Tag Archives: ABS

Interest rates Australia: the outlook for 2019

This post was first published in In The Black on 8 March 2019 at https://www.intheblack.com/articles/2019/03/08/interest-rates-australia-outlook-2019

When the Reserve Bank of Australia (RBA) last changed interest rates Malcolm Turnbull was still prime minister, Donald Trump had yet to seize the White House, the UK had just voted for Brexit and house prices were booming.

During all the subsequent turbulence locally and abroad, the RBA cash rate has been a rare constant. In two and a half years it has not budged from a record-low 1.5 per cent.

However, markets and economists increasingly believe this period of policy stability is coming to an end, though views diverge sharply on whether the next move will be down or up.

The Reserve Bank recently indicated that it has shifted from a bias towards increasing interest rates to a more neutral stance. Governor Philip Lowe said in a recent speech that “over the past year, the next-move-is-up scenarios were more likely than the next-move-is-down scenarios. Today, the probabilities appear to be more evenly balanced.”

Unemployment falling

CommSec senior economist Ryan Felsman.

Some, such as CommSec senior economist Ryan Felsman (left) and ANZ’s co-head of Australian economics, Cherelle Murphy, think the time is coming when the RBA will be able to raise interest rates.

Despite weakening house prices, the employment rate was steady at 5.1 per cent in January, supported by strong participation in the labour force, according to the Australian Bureau of Statistics. The trend ratio of employment to population rose to a 10-year high of 62.4 per cent.

Felsman says the central bank will look past the continued slide in house prices and unexpectedly soft growth in the September quarter to developments in employment.

“The labour market is the key indicator going forward as far as interest rates are concerned,” he says.

Demand for workers has been building – about 284,000 jobs were created in 2018 and the unemployment rate has dipped to 5 per cent – and Felsman expects this pressure to gradually force wages higher and enable households to increase their spending.

Eventually, he expects wages growth to reach 3.5 per cent, which would be consistent with an inflation rate of about 2.5 per cent – the mid-point of the Reserve Bank’s 2 to 3 per cent target band – “which the RBA has previously identified as a level they would like to get to before they lift interest rates”.

Interest rates to rise in November?

ANZ’s co-head of Australian economics, Cherelle Murphy.

 

Felsman thinks this point will most likely be reached in November, convincing the central bank to lift the cash rate to 1.75 per cent.

Murphy (right) shares Felsman’s upbeat outlook for the economy but foresees a more gradual improvement.

She does not expect the RBA to lift the cash rate until August next year, followed by another increase in November 2020 to take the cash rate to 2 per cent.

Murphy says national income is holding up. Businesses are being buoyed by good profits, encouraging them to invest and hire, and feeding more company taxes into government coffers.

Just as important, tighter credit conditions are working to cool the once-rampant property market without triggering widespread mortgage defaults.

While homeowners may see a peak-to-trough fall of 20 per cent in house values before the market stabilises, Murphy says the fact that mortgage rates are stable means few are being forced to sell.

“This helps explain why consumer confidence has not fallen in a hole, and instead has stayed at pretty high levels,” she says, along with the strong jobs growth.

Given the importance of private consumption for economic activity (accounting for almost 60 per cent of GDP), this is an important plus for growth.

Further interest rate cuts

AMP Capital Markets chief economist Shane Oliver.

 

AMP Capital Markets chief economist Shane Oliver (left) and Market Economics principal Stephen Koukoulas are much gloomier about the economic outlook and believe tepid growth, elevated global risks and inflation that is stubbornly below target will leave the Reserve Bank board with no choice but to cut official interest rates in 2019. Oliver tips the rate to drop to 1 per cent by the end of this year; Koukoulas reckons it will hit a record low 0.75 per cent.

Both forecasts are more aggressive than financial market estimates which, which nonetheless have fully priced in a rate cut to 1.25 per cent by the end of the year.

Concerns about growth, falling house prices, stagnant wages and soft household spending have been underlined by the release of figures showing underlying inflation has been below the RBA’s 2 to 3 per cent target range for most of the past four years.

China’s slowing economy

Internationally, China – Australia’s largest export market – has slowed. In the 12 months to the December quarter it expanded by 6.4 per cent, its weakest pace in almost three decades as consumers eased the pedal on major purchases such as cars. The unresolved US-China trade war has deepened concerns about Chinese growth.

Against this, the Chinese Government has pledged to support the economy and is expected to unveil tax cuts and relax bank cash reserve requirements.

Nonetheless, the International Monetary Fund (IMF) expects the US economy to soften in the next two years as the effects of the Trump tax cuts fade, recent Federal Reserve rate hikes bear down on activity and the trade war with China rumbles on.

