Welcome to November 2019. We may be approaching the middle of January 2020, but the economic data reports coming from the Australian Bureau of Statistics mostly relate to November and the good news is that it looks like a stronger month for the economy than anticipated. Employment growth; the unemployment rate; international trade; and importantly retail sales were all much better than expected.
Reviewing the November data set against consensus market expectations, shows employment up 39,900 (expectation +14,000); national unemployment rate 5.2% (expectation 5.3%); international trade +$A5.8 billion (expectation +$A4.1 billion); home building approvals up 11.8% m-o-m (expectation +0.4%); and retail sales up 0.9% m-o-m (expectation +0.2%). These November readings are unexpectedly strong, implying a turn for the better in Australian economic activity mid-Q4 2019.
Whether the November improvement was sustained in December or not requires a wait for the data reports. Employment data will be out in 10 days while the December home building approvals; international trade and retail sales will be released in the first week of February either side of when the RBA holds its first monetary policy meeting of the year. The Q4 CPI will also be released late this month and is probably the one statistic that can be forecasted with a degree of confidence. It will almost certainly show annual CPI inflation hovering near 1.7% y-o-y in Q4, the same as in Q3 2019 and below the RBA’s 2-3% target band with no real prospect of climbing within the band in the near future.
Everything other than the Q4 CPI to be released ahead of the February RBA meeting is harder to forecast, with the risk migrating to the stronger side of previous expectations in light of November economic reports.
When the RBA met last at the beginning of December, it was amid various concerns about Australia’s economic growth prospects. The economy was growing but below long-term trend growth. There had been several months of strong growth in home sales and prices leading to hopes of basing and improvement in home building activity in 2020. Household consumption spending growth, however, was still very soft with little signs of any boost from the mid-year tax cuts that previously lifted weak growth in household disposable income.
In early December, the household sector still seemed very cautious about spending more freely. The caution was attributed to a combination of high household debt and weak wages growth. There also seemed little prospect of a lift in annual wages in a flexible labour market where strong demand for labour was being met by strong growth in labour supply. The unemployment rate was drifting along above 5% and it appeared that changes over the past decade or so in labor market conditions while making labour requirements easier for employers also meant that the unemployment rate was consistent with labour scarcity, which helped drive up wages and inflation. In short, a national unemployment rate just above 5% in the past would have been consistent with rising inflation, however the indicated excess capacity has placed no general upward pressure on wages and inflation. In current circumstances, it seemed that the unemployment rate would need to fall to 4.5% or less to generate much lift in wages.
In Early December, the RBA was looking at an economy that it still expected to lift slowly but still beset by weak influences that might require the RBA to provide more monetary stimulus. Given that the cash rate was already very low at 0.75%, there was no pressing need for the RBA to cut the cash further. It had the luxury of waiting for more information about how the economy was performing to assess whether another rate cut was needed.
The brighter-than-expected past (November data reports) is one factor encouraging the RBA to wait longer before considering adding more monetary stimulus, especially with the possibility that December readings could reinforce the brighter past and prompt a brighter assessment of future economic growth prospects.
Of course, the stronger November economic readings have not been the only surprise since early December. An unpleasant surprise over the same period has been the worsening of bushfire damage especially in New South Wales, Victoria and South Australia. Among the negative consequences of the bushfire crisis is a near-term detraction from Australian economic growth possibly as much as 0.5 percentage points off annual GDP growth in 2019-2020.
Amid the bushfire devastation and its immediate appalling costs there are also some reasons to be more positive about Australia’s growth outlook next financial year in 2020-21. The bushfire crisis has changed the Government’s attitude towards balancing the Budget. It is now committed to spending whatever it takes and as quickly as possible to help affected communities recover. Increased budget spending will be boosting GDP growth later in 2020 and probably throughout 2021 as well.
Putting together the brighter past with the immediate hit to growth from the bushfires and the prospect of large-scale government bushfire recovery spending the RBA has at least as much reason as it had in December to wait for much more information before deciding whether there is a need for more monetary stimulus. Previously, we expected the RBA to cut the cash rate 25bps to 0.50% in February. We are changing that forecast to the RBA staying on hold at 0.75% throughout 2020. There is a growing chance that 0.75% may prove to be cash rate low point for the current cycle.