on the weak Q1 GDP data (released the day after the Board meeting), so it will interesting to see how the minutes treat the subdued output data. The RBA statement two weeks ago predicted growth returning to about 3%, but the National Accounts showed the economy struggling along at barely half that rate. Officials are nowhere near capitulating on their optimism, but their views are being challenged.
  • The highlight of the economic data flow will be the release of the March quarter house price data for the capital cities. The previous data for Q4 revealed a stellar 4% gain over the quarter, the steepest rise since mid-2015. The Q1 data probably will reveal much more modest growth, particularly in Sydney and Melbourne. There are a host of reasons for this - foreign demand has cooled, housing supply has increased, interest rates are rising, and the regulators are making life more difficult for the banks. Sustained house price falls are unlikely, but there will be weakness in key sectors in the quarters ahead.

Chart of the week – House prices – a tale of two cities

Business and consumer confidence 

Economic Calendar – the week ahead

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Last week (starting 29 May) – bounce in retail sales…investment still weak

  • There was a decent flow of domestic economic data last week, including important releases on residential building approvals, credit, business investment and retail spending. The outcomes for approvals and credit were largely as had been expected, but the retail spending report showed an unexpectedly large bounce for the month of April. There was the positive impact from additional spending associated with the aftermath of Cyclone Debbie in Queensland (hardware spending bounced) and from the shifting seasonal effects of Easter. The result nevertheless is welcome after two very weak outcomes for the prior two months.
  • The Q1 business investment report was looked to by most economists as the highlight of last week’s calendar but, unfortunately, the result was underwhelming. Firms did increase their spending on investment by more than had been anticipated last quarter – just the second rise in the last 10 quarters – with even investment by the retreating miners rising. The all-important forward looking estimates of future spending, though, improved only modestly. This was despite business confidence having risen to multi-year highs, the emergence of more green shoots of optimism about the global outlook, and interest rates in Australia still sitting at record lows. The investment estimates are moving in the right direction, but at glacial pace.

This week (starting 5 June) – Q1 GDP report due Wednesday

  • The week ahead is unusually busy, with the Reserve Bank Board meeting tomorrow and plenty of economic data being released. The RBA is widely expected to be inactive on policy, with economists not expecting much change to the official language on the economy, either. Over the next few days, more building blocks for the Q1 GDP result (released on Wednesday – see preview below) will be released, including data on inventories, company profits, government spending and trade. The bottom line is that these pieces should add up to only sluggish growth in real GDP last quarter, following the healthy bounce in Q4.
  • Indeed, the consensus of economists is that the economy grew by just 0.2%q/q in Q1. Remember that GDP contracted in Q3 last year, before rebounding 1.1% in Q4. Given this volatility, an outcome close to that expected by economists will not look too bad, but nevertheless will highlight that the economy is not running on all cylinders. There is a material risk of real GDP actually having fallen in Q1, which would set up the prospect of Australia’s economy dipping into technical recession for the first time in 26 years.

Chart of the week – sluggish economic growth expected in Q1

Real GDP Growth % q/q 

Economic Calendar – the week ahead

Stephen Walters: Live event

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

Last week (starting 23 May) – weak signals ahead of the Q1 GDP report

  • The building blocks for the Q1 GDP report (released on 7 June) started falling into place last week. The news was not great, with construction work dipping more than had been expected last quarter. Construction activity undertaken during the quarter dipped 0.7%q/q, with residential construction alone plunging nearly 5%. This is something of a surprise given the surge of approvals for new building work in recent quarters, but reflects the lumpy nature of this particular data set. The silver lining in the construction data was news that engineering work, which has been a perennial laggard, bounced more than 2%q/q, signalling that the bottom of the mining investment cycle may be approaching.
  • There are other GDP components to be released this week (see previews below) but, even now, it seems that growth in the economy last quarter was pretty sluggish. Remember that GDP in real terms dipped unexpectedly in Q3 last year, before rebounding strongly in Q4. But most economists expect GDP growth in the March quarter of no more than 0.4%q/q. Economists' forecasts will be refined this week as the data comes to hand.