These developments are buffeting other economies. In Europe, the IMF expects Germany to be hit particularly hard. The euro zone’s largest economy is heavily reliant on exports to the US and China, and the Fund has sharply downgraded its growth prospects, forecasting it will expand by just 1.7 per cent this year.

Slowing European growth

Add to this mix the Brexit fiasco, and the IMF thinks the euro area as whole will struggle to grow by just 1.9 per cent in 2019 – and that is assuming Britain and the EU reach agreement on an orderly exit.

While these issues have been on the Reserve Bank board’s radar for some time, Oliver says the way they have evolved in the last few weeks will have it worried.

“I think they would be feeling more nervous about things than they were in December when they last met,” he says. “We have seen another round of volatility in markets, and a lot of the issues around that haven’t been resolved. Locally, the housing downturn has worsened, [and there are] more concerns about tight credit conditions.”

Despite this, Oliver does not expect the central bank to be in a rush to cut the cash rate and will instead want to see spending measures in the April Federal Budget and the promises made by both the major parties in the lead-up to the federal election before moving.

Amidst such uncertainty, the RBA and its counterparts around the world appear poised to act meeting to meeting, examining data in forensic detail for the faintest hints of how key aspects of the economy are faring.

As Felsman says, “Every policy meeting is now live.”

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Weak jobs, weak budget

Forget Tony Abbott’s boasts about how many jobs have been created since his government was elected.
The facts are that the labour market is weak, and the incentive for business to put on more staff is low (though the ANZ job ads survey out early this week indicated employers are increasingly looking to hire).
Not only has the unemployment rate (6.4 per cent last month) jumped to its highest point in almost 13 years, the average hours worked each week is stuck around a record low 31.7 hours.
In practice, it means there is plenty of scope for employers to bump up the hours of existing staff before they need to start thinking of hiring someone extra.
Today’s labour force figures simply reinforce Reserve Bank of Australia warnings that the growth outlook is underwhelming – the central bank expects the economy to have expanded by just 2.25 per cent in the 12 months to June this year, and doesn’t expect any major improvement until into 2016.
There are some positives. The exchange rate is hovering around $US0.76, interest rates are at a multi-decade low of 2.25 per cent, petrol prices have tumbled in recent weeks and consumer sentiment has jumped.
But the improved outlook of households is likely to be short-lived as worries about job security and political turmoil in Canberra drag on confidence.
Altogether, it is not a great time to be framing a federal budget, with little reason to think that the huge slowdown in revenues from company and personal income tax will be reversed any time soon.
If ever the nation needed to have a serious conversation about broadening the tax base and reigning in tax expenditures (which were worth $113 billion in 2009- 10 alone), this is the time.
As Stephen Bartos noted in testimony to the inquiry into the establishment of the Parliamentary Budget Office, “tax expenditures are the unloved orphan of fiscal scrutiny, paid little attention and not well understood and analysed”.
It is time to change that.

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Tony Abbott’s world just gets uglier

