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Australia’s economic outlook remains mixed. The unemployment rate unexpectedly fell to 5.5%, while headline inflation remains well contained. On the other hand, household debt continues to break new records, raising concerns about a possible housing crash in the major capital cities. The RBA Shadow Board continues to advocate a hold-and-wait policy. It attaches a 59% probability that this is the appropriate setting. The confidence attached to a required rate cut equals 2%, while the confidence in a required rate hike equals 39%.
Economic growth for the March quarter was 0.3 per cent, for a sluggish annual growth rate of 1.7 per cent. Headline inflation, which increased to 2.1% in the March quarter, lies comfortably within the Reserve Bank of Australia’s official target range of 2-3%. Australia’s seasonally adjusted unemployment rate unexpectedly dropped to 5.5% in May, according to the Australian Bureau of Statistics, with the economy adding more than 52,000 full-time jobs. The labour force participation rate remains virtually unchanged at 64.9%, along with the youth unemployment rate, which equals 12.7%. Weak nominal wage growth of under 2% continues to be a concern, with no signs of any industries experiencing significant wage pressure.
The Aussie dollar, relative to the US dollar, after falling the previous month, has appreciated considerably, to above 77 US¢, in contrast to many experts’ predictions. Yields on Australian 10-year government bonds have reversed their recent slide and now equal approximately 2.6%. Domestic share prices continue to trade within a narrow range, with the S&P/ASX 200 stock index trading mostly between 5,650 and 5,850.
As in the previous round, there exists no stand-out news item on the international economy to help guide policy. As widely expected, the Federal Reserve Bank in the US lifted the federal funds rate target for the third time in six months in June. The tightening of US monetary policy looks set to continue, making it more likely that the RBA will need to lift domestic interest rates in the medium- to long-term.
Instead, the spotlight is turning again to the high indebtedness of Australian households. The Bank for International Settlements (BIS) in Basel, Switzerland, recently cited Australia as having precariously large household debt, at 130% of GDP among the highest in the world and some 20 percentage points higher since the global financial crisis. The BIS remarked that Australia’s household debt servicing burden is currently more than 2 percentage points higher than the long-run average. Even without any, or only small, interest rate rises this is due to rise to 4-6% in the foreseeable future, prompting the BIS to warn that a “financial cycle bust” could well trigger the next recession. Global ratings agency Moody’s followed Standard & Poor’s lead and downgraded the big four banks and eight other financial institutions over fears about unsustainable debt and inflated house prices.
Consumer and business confidence remain largely unchanged. Capacity utilization increased more than a percentage point to 82.44%. Retail sales continue to show weakness, growing a paltry 2.7%, year-on-year, its lowest in three-and-a-half years. The AIG/Housing Industry Association Performance of Construction