Last week (starting 12 March) – business conditions reach new cycle-high

  • Last week was quiet in terms of local economic events, particularly after the deluge of data the previous week, which included the Q4 GDP result. The main events were the releases of the latest business and consumer readings, respectively. Business confidence in the National Australia Bank survey unexpectedly slipped three points to a still decent +9, but the matching conditions reading advanced to a new peak for this cycle at a very healthy +21. The employment net balance soared ten points to also post a new cycle-high. Consumers, though, are less upbeat. The Westpac-Melbourne Institute index for March was steady at 103, but this still means that optimists outnumber pessimists. Continued gains in employment (see preview below) should help to support consumer wellbeing, but many households are pining for faster wages growth.

  • The other data last week was the release of the latest home lending data. There was a small fall in the number of home loans approved, owing to the combined effects of a stricter regulatory regime, modest rises in mortgage rates, and cooling housing activity in the major east coast cities. Still, there are signs of lending conditions easing a touch, with competition among the banks in the investor space apparently intensifying.

This week (starting 19 March) – jobs data to show another healthy gain

  • There are two main events in Australia this week, the release of the minutes from the most recent Reserve Bank of Australia (RBA) Board meeting tomorrow and the February jobs data on Thursday. The tone of the RBA’s commentary is unlikely to have changed much from that of the statement announcing an unchanged cash rate two weeks ago. Officials still expect decent growth in the economy, falling unemployment and faster wages growth. This optimism probably will be supported by the jobs report. Economists expect 20,000 jobs to have been created in February, a gain that will take the run of uninterrupted improvement to 16 months. The jobless rate is likely to remain steady at 5.5%, owing to rising labour force participation.

  • The main offshore event will be the outcome of the meeting of the US Federal Reserve on Thursday, our time. Financial markets expect the Fed to lift interest rates for the sixth time since the rate was first increased for this cycle back in December 2015 - this will take US interest rates above those in Australia for the first time since 2001. The US central bank is trying to stay ahead of inflation pressures that were building even before the Trump Administration started supercharging an economy with little spare capacity. The latest announcement of tariffs on steel and aluminium imports can only add to that price pressure.

Chart of the week: US and Australian official interest rates

cash rates 

Economic events in Australia

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

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

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

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

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

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

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

bond yields 

Economic events in Australia

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

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

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

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

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

bond yields 

Economic events in Australia

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

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

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

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

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

consumer confidence 

Economic events in Australia

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

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

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

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

Chart of the week: inflation still undershooting target

consumer confidence 

Economic events in Australia

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

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

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

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

Chart of the week: Crypto-currency boom unwinding

consumer confidence 

Economic events in Australia

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

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

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

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

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

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

Chart of the week: consumer confidence recovering

consumer confidence 

Economic events in Australia

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

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

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

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

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

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

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

retail sales 

Economic events in Australia

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

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

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

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

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

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

GDP Growth 

Economic events in Australia


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

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

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

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

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

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

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

Mining investment

The week ahead