The ugly position the Abbott Government finds itself in has been underlined by the latest tax revenue and public expenditure figures from the official statistician.
A lot of attention will probably be drawn to the 15 per cent plunge in tax receipts across all levels of government in the September quarter to less than $100 billion.
There is no doubt that tumbling commodity prices and weak wages growth are weighing heavily on the Budget ledger – Deloitte Access Economics reckons the write-downs will push the Budget deficit to $34.7 billion this financial year – $5 billion more than the Government forecast in May.
But the steep 15 per cent fall reported by the Australian Bureau of Statistics today is hardly unexpected – it happens every year at this time. Historically, the three months to September is the weakest quarter for tax collections, for the obvious reason that most corporations settle their annual tax bill in the June quarter.
What is more telling is the ABS’s assessment that Commonwealth spending (ex-defence) grew 2.2 per cent in the September quarter and is up more than a 1 per cent from where it was when the Coalition came to office little more than a year ago.
The Government will probably claim that this is because so many of its Budget savings measures have been stymied by a hostile Senate.
But they should not be let off the hook so easily.
Take the $7 Medicare co-payment proposal, which is languishing on the Government’s books and hasn’t even made it onto Parliament’s agenda yet.
The Government claims it will save $3.5 billion by slicing $5 from Medicare rebates for GP, pathology and diagnostic imaging services. But this money has not been slated to improve the Budget bottom line.
Instead, the revenue was to be directed to the Medical Research Future Fund, to provide a fig leaf for Tony Abbott’s pre-election pledge not to cut spending on health.
Other measures will take years to deliver savings, such as shifting more tertiary tuition costs onto students.
Ripping more than $1.8 billion out of public hospital funding is a significant (if short-sighted) savings measure, but it won’t really have a big impact on the bottom line until 2017-18, while abolishing programs and agencies, such as the Australian National Preventive Health Agency are mostly small beer (scrapping ANPHA will realise just $6.4 million in savings over four years).
Instead, the Government has lumbered itself with a raft of unnecessary costs arising from impulsive and ill-considered decisions affecting the machinery of government.
For instance, the Government reckons that – on paper, at least – abolishing AusAID and absorbing its functions within DFAT will save $397.2 million over four years.
But there are good reasons to question whether the savings will approach anything like that.
First of all, the savings were predicated on staff cuts, and DFAT offered attractive redundancy packages to entice people to leave. As at 30 June, 272 DFAT staff had accepted a voluntary redundancy. Tellingly, a majority (56 per cent) were 50 years or older and 55 per cent were executive level staff – so their payouts would not have been cheap.
Secondly, the entire process was a productivity killer. For months, nothing much was done as management worked out how to takeover would work, and sorted out the structure of the new, larger, organisation.
Third, the process has been a morale killer for many in the Department, further hitting productivity.
You can only wonder whether all these flow-on costs formed part of the calculation when the Budget was being drawn up. I suspect not.
A similar gag-handed decision is to relocate many of the functions of the Department of Agriculture to regional centres dotted across the country.
For an agrarian socialist, it sounds like a neat way of spreading jobs and encouraging economic activity in smaller regional centres.
But reality has a way of mugging such hopes.
There is the cost of breaking the lease on existing premises, locating and securing appropriate accommodation, assisting staff who are willing to relocate and paying out and replacing staff who are not.
Then there’s the increased expense of co-ordinating activities across and geographically dispersed and decentralised organisation – not least higher communication and travel expenses.
Then there is the challenge of luring appropriately skilled and experienced staff to work in these regional offices – not many rural communities will be flush with people experienced in, say, administering a grants program or overseeing research projects.
As the Government struggles to come up with a compelling narrative to pitch its forthcoming Mid-Year Economic and Fiscal Outlook, it will have seen precious few green shoots of hope regarding the Budget books.
As Reserve Bank of Australia Governor Glenn Stevens noted today, it will be “some time yet” before there is a sustained fall in unemployment, so growth in wages (and hence income tax revenue) will be weak for quite a while yet.
And desultory economic growth will not do much for corporate profits or tax receipts either.
If the Government wants to burnish the Budget books and chart a convincing path back to surplus, it will have to contemplate killing more than a few sacred cows, like the massive subsidies currently built into the system for superannuants and hugely expensive corporate tax breaks and handouts.
If Tony Abbott truly thought last May’s Budget was brave, then he and Joe Hockey will have to deliver something of Homeric proportions if they are serious about setting the Budget on a sustainable path.
Otherwise, we’ll just continue to bumble along on familiar our shambolic path of hasty, ill-conceived and partisan Budget decisions and just hope that something – another China, perhaps? – comes along to paper over the glaring inadequacies of the nation’s political class.

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Unemployment rate drop unlikely to trigger rate hike

As economists are often wont to say, the March labour market figures are decidedly ‘noisy’.
The unemployment rate is down (a 0.2 percentage point drop to 5.8 per cent), but so is the participation rate (also slipping 0.2 of a percentage point to 64.7 per cent.
So, jobseekers were more successful last month, but there were proportionately fewer of them.
In addition, the Australian Bureau of Statistics tell us, more than 22,000 full-time jobs were lost, offset by the addition of more than 40,000 part-time positions, to push the aggregate hours worked in the month up by eight million.
A review of recent jobs data shows these numbers have been volatile. Until last month, the unemployment rate seemed to be on an inexorable rise. After hovering around 5.7 to 5.8 per cent for most of the second half of 2013, it climbed in quick succession to 6.1 per cent by February.
Over the same period the participation rate slid down to a seven-year low of 64.5 per cent (in December 2013) before jumping to 64.9 in February and settling a little lower last month.
The trend measure, which is offered as a way to ‘see through’ the monthly volatility, says the unemployment rate held steady last month at 6 per cent, and the rate of increase has slowed and may be levelling off.
Looking at the labour market through the prism of demand for workers, the ANZ job ads series suggests more employers are looking to add staff, which would be a concrete vote of confidence that better times lie ahead.
Turning points in indicators of economic activity often seems to be characterised by a period of volatility before a definite direction asserts itself, much like a sail that momentarily flaps in the breeze as a ship changes tack.
Often such turning points only become really apparent with hindsight.
But other evidence suggests that jobless rate might not have much further to climb, bringing the prospect of an interest rate hike into sharper focus.
Retail sales are firming (strong monthly gains in December and January were consolidated in February), building approvals are up more than 23 per cent from a year earlier, and business conditions and confidence are improving.
But the recent appreciation in the exchange rate (the Australian dollar surged to US94.3 cents following the release of the jobs data) is a clear risk for the RBA, which has been keen to see the currency lose much of its altitude.
Today’s activity shows the currency markets are primed to exploit even the hint of an increase in the interest rate differential between Australia and the US, where confirmation by the Federal Reserve of a US$10 million cut in bond purchases under the quantitative easing program saw the greenback lose ground.
The stronger $A will also hamper the shift in the economy away from resources-led activity toward other sources of growth, possibly prolonging the nation’s lacklustre GDP performance.
A turn in the labour market, if that is what this proves to be, is unlikely by itself to convince the RBA Board to hike rates – particularly while wage inflation appears so tame.
A more probable prompt for a rate rise would be increasingly uncomfortable signs of heat in the housing market, particularly credit growth. So far, the warning signs on this front are amber, rather than flashing red.

