9 November 2018 AUSTRALIAN ECONOMIC DEVELOPMENTS

Transcription

1 9 November 2018 AUSTRALIAN ECONOMIC DEVELOPMENTS This week the Reserve Bank of Australia (RBA) left the cash rate at a record low of 1.50%. The RBA expects inflation and wages to accelerate gradually from here, as spare capacity in the labour market is absorbed (that is, as unemployment and underemployment fall). In its November Statement on Monetary Policy (released this week), the RBA noted that the economy is performing stronger than expected. As a result, the RBA s forecast for GDP growth has been revised higher and the unemployment rate forecast has been revised lower from its last quarterly assessment in August. The ABS cost of living indexes released this week provide useful supplementary detail to the Consumer Price Index (see our Economics Weekly 2 Nov 2018). The cost of living for employee households rose by 2.0% p.a. in the September quarter (Q3) of This was a deceleration from the June quarter (Q2) of 2018, largely because of changes to the Child Care Subsidy in July 2018 which caused out of pocket child care prices to fall in Q3. Elsewhere in the economy, Ai Group s monthly business surveys suggest slowing and diverging business conditions in October. The Australian PMI (released last week) and the Australian PSI slowed in October but are still indicating expansion. The Ai-Group/HIA Australian PCI declined by 2.9 points to 46.4 points in October (seasonally adjusted). This marked the industry s second consecutive month of decline after 19 months of growth. 1

2 RBA cash rate on hold, economy performing well In its latest quarterly Statement on Monetary Policy (the November SOMP, published this week), the RBA estimates GDP to grow above trend in the coming years. The RBA has slightly upgraded its near and far-term GDP forecasts and expects GDP growth of 3.5% by the end of 2018, before moderating to 3.25% in and GDP growth is expected to ease to 3.0% by the end of 2020 as production of some resource commodities, led by LNG exports, stabilise at high levels (see chart 1). The RBA expects GDP growth to be supported by ongoing public spending, particularly on infrastructure projects and the implementation of the National Disability Insurance Scheme (NDIS), along with strengthening non-mining business investment. Strong labour market conditions are expected to support growth in household income, consumption and business investment, but the key uncertainty around the forecast is the outlook for household income, especially in the context of high household debt and a slowing housing market. Exports of services and manufactured goods are also expected to grow steadily, supported by solid trading partner growth (mainly in Asia) and the depreciation of the exchange rate since the start of Chart 1: Real GDP and RBA forecasts, year ended Source: ABS National Accounts, June 2018; and RBA Statement on Monetary Policy, Nov 2018 As predicted by the RBA, inflation in Q decelerated a little because of expected declines in some administered prices (that is, government regulated or influenced prices, including falling child care prices and moderating utility prices). Looking ahead, the RBA expects inflation to rise a little earlier than previously forecast in its quarterly statement from August. Underlying inflation is expected to reach to 2.25% by late 2019, reflecting a faster than expected decline in spare capacity in the economy (see chart 2). Headline inflation is expected to rise in the last quarter of 2018 because of an increase in fuel prices and remain a touch above underlying inflation over 2

3 the forecast period because of legislated tobacco excise increases (tobacco price changes are excluded from underlying inflation). A key area of uncertainty around the inflation forecast is how long competitive discounting in the retail sector will put downward pressure on retail prices. Chart 2: Headline and core inflation, % p.a. and RBA forecasts Source: ABS CPI, Sep 2018; and RBA Statement on Monetary Policy, Nov 2018 Globally, the RBA s outlook remains positive and is largely unchanged from the August SoMP. Growth has slowed in some economies but is expected to remain above trend in major advanced economies, with US growth in the short-term looking strong due to tax cuts, higher government spending, and still-accommodative interest rates. The risk of trade disruption and protectionism are increasing however, which could slow global GDP growth and/or weaken business confidence and investment. Growth in Australia s major trading partners is expected to slow in the coming years but has remained relatively strong to date. Some economies in Asia may be adversely affected by rising trade tensions between the United States and China because of their position in global supply chains. Another risk highlighted by the RBA is that inflation in advanced economies rises faster than expected. The RBA reports that growth in China has eased a little as Chinese authorities continue to balance financial risk against growth. Authorities in China have moved to ease fiscal policy in some areas of the economy to avoid a material slowing in growth, while responding to financial stability risks. In the very long-term, growth in China is expected to slow gradually, reflecting structural factors such as the declining working-age population. 3

