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GDP data may finally prompt RBA action
Summary: The RBA kept its cash rate unchanged at 1.5% today, thereby extending its record run of watching and waiting and holding steady to 28 consecutive board meetings.
Despite continuously missing its 2%-3% inflation target range over the past three years, tepid wage growth and heavily overleveraged Australian consumers, the Reserve Bank of Australia maintains a stoic optimism that the labour market will strengthen and inflation will return to its target range.
The RBA was unlikely to cut rates today, but market participants were keenly watching for hints of a potential move to a cut after Governor Philip Lowe opened the door to a more neutral policy stance in a speech at the National Press Club last month. Lowe finally recognised the mounting downside risks switching to a more balanced outlook. "Looking forward, there are scenarios where the next move in the cash rate is up and other scenarios where it is down," Lowe said.
The statement released today was very similar to last month’s, so it disappointed those looking for clarity on the next move. In today’s board meeting statement, the RBA maintained its view that inflation would eventually return to target, albeit at a slower rate, with household incomes rising to support consumption and offset the negative wealth effect form the slide in property prices. The RBA maintained its concerns about global growth and the potential knock on effects locally as well as the downside risks to the domestic economy precipitated by the housing market slide.
Australia’s central bank is moving at a glacial pace in the progression of its views, but it acknowledge the loss of economic growth momentum in the second half of last year (2H18) which is dovish on the margin. In our view the RBA is likely still too optimistic and tomorrow’s GDP will confirm this. If the number is particularly weak, the RBA will need to change course.
Economists are expecting a weak Q4 GDP, and the median forecast has been revised down to 0.3% QoQ from 0.5% QoQ last Friday after a slew of weaker data this week. The problem is that forecasters face a significant gap in the data to be able to get a clear picture on consumer spending ahead of the data release. The retail sales data only captures approximately 30% of consumer spending. The missing data is the household services spending, which also accounts for approximately 30% of GDP. With this black hole heading into the data release it is hard to accurately forecast the consumption component.
The RBA has pinned the future path of monetary policy to the strength in the labour market and is banking on employment strengthening and wage growth coming through to offset the negative wealth effect. Until there is evidence of labour market strength tapering off the RBA will be less inclined to cut rates.
The downturn in the housing market will result in a hit to consumption and consequently weaker GDP growth (this was already visible in the Q3 GDP data) which will feed into labour market weakness.
ANZ job advertisements fell again in February, the fourth consecutive monthly decline. Now down 4.3% over the year, this is a leading indicator (unlike unemployment which is lagging) that points to a potential drop off in hiring ahead, consistent with our view that economic growth is deteriorating and will continue to do so throughout the year.
ANZ job advertisements (leading indicator) point to slowdown in hiring and rise in unemployment:
Along with other leading indicators, recent data on the slump in building approvals highlights a marked decrease in residential construction to come, pointing to potential weakness in employment in residential construction further down the track. As the housing market slide continues it is only a matter of time before jobs are affected, particularly in Sydney and Melbourne where the steepest declines have been felt.
The strength in the labour market is going to be crucial in determining the RBA’s next policy move. If, as many of the leading indicators suggest, the labour market strength proves to be transient and the unemployment rate does pick up, 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, there is a low threshold for moving to a cut, given that the option has been opened for a potential downwards move in the cash rate. As previously noted, in our view, this eventuality will be inevitable, and the RBA will move to cut the cash rate, but for as long as employment remains at a cycle low the RBA will not fully capitulate on policy guidance.
The strength in the labour market is going to be crucial in determining the RBA’s next policy move. If, as many of the leading indicators suggest, the labour market strength proves to be transient and the unemployment rate does pick up, 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, there is a low threshold for moving to a cut, given that the option has been opened for a potential downwards move in the cash rate. As previously noted, in our view, this eventuality will be inevitable, and the RBA will move to cut the cash rate, but for as long as employment remains at a cycle low the RBA will not fully capitulate on policy guidance.