Key insights from the week that was.
For Australia, the week got underway with the release of the September RBA minutes. The minutes had a renewed focus on the Australian labour market, particularly persistent weak wages growth. Of greatest significance on this topic, the RBA noted that “the upward trend in wages growth”, seen as a necessary support for a sustained lift in consumption growth, “appeared to have stalled”.
On the housing market, while a turnaround in prices is evident, particularly in Sydney and Melbourne, for economic activity what matters is the ongoing sharp decline in new residential construction and that abnormally-low turnover in the housing market means “spending on home furnishings and other housing related items was not expected to contribute to consumption growth in the near term”. Regarding the global backdrop, trade and political tensions were recognised as having escalated recently – further supporting the case for rate cuts in coming months.
For the RBA outlook, the other major release this week was the August labour force release. While employment growth was again strong (+37k, 2.5%yr), the unemployment rate rose to 5.3% as the participation rate lifted to (another) historic high. Underemployment also moved higher in the month, to be back in line with its recent peak of May 2019. These unemployment and underemployment outcomes highlight that the Australian economy is currently not growing at a strong enough pace to provide enough jobs to offset the flow of new workers associated with rapid population growth and historically-high participation. As noted in the September RBA minutes, forward-looking indicators point to a deceleration in employment growth ahead, increasing labour market slack and the headwinds for wages growth.
A final point on Australia for the week. On Thursday, the Federal Government announced that in 2018/19, the underlying cash position returned to balance (0.0% of GDP) for the first time since 2007/08, prior to the GFC. This was a positive surprise versus the forecasts contained in the May 2018 and April 2019 Budgets. Commodity prices and strong job growth have resulted in tax revenue materially exceeding expectations for 2018/19, while spending was below forecast. In keeping with tradition, this update included no figures or commentary for the current financial year or beyond.
Moving to New Zealand, Q2 GDP came in between the market’s and our own expectation at 0.5%. At 2.4%yr, annual growth is the lowest it has been since 2013 and, in per capita terms, since 2011. Growth is expected to remain subdued in the near term before it strengthens in 2020 as a result of recent policy support. Being broadly in line with the RBNZ’s expectations, this result has no material implications for monetary policy. Our NZ economics team expects the RBNZ to keep policy unchanged in September and to then deliver a final cut for this cycle of 25bps at their November meeting.
In the US, the data flow has been light, focusing attention on the FOMC. The 25bp cut delivered at their September meeting was widely expected and hence of little consequence for markets. While participants took the accompanying guidance and broadly-unchanged economic forecasts as a hawkish surprise, to us there is still strong cause to anticipate additional rate cuts in coming months. While at September only seven members of the Committee forecast another rate cut by year end, this view depends on GDP growth remaining above trend as a result of continued strength in the labour market and hence consumption. We see this as unlikely given employment growth has already slowed materially in 2019, and forward indicators point to a further deterioration in domestic demand. Global risks were also recognised as having increased of late. On this front, the outlook is highly uncertain – as also emphasised by the Bank of England and Bank of Japan when they met this week.
As highlighted by Chair Powell in his press conference, “history teaches us it’s better to be pro-active in adjusting policy” and further that the FOMC is a Committee that has “shifted its policy stance repeatedly and consistently” in a data-dependent, risk-aware manner. Assuming the FOMC remains pro-active, we believe two further rate cuts are set to be delivered in 2019 (October and December), followed by two more in 2020. The Bank of England is also likely to cut twice by March 2020. The Bank of Japan, in contrast, has limited scope to act.