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Aussie retailers barely in the online shopping game

There’s a bit of a reality check for Australian retailers in today’s retail numbers regarding how well they are doing tapping into the burgeoning online shopping market.

The bottom line message is, not well.

For the first time, the Australian Bureau of Statistics has released a time series of estimates of online retail turnover in Australia, and they show that domestic online shopping accounted for no more than 1.9 per cent of total retail sales through most of 2013.

More alarmingly, given strong international growth in online shopping, among Australian retailers online purchases as a proportion of overall sales barely budged over the period. If you are looking for strong growth, it’s not here.

This included both businesses set up purely as online traders, and those who operate an online shopping site as an adjunct to bricks and mortar outlets.

Of course, the main online competitive threat for many retailers comes from offshore, and unfortunately these numbers shed no light on that.

But as a barometer for how well local retailers are coping in meeting this threat, the figures are not particularly encouraging, especially when anecdotal evidence and inferences from things like parcel volumes suggest online shopping overall is booming.

Unsurprisingly, given this is a first off attempt, these numbers – which cover the period from March to September last year – come with plenty of caveats.

Firstly, they are only in original terms – the ABS says it will look to publish seasonally adjusted and trend estimates “in the future”.

Secondly, there will inevitably be revisions and changes to methodology, questions about sampling variability and so on.

But as a wake up call for local retailers about their lack of penetration into the online shopping market, they should resound through the industry.

 

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ABS to give full reckoning of household wealth

There are plenty of reasons why households tighten their belts or splurge out on an overseas holiday.

But until now, the National Accounts have only shone a light on part of the picture – income – when it comes to explaining spending and saving behaviour.

That will change from next month when, for the first time, the National Accounts will include a quarterly report on the Household Balance Sheet that incorporates the effect of house prices, shares, superannuation and other assets as well as income on household net worth.

This is of more than just academic interest.

As the Australian Bureau of Statistics itself has pointed out, non-financial assets are a huge piece of the puzzle when it comes to evaluating real household worth, because they are about two-thirds larger than the value of financial assets.

As the ABS coyly admitted, this was “a significant data gap”.

In an explanatory note announcing the change, the Australian Bureau of Statistics has presented an analysis of how household net worth plunged when the global financial crisis hit hard in the second half of 2008.

Between March 2008 and June 2009, it plunged from around $6 trillion to close to $5 trillion, with much of the decline stemming from falls in the value of land, shares and superannuation accounts rather than cuts to income.

The ABS has prepared a Household Balance Sheet chart that demonstrates how these losses will be captured by the new analysis (see below).

Household Balance Sheet

It shows the balance of household net savings and other measures of real net wealth plunged from around $200 billion in late 2007 to almost negative $500 billion in the December quarter of 2008.

As the ABS notes, “much of the decline in household net worth in December 2008 is explained by large real holding losses on land and financial assets”. That is, the plunge in house and share prices (and the flow on effect to superannuation accounts) sent household net worth into a tailspin.

Importantly, these “paper” losses had immediate effects on behaviour. Households tightened their belts, cutting back on spending and increasing saving.

This change in behaviour, along with a recovery in house prices, helped to quickly send the household balance sheet back into positive territory.

Since the plunge in the balance sheet in late 2008, there have been two other periods in which it has fallen into negative territory before recovering – early-to-mid 2010 and mid-2011.

What may concern policymakers and businesses that depend on households to spend, is that the ABS chart shows the Household Balance Sheet has again turned down and is close to zero.

Strengthening housing and share markets might turn that around, but elevated unemployment and flat real income growth won’t provide much support.

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