27 April 2018 AUSTRALIAN ECONOMIC DEVELOPMENTS Australia s consumer price index (CPI) held steady at 1.9% p.a. in the March quarter (Q1) of 2018, remaining below the RBA target band of 2 to 3% over the cycle. The biggest increases in Q1 were annual price increases in private secondary school fees and bi-annual price rises in utility bills, particularly in Victoria. Core inflation (a less volatile measure than headline CPI which removes volatile and seasonal items) accelerated to 2.0% for the first time since 2015. Related pricing data confirms producer prices (the PPI) are, on average, rising more strongly than output prices for producers of Australian goods and services. Price growth in preliminary demand (+3.6% p.a.) and intermediate demand (3.7% p.a.) (that is, producer inputs) outpaced price growth in final demand (+1.7% p.a.) (that is, producer outputs). This growth gap between price rises for final products and price rises for preliminary and intermediate products confirms that business margins were further compressed in Q1 2018, as has been apparent in the pricing sub-indexes across Ai Group s three performance indexes. In other pricing data for Q1 2018, Australia s export prices were significantly higher in the March quarter (+4.9% q/q) but were lower over the year (-1.4% p.a.). Prices received for many of Australia s mining commodities rose in the quarter as Chinese manufacturers continued to build stockpiles. Import prices rose 2.1% q/q and 2.3% p.a., driven by higher prices paid for petroleum and petroleum derived materials because of tighter global supply and capacity constraints. Inflation remains below RBA target band at 1.9% p.a. in Q1 2018 Australia s headline consumer price index (CPI) held steady at 1.9% p.a. in the March quarter of 2018 (Q1). It remains below the RBA s target band of 2 to 3% over the cycle and below the RBA s mid-year (Q2 2018) forecast of 2.0%. In quarterly growth terms, headline CPI slowed to +0.4% in Q1 2018 from +0.6% in Q4 2017. Core inflation (a less volatile measure than headline CPI which removes volatile and seasonal items) was slightly stronger than headline inflation over the March quarter (+0.5% q/q) and over the year to Q1 2018 (+2.0% p.a.). Underlying inflation has accelerated since its lowest point in 2016. It is now slightly higher than the RBA s mid-year (Q2 2018) forecast of 1.75%, reflecting modestly stronger consumer demand (see Chart 1). Nevertheless, underlying inflation remains sluggish and just below the RBA target band of 2-3% over the cycle. 1
Chart 1: Headline and core inflation, % p.a. and RBA forecasts Source: ABS CPI March 2018 and RBA Statement on Monetary Policy February 2018 Inflation was relatively weak across the board in Q1, with 67% of the items contained within the ABS basket of goods showing price rises of less than 2.0% p.a. in Q1 2018 and 37% of items within the basket of goods showing price deflation (that is, outright falls in price). Indeed, even for the handful of goods and services that saw stronger price increases, much of the upward pressure on prices in Q1 appeared to be temporary. Price rises for housing-related items were driven by gas and other household fuels (+6.0% q/q) and electricity (+1.8% q/q), partly because of utility price rises in Melbourne that were due to unusually large annual increases in wholesale prices being passed onto retail customers. This is unlikely to be repeated because wholesale prices, while still high by historical standards, have come down slightly from their record highs in 2017. Food price increases (+0.5% q/q) are also likely to be temporary; bad weather destroyed some vegetable crops which caused vegetable prices to increase by 3.7% in the quarter. Inflation for goods and services with largely market determined prices (excluding volatile items) remained very weak in Q1 (+0.0% q/q and +1.1% p.a.) while inflation for largely government administered items (such as utilities and