4 Cost of living changes slowly for employees, more strongly for retirees The ABS cost of living indexes provides useful supplementary detail to the Consumer Price Index (CPI, last released in October for Q3 2018). Living cost indexes are calculated for four different types of households based on their average consumption patterns: employees; age pensioners; self-funded retirees; and other government transfer recipient households (mainly disability pensioners). The cost of living index for employee households increased by the same amount as the CPI in Q3 (+0.4% q/q). Higher international holiday prices were one of the main contributors to this living cost index in Q3. Price falls for furnishings, household equipment and services (-1.7% q/q) contributed the most significant partial offset this quarter for employee households, driven by falling prices for child care because of the changes to the Child Care Subsidy. Over the year to Q3, the cost of living for employee households decelerated to 2.0% p.a. (Chart 3). In contrast, the cost of living index for age pensioner households (+0.6% q/q) recorded a larger rise compared to the CPI (+0.4% q/q) this quarter, largely because age pensioner households do not have any child care expenses, which fell in the CPI this quarter. Self-funded retiree households recorded an even larger rise (+0.9% q/q) compared to the CPI because they have no child care costs but a larger expenditure on recreation and culture than other household types. Prices for this expenditure item rose this quarter (because of higher prices for international travel), compared to the CPI population. Other government transfer recipients recorded a smaller rise (+0.3%) compared to the CPI in Q3, due to price deflation for child care and because other government transfer recipients have lower expenditure on recreation and culture activities. Chart 3: Selected living cost indexes, annual change Sources: ABS Selected Living Cost Indexes, Sep 2018 Since the start of the decade, employee household living costs have increased more slowly than 4

5 other household types. Since 2010, the employee living cost index has increased by 16% compared to 22% for other government transfer recipients. This weak inflation rate for employee households means that nominal private sector wages have grown faster than the cost of living for employees since the start of the decade, despite record slow nominal wage growth in This represents a real wage (that is inflation adjusted) increase for employees. As of Q2 2018, private sector wages had increase 24% since the start of the decade, compared to an increase of 16% in the employee cost of living index since the start of the decade (as of Q3) (see chart 4). Based on these two measures, real wages fell temporarily, by 0.3% p.a., in Q2 2018, partly because of rising oil prices in that quarter. This will probably be reversed in Q3 2018, since the pace of change in the cost of living for employee households slowed to +2.0% p.a. Chart 4: Cumulative change in nominal private sector wages and employee household living costs since 2010 *Nominal private sector wages from the unadjusted WPI for private sector **Employee living costs from the Employee Living Cost Index Sources: ABS Selected Living Cost Indexes, Sep 2018; ABS Wage Price Index, Jun

6 Services and construction sectors looking slower in October The Australian PSI fell 1.4 points to 51.1 points (seasonally adjusted), indicating slower growth in October 2018 compared to September and the average of The Australian PSI indicated expansion in five of its nine sectors in October (trend). All business-oriented services sectors reported slower conditions than in September. The largest of these, business and property services, slowed but continued to report broadly positive conditions due to high levels of infrastructure construction activity. The consumer-oriented services sectors were mostly positive, with hospitality (cafes and restaurants) and retail trade reporting stronger conditions (trend). Chart 5: Australian PSI Source: Ai Group, Oct The Ai Group-HIA Australian PCI declined by 2.9 points to 46.4 points (seasonally adjusted) in October. This signalled a steeper rate of contraction in the construction industry (readings below 50 points indicate contraction). It also marked the industry s second consecutive month of decline after 19 months of growth and the sharpest rate of contraction since October Despite continued expansion in engineering construction activity, overall levels of activity in October were adversely affected by a faster decline in housing activity, commercial construction and apartment building work. House building respondents to the Australian PCI linked slower activity in October to tighter lending conditions, falling house prices and generally weaker home buyer sentiment. Apartment builders indicated that activity continued to decline from recent peaks in response to falling investor demand, falling prices and excess supply in some markets. More positively, major engineering project activity continued to be supported by a solid pipeline of engineering infrastructure investment, although respondents noted fewer new orders being 6

