Australian Market Strategist, Saxo Bank Group
Summary: The Reserve Bank of Australia has pinned its policy forecasts to projected labour market strength, but the latest business conditions data show a hiring slowdown. Will Australia's central bank pivot to an easing stance to accomodate the slowdown?
The slide in slowdown in economic growth, both globally and locally, is spilling over into the business sector with profitability taking a hit. This comes as the Q3 and Q4 2018 GDP readings now confirm that the domestic economy recorded the two weakest quarters of growth since the financial crisis as household spending continues to drag on growth. Last week’s weak Q4 GDP report, where GDP growth slowed to 2.3% year-on-year (well below the Reserve Bank of Australia’s 3% target), highlighted the loss in economic growth momentum in the back half of 2018.
As incoming data continues to point to little reprieve in a growth rebound, the RBA looks increasingly at odds with economic reality.
February NAB business survey:
• Business confidence 2, -2 Pts
• Trading 8, -2 Pts
• Profitability 1, -4 Pts
• Employment 5, unchanged
• Capacity utilisation rate 80.9%
Today’s business survey highlights that the slide in the property market and slowdown in economic growth, both globally and locally, are spilling over into the business sector. This is of particular importance as the strength in the labour market will be crucial in determining the RBA’s next policy move. Leading indicators within NAB’s survey today highlight that business conditions are likely to remain weak; if growth continues to decline, businesses will cut hiring and unemployment will rise, and then we can expect a further easing bias to be adopted by the RBA.
Employment will not continue to hold up as confidence is eroded and growth continues to lose momentum. Currently, the labour market remains resilient, but unemployment is a lagging indicator, so the data only give us a backwards-facing view on the health of the labour market.
Within today’s survey, capacity utilisation continued to decline and is now below average. This is another leading indicator pointing to slowing in the labour market and a potential rise in unemployment ahead.
Given that strength in the labour market is crucial in determining the RBA’s next policy move, and that many leading indicators suggest labour market strength will soon drop off and unemployment will rise, we can expect a further easing bias to be adopted by the RBA.
We don’t necessarily need to see unemployment move up in a big way, given that it has remained the RBA’s pillar of strength in the domestic economy. If this were to crumble, there is probably a relatively low threshold for moving to a cut. As previously noted, we believe eventuality will be inevitable, and the RBA will need to act by moving to cut the cash rate.