pharmaceuticals) remains high (1.1% q/q and 6.2% p.a.). This is a continuation of a longer-term trend (see Chart 2). The headline inflation index has risen by 61.5% since 2000, while prices for government administered services such as education and health have risen by 141.9% and 130.3%, respectively since 2000. In contrast, items within the travel, transport and communication groups have risen more slowly than headline inflation and are probably cheaper in real terms today than they were in 2000 (that is, relative to real incomes). It is also worth noting prices for health and education always rise in the first quarter of every year and the rises for these items in this year s Q1 were no bigger than in previous years. Health price increases in Q1 are due to co-payment indexation rises for the Pharmaceutical Benefits Scheme 2
(PBS) and a reduction in the proportion of customers qualifying for subsidies under the PBS and Medicare Benefits Scheme (MBS), while education increases in Q1 are largely due to annual increases in private school fees. Chart 2: Indexed group inflation, March 2000 = 100 Note: Indexes rebased to March Quarter 2000 = 100. Source: ABS CPI March 2018 Across the capital cities, annual inflation in Q1 was slowest in Perth (+0.9% p.a.) and highest in Canberra (+2.4% p.a.). The eastern capitals are experiencing stronger price growth, as the drivers of economic activity have shifted back to the south-eastern seaboard and away from the miningoriented states of Western Australia, Northern Territory and Queensland. Annual inflation was strongest in the non-mining state and territory capital cities of Canberra, Adelaide, Melbourne and Sydney but inflation remained in the lower half of the RBA s target band or below it in all capital cities (see Table 1). Prices for tradeable goods and services (accounting for around 35% of the CPI basket) fell by 0.4% q/q in Q1 and 0.5% over the year. Prices for tradeable goods and services are largely determined by global production costs but are also affected by movements in the exchange rate and in commodity prices (agricultural as well as resources). Long-term changes in global supply chains and production technologies are reducing production costs, increasing competition for traded goods and limiting the ability of businesses to raise their prices. Prices for non-tradeable goods and services (accounting for around 65% of the CPI basket) increased by 0.8% q/q and 3.1% p.a. in Q1. Prices for non-tradeable goods and services are largely determined locally by labour, rent and other local production costs and are rising faster than tradeable goods and services (see Chart 3). They include large categories of consumer and household spending such as housing, healthcare and education. 3
Table 1: Key inflation numbers, Q1 2018 Quarterly % change Annual % change Mar-18 Dec-17 Mar-18 Dec-17 Headline CPI 0.4 0.6 1.9 1.9 CPI excluding volatile items 0.4 0.3 2.0 1.9 trimmed mean 0.5 0.4 1.9 1.8 weighted median 0.5 0.5 2.0 2.0 Core CPI (average of trimmed mean and weighted median) 0.5 0.5 2.0 1.9 Tradables -0.4 0.5-0.5-0.3 Non-tradables 0.8 0.8 3.1 3.1 Goods 0.3 1.0 2.0 2.2 Services 0.6 0.3 2.0 1.7 Sydney 0.3 0.7 2.1 2.2 Melbourne 0.9 0.7 2.2 2.2 Brisbane 0.1 0.8 1.7 1.9 Adelaide 0.4 0.7 2.3 2.3 Perth 0.1 0.4 0.9 0.8 Hobart 0.7 1.0 2.0 2.1 Darwin 0.0 0.3 1.1 1.0 Canberra 0.8 0.6 2.4 2.2 Source: ABS CPI March 2018 Chart 3: Tradable and non-tradable inflation, % p.a. Source: ABS CPI March 2018 The main contributors to headline inflation in Q1 were price rises for housing (+0.7% q/q and +3.3% p.a.); transport (+1.1% and +2.9% p.a.); health (+2.2% q/q and +4.2% p.a.); and education (+2.6% q/q and +2.6% p.a.), which together lifted consumer prices by 0.6% q/q. These strong quarterly rises were offset by price falls for clothing and footwear and by recreation and culture goods and services (see Chart 4). 4