7 finalised in October. Chart 6: Australian PCI activity, by sub-sector (trend) Source: Ai Group, Oct

8 This week s data and events, 5 Nov 9 Nov 2018 Day Date Data/event Data period Result Mon 5 Nov Australian PSI Oct (M) 51.1 points ANZ Job Ads Oct (M) +0.2% m/m, +3.6% p.a. Tue 6 Nov RBA Board Meeting Nov (M) Cash rate 1.50% Wed 7 Nov Australian PCI Oct (M) 46.4 points Selected Living Cost Indexes Sep (Q) Employee LCI +0.4% q/q, +2.0% p.a. Thu 8 Nov ABS Education and Work 2018 (A) 67% of 20 to 64 years of age with non-school qualification ABS Employment and Earnings, Public Sector (A) 1.99mn public sector employees Fri 9 Nov RBA Statement on Monetary Policy Nov (Q) N/A ABS Housing Finance Sep (M) M = monthly. Q = quarterly. H = half-yearly. A = annual. All data are seasonally adjusted unless otherwise noted. Next week s data and events, 12 Nov 16 Nov 2018 Total dwelling commitments $29.9bn and -1.1% m/m Day Date Data/event Data period due for release Result of previous release Tue 13 Nov ABS Lending Finance Sep (M) Aug (M): Commercial finance -4.7% m/m NAB Business Survey Oct (M) Sep (M): Confidence +6 points Conditions +15 points Wed 14 Nov ABS Wage Price Index Sep (Q) Jun (Q): +0.6% q/q; +2.1% p.a. Westpac-MI Consumer Sentiment Nov (M) Oct (M): points Thu 15 Nov ABS Labour Force Oct (M) Sep (M): emp growth 2.4% p.a.; unemp rate 5.2% (trend) Fri 16 Nov ABS Australian National Accounts: State Accounts (A) (A): N/A -M = monthly. Q = quarterly. H = half-yearly. A = annual. B= Biennial. All data are seasonally adjusted unless otherwise noted.. 8

9 Australian economy: latest full-year growth rates and government forecasts RBA SoMP (November 2018) a a f f GDP, % change p.a., year end Unemployment rate, %, year end Inflation (CPI), % change p.a., year end Treasury Budget (May 2018) p GDP, % change p.a., year average Household consumption, % p.a., year average Dwelling investment, % p.a., year average Business investment, % p.a., year average Terms of trade, % change p.a., year end p Employment growth, % p.a., year end Unemployment rate, %, year end Inflation (CPI), % change p.a., year end Wages (WPI), % change p.a., year end a = actual f = forecast p = projection Sources: ABS various data; RBA Statement on Monetary Policy (SoMP), latest quarter; Australian Treasury, Budget (May 2018). Australian economy: latest indicators Economy FX and commodity prices (Thursday afternoon) RBA official cash rate, % Nov (M) AUD/USD exchange rate US$ Oil price Real GDP, % change p.a. Jun (Q) 3.4% US$60.67 (WTI light crude, USD/BBL) Headline CPI, % change p.a. Sep (Q) 1.9% Gold price (USD/OZ) US$1, Copper price Unemployment rate, % trend Sep (M) 5.2% US$ (USD/tonne, LME spot) Australian Industry Group monthly performance of industry indices Australian PMI Oct (M) 58.3 Australian PSI Oct (M) 51.1 Australian PCI Oct (M) 46.4 M = monthly. Q = quarterly. All data are seasonally adjusted unless otherwise noted. Arrows represent direction of movement relative to last week for prices, and last observation for growth rates and indices. Sources: ABS various data; Ai Group; Australian Financial Review market prices (as of Fri); London Metals Exchange market prices (as of Fri). Ai Group Economics and Research Team Julie Toth Chief Economist (03) David Richardson Senior Economist (02) Colleen Dowling Senior Research Analyst (03) Andrew Bridger Economist (03) Molly Knox Research Assistant (03) economics@aigroup.com.au 9