Key insights from the week that was.
The Australian economic data flow came back to full strength this week, with the release of the January Westpac-MI Consumer Sentiment survey and December’s labour force report.
Following the devastating bushfires of this summer, it was reasonable to expect a decline in consumer sentiment in January. In the event, a 1.8% fall was seen to 93.4. This is a relatively small fall compared to the 2011 Queensland floods (–5.8%). However, the 2011 decline was from a much higher starting point of 111 – a clearly above-average reading – versus December 2019’s 95.1. Further highlighting how weak sentiment is currently, note also that, since the lows of the GFC, there have only been seven readings below the current level of 93.4.
Despite greater market optimism over the global outlook, resulting in a 6% gain for Australian equities since December 31, the ‘economy, next five years’ sub-index fell 3.7% in the month and the economy, next 12 months’ index was down 5.4%. Respectively, these sub-indexes are 7% and 4% below their long-run averages. ‘Family finances versus a year ago’ and for the year ahead are worse still, being 8% below average, and ‘time to buy a major household item’ is 11% below average. These outcomes all point to household consumption growth remaining weak.
Households’ optimism over housing is a stark contrast to their unease towards the economy and spending. Westpac–MI house price expectations rose a further 8.1% in January to be a staggering 58% higher than a year ago. ‘Time to buy a dwelling’ however suggests a more muted rise in the volume of sales, the sub-index remaining below the peak reached last August, shortly after the June low for prices, as well as its long-run average. Affordability and available supply are at play here.
Turning then to the labour market, December provided another upside surprise to the market, 29k jobs being created in the month following November’s 40k gain. That left both annual and six-month annualised employment growth around 2.0%, ahead of population growth.
With the participation rate unchanged in December, the unemployment rate edged down to 5.1%. The unemployment rate is currently 0.2ppts lower than October’s peak of 5.3%, and also only marginally higher than the year-ago level.
Given this strength and the significance of the labour market in the mind of the RBA, we have consequently decided to push out our forecast for two further cash rate cuts from February and June to April and August 2020. As highlighted by Chief Economist Bill Evans, the case for further policy easing in 2020 remains intact. Most notably, as GDP growth remains below trend, we expect current momentum in the labour market to prove unsustainable, seeing the unemployment rate rise to 5.5% mid-year. Without a stronger labour market, wage growth will remain weak and inflation will disappoint.
Offshore, a sparse release calendar and the World Economic Forum in Davos saw the market hold to its view of recent weeks that global risks are receding. Following last week’s signing of the US/China stage 1 deal, this week the US and France called a truce in their conflict over France’s introduction of a digital services tax (and their call for this to be adopted globally). As with US/China trade tensions, the conflict is not resolved. Time has however been bought for further negotiation.
Global central banks are also continuing to take an optimistic view on the outlook. Of greatest prominence this week was the ECB. While President Lagarde still sees risks as “tilted to the downside”, they are regarded as “somewhat less pronounced”. Further, that the ECB regard now as an apt time to commence a year-long formal review of their policy framework signals a belief that the current policy stance will remain appropriate for the foreseeable future.
The Bank of Japan also took confidence in recent global developments as well as local fiscal stimulus, edging higher their growth view for 2020 at their January meeting. Like the ECB, they look to be planning to remain on the sidelines in coming months. The Bank of Canada was meanwhile a little more circumspect, noting a willingness to cut if necessary. Note though, this was due to domestic weakness rather than global risks.
Interestingly, the economic data to hand provides little-to-no support for the uplift in growth that financial markets are pricing in and the IMF is forecasting – global growth seen rising from 2.9% in 2019 to 3.3% in 2020 and 3.4% in 2021. To us, it seems more likely that global growth will merely stabilise at 3.0% in 2020, and then only edge higher to around 3.2% in 2021.
An at-trend 1.7% annualised outcome for US Q4 GDP next week will again highlight the absence of momentum in the developed world, just as China’s Q4 GDP outcome did for developing Asia last week. Looking to 2020 and beyond, China will continue to show resilience and a broadening of the growth pulse. However, the US, Japan and Europe will see weaker momentum. This will put pressure on their respective policy stances. As global optimism fades, the FOMC is most likely to react given their much tighter policy stance. From the FOMC, we now see cuts in June, September and December.