Chart 4: CPI changes, major categories, Q1 2018 Source: ABS CPI March 2018 Producer input prices continue to rise faster than output prices in Q1 2018 The latest producer price indexes (PPI) indicate that on average, input prices are rising more strongly than output prices for producers of Australian goods and services. On average, producer prices for all final goods and services rose by 0.5% q/q and 1.7% p.a. in Q1 while intermediate prices rose by 1.4% q/q and 3.7% p.a. and preliminary prices rose by 1.5% q/q and 3.6% p.a. This growth gap between price rises for final products and price rises for preliminary and intermediate products indicates that business margins were further compressed in Q1 2018. These pricing trends and their effects on business margins have been evident in Ai Group s Australian PMI, PSI and PCI in Q1 2018 and throughout much of 2017. For manufacturers, input prices rose faster than output prices in Q1 2018. The PPI data indicate pricing for inputs increased by 2.8% q/q and 4.1% p.a., driven by input price rises for crude oil, steel and milk in Q1 2018. Pricing for all manufacturing outputs rose by 0.9% q/q and 3.3% p.a. and were driven by prices received for outputs of petroleum refining and petroleum fuel manufacturing (+4.9%), other basic non-ferrous metal manufacturing (+2.8%) and cheese and other dairy product manufacturing (+3.2%). Energy input price indexes confirm that electricity input prices for manufacturers were 16.0% higher than one year earlier while gas prices were up 25.1% p.a. (see Chart 5). The most recent data continues to show the cumulative impact of energy price rises. Electricity input prices for manufacturers are at a new high and more than double the prices paid one decade ago (see Chart 6). In contrast, prices for all manufacturing inputs and outputs are around 50% higher in 2017 than they were in the year 2000. 5
Chart 5: Manufacturers electricity and gas input price indexes, % change p.a. Source: ABS PPI March 2018. Chart 6: Manufacturers electricity and gas input price indexes, cumulative change Note: Producer price indexes rebased to March Quarter 2000 = 100. Source: ABS PPI March 2018. 6
Gas price developments in Q1 2018 In response to recent significant expansion of the Australian natural gas market, the ABS recently began publishing data to measure price changes in the local natural gas industry. Following the first east coast LNG exports in January 2015, the east coast gas market began to transition from producing gas only for domestic consumption to becoming a major exporter of LNG. Three LNG export facilities became fully operational by the end of 2016 which had downstream effects on supply and prices across the east coast market. The new series from the ABS measure changes in the prices received by producers of natural gas on the domestic market. Over the past two years, prices received by producers on domestic east coast market have jumped 72.0%. In contrast, prices received by producers of natural gas in the domestic Western Australian market were down 18.9% from two years ago (see Chart 6). Prices received by producers on the domestic east coast markets have jumped significantly in recent quarters even though wholesale prices have eased from record highs in 2017. This is because many businesses are coming off wholesale gas contracts of $2-$4 per GJ and negotiating new contracts at current netback prices (LNG contract prices less the costs of liquefying and transporting gas to international customers). The average wholesale gas price for supply in 2018 on a new gas supply agreement has increased to A$8.45/GJ in Queensland and A$9.01/GJ in the southern part of the eastern gas market, according to the ACCC December 2017 Gas Inquiry. Domestic contract price negotiations are expected to be shaped by expectations of future international LNG prices, which in many cases are double to five times the cost of the previous contract. Chart 6: Prices received by natural gas producers, selected domestic markets, cumulative change Source: ABS PPI March 2018. 7
