Cliff Notes: Policy’s Effect Being Felt

Key insights from the week that was.

Q3 GDP for Australia surprised to the downside, printing 0.2% (2.1%yr). Relative to expectations, the key disappointment in the quarter was consumer spending, unchanged in Q3 after just a 0.1% gain in Q2. Per capita consumption growth is in the realm of –2.0%yr, second only to the GFC experience. Interest costs and tax payments are putting households under significant pressure, the drag from the latter being the largest ever recorded. Together these detractors wiped out a robust gain in nominal gross income in Q3. Also accounting for inflation, real disposable income has deteriorated materially (–4.3%yr).

Elsewhere in the domestic economy, public demand was a key contributor to growth, rising 1.4% in the quarter. In part this explains some of the weakness in consumption – government subsidies reducing the cost of electricity for households. That public investment meanwhile extended its uptrend (+12%yr) reflects the pursuit of capacity to meet the needs of a growing population. The impetus seen in business investment H1 2023 is, in contrast, fading after the expiration of generous tax incentives. From 2.5% in Q2, quarterly growth in business investment is now just 0.6%.

On trade, Australia’s current account balance fell from a surplus of $7.8bn in Q2 to a slight deficit of –$0.2bn in Q3. That was primarily driven by a moderation in the trade position as the terms of trade continued to slip (–2.6% ), a trend that extended into October for goods. In real terms, the decline in export volumes (–0.7%) in Q3 was met with a lift in imports (+2.1%), leading net exports to subtract a material 0.6ppts from GDP in the three months to September.

As detailed by Chief Economist Luci Ellis, the RBA’s decision to leave policy unchanged earlier in the week was unsurprising given the constructive dataflow ahead of the decision. The Board’s patience – to allow careful assessment of the dataflow – was further justified by the picture the National Accounts painted of the household sector.

Westpac remains of the view that the RBA does not need to tighten any further. The Q4 CPI still holds some risk; but with the consumer clearly pulling back on discretionary spending in response to higher interest rates and a growing tax burden, not only is the Q4 CPI likely to show softer momentum, but the detail is also expected to imply persistence in this downtrend through 2024.

Before moving offshore, a final note on housing. October’s housing finance data showcased a 5.6% bounce in the value of owner-occupier loan approvals, centred on a surge in construction-related lending (+9.1%) and, to a lesser extent, loans for the purchase of existing dwellings (+4.6%). Highlighting the price-led nature of the cycle thus far, the volume of total owner-occupier loans is little-changed from last year (–0.6%) whilst the total value of loans has lifted 12.1% over the same period. Affordability will continue to have a significant bearing on housing market outcomes in 2024.

Offshore, North America was in focus.

The Bank of Canada kept rates steady at 5% in December. The statement noted “the economy is no longer in excess demand”, implying that monetary policy is achieving its aims. Despite this, the Governing Council are still cautious on risks to wages and inflation and so “remains prepared to raise the policy rate further if needed”. Arguably, the BoC are keen to restrain market participants from pricing in rate cuts too soon, thereby easing financial conditions and risking additional momentum in inflation. Having already had to resume rate hikes once, they won’t want a repeat. Elevated wage growth is the primary risk for inflation, but it is receding as job creation and vacancies slow.

South of the border, US data pointed to a gradual easing in activity and the labour market. Factory orders fell 3.6%mth, with weakness in both durable and non-durable goods. Weaker demand sets the stage for a continued cooling of the labour market. The job openings rate declined 0.3ppts in October while hiring and separation rates were broadly stable, in line with pre-pandemic levels. The official US employment report is out tonight; but, ahead of that release, the services ISM this week, and other business surveys previously, pointed to downside risks for employment from November.