This week (starting 29 May) – Q1 business investment report the highlight

  • The highlight this week will be the release of the business investment report on Thursday. The survey results have been gathered over the last two months, which during a period when business confidence rose to multi-year highs and as the global economic outlook brightened. It follows that firms probably became more upbeat about their investment intentions, meaning the expectations component of the report should show a decent rise, particularly for 2017-18. The historical component of the report though, will probably reveal another fall, albeit a modest one as the long descent of mining investment spending comes closer to ending.
  • The other data releases this week are for building approvals, credit and retail spending. The retail spending report is probably the highlight of these. Recent monthly reports have shown spending falling, but there will probably have been improvement in the month of April. Rising consumer caution this year probably helps to explain the demise of some high-profile retail outfits in recent months. If anything, the retail environment will become even tougher in the quarters ahead as interest rates rise and wages growth stays sluggish.

Chart of the week – mining investment still falling

Chart of the week: Mining Vs non-mining investment 

The week ahead: Econimic events in Australia – 29 May 2017

Stephen Walters: Live event

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

Last week (starting 8 May) – “Plan B” for the government on Budget strategy

  • The undoubted highlight last week was the release of Treasurer Scott Morrison’s second federal Budget. It revealed adoption of “Plan B” by the government, with the burden of fiscal repair now falling even more heavily on the revenue side of the accounts. The government has all but abandoned further spending restraint, with the “walking dead” savings from the 2014 Budget finally put to rest. The increased reliance on a bounce in revenue leaves the Budget vulnerable to disappointment, with Treasury’s forecasts for wages growth and nominal GDP looking optimistic. There were some worthy policy measures revealed last Tuesday night, but the promised return to surplus remains a mirage at the end of the forward estimates. At least it no longer is receding, as it has for previous Treasurers.
  • This week on the Dismal Science podcast we do a full run down of the Budget, the prospects for the surplus and all the measures announced.
  • In our Leaders’ Pulse survey sent out immediately after the Budget, directors were generally positive with just over half (55.6%) rating it positively up from 40.5% last year and again a little over half (52.3%) seeing it as positive for business, though this was down from 68.4% last year. Nearly two thirds (63.9%) saw the budget as positive for the community. The biggest disappointments in the budget for directors was the lack of tax reform (cited by 30.7%) and the pace of budget repair (17.7%). The biggest positive was infrastructure investment (cited by 59.9%).
  • The economic data released last week was a mixed bag. Job advertisements rose, and there was a surge in the NAB business confidence index to the highest level for 8 years. This improvement mirrors the bounce in the AICD’s own measure of business sentiment the week before. There was, however, a plunge in approvals for new home construction. The biggest disappointment last week, however, was another fall in retail sales over the month, the second straight decline. It seems households are pulling back on spending because of the weakest wages growth in a generation and rising mortgage rates.

This week (starting 15 May) – Wages growth the highlight in quiet week

  • The most important economic event this week is the release on Wednesday of the latest quarterly wages data. The wages information often does not get the attention it deserves, but the previous data for Q4 showed growth in wages slipping to the lowest rate since this data was first reported in 1997. There likely will have been a modest improvement in Q1, but a marked acceleration is unlikely while the pool of underemployed workers continues to grow.
  • The other important event this week is the release of the minutes from the latest RBA Board meeting. The Board meeting two weeks earlier had left the cash rate steady at 1.5% as had been expected, and the commentary revealed no major surprises. The minutes, then, probably will have few revelations, but you just never know. The previous minutes, for example, included additional guidance on policy, and inserted a statement that officials were watching developments in the housing and labour markets, in particular.

Chart of the week – Budget surplus still expected in 2020-21

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