This week s data and events, 20 April 27 April 2018 Day Date Data/event Data period Previous release Tue 24 Apr ABS Consumer Price Index Mar (Q) headline 0.4% q/q, 1.9% p.a. core +0.5% q/q, 2.0% p.a. Thu 26 Apr ABS Taxation Revenue 2016-17 (A) total revenue $488.5bn ABS Labour force, Detailed Electronic Delivery Mar (M) - ABS International Trade Prices Indexes Mar (Q) Fri 27 Apr ABS Producer Price Index Mar (Q) import prices +2.3% p.a., export prices -1.3% p.a. final demand +1.7% p.a., intermediate demand +3.7% p.a., preliminary demand +3.6% ABS Employment in Renewable Energy Activities 2016-17 (A) 14,820 FTEs, +33% p.a. M = monthly. Q = quarterly. H = half-yearly. A = annual. All data are seasonally adjusted unless otherwise noted. Next week s data and events, 30 April 4 May 2018 Day Date Data/event Data period due for release Previous release Mon 30 Apr RBA Financial Aggregates Mar (M) Feb (M): total credit +4.9% p.a. Tue 1 May Australian PMI Apr (M) Mar (M): 63.1 points RBA cash rate decision May (M) Apr (M): 1.50% RBA Index of Commodity Prices Apr (M) Mar (M): AUD terms: +1.0% q/q, +3.1% p.a. Victorian State Budget 2018-19 2017-18: - Wed 2 May ABS Selected Living Cost Indexes Mar (Q) Dec (Q): employee index: +0.7% q/q, +2.0% p.a. Thu 3 May Australian PSI Apr (M) Mar (M): 56.9 points ABS International Trade in Goods and Services ABS Building Approvals Mar (M) Mar (M) Feb (M): imports $33.4bn, exports $34.2bn Feb (M): total dwellings approved -6.2% m/m, -3.1% p.a. Fri 4 May RBA Statement on Monetary Policy May (Q) Feb (Q): - M = monthly. Q = quarterly. H = half-yearly. A = annual. All data are seasonally adjusted unless otherwise noted. 8
Australian economy: latest full-year growth rates and government forecasts 2016-17 Dec 17 Jun 18 Dec 18 Jun 19 Jun 20 RBA SoMP (Feb 2018) actual actual f f f f GDP, % change p.a., year end 1.8 2.5f 2.75 3.25 3.5 3.0 Unemployment rate, %, year end 5.6 5.5 5.25 5.25 5.25 5.25 Inflation (CPI), % change p.a., year end 1.9 1.9 2.0 2.25 2.25 2.25 Treasury MYEFO (Dec 2017) 2015-16 actual 2016-17 actual 2017-18 f 2018-19 f 2019-20 p GDP, % change p.a., year average 2.6 2.0 2.5 3.0 3.0 3.0 Household consumption, % p.a., year average 2.9 2.4 2.25 2.75 Dwelling investment, % p.a., year average 10.6 2.6-1.5-1.5 Business investment, % p.a., year average -10.3-4.0 2.0 3.0 2020-21 p Employment growth, % p.a., year end 1.9 1.9 1.75 1.5 1.25 1.25 Unemployment rate, %, year end 5.8 5.6 5.5 5.25 5.25 5.25 Terms of trade, % change p.a., year end -10.2 14.5-2.0-5.0 Inflation (CPI), % change p.a., year end 1.0 1.9 2.0 2.25 2.5 2.5 Wages (WPI), % change p.a., year end 2.1 1.9 2.25 2.75 3.25 3.5 f = forecast. p = projection. Sources: ABS various data; RBA Statement on Monetary Policy (SoMP), latest quarter; Australian Treasury, MYEFO 2017-18 (Dec 2017). Australian economy: latest indicators Economy FX and commodity prices (Friday morning) RBA official cash rate, % Apr (M) 1.50 - AUD/USD exchange rate US$0.7551 Oil price Real GDP, % change p.a. Dec (Q) 2.4% US$67.91 (WTI light crude, USD/BBL) Headline CPI, % change p.a. Mar (Q) 1.9% - Gold price (USD/OZ) US$1,316.76 Copper price Unemployment rate, % trend Mar (M) 5.6% US$6885.00 (USD/tonne, LME spot) Australian Industry Group monthly performance of industry indexes Australian PMI Mar (M) 63.1 Australian PSI Mar (M) 56.9 Australian PCI Mar (M) 57.2 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 indexes. Sources: ABS various data; Ai Group; Australian Financial Review market prices (as of Thu); London Metals Exchange market prices (as of Fri). Ai Group Economics and Research Team Julie Toth Chief Economist (03) 9867 0124 David Richardson Senior Economist (02) 9466 5456 Colleen Dowling Senior Research Analyst (03) 9867 0251 Andrew Bridger Economist (03) 9867 0231 Molly Knox Research Assistant (03) 9867 0108 economics@aigroup.com.au www.aigroup.com.au/policy-and-research/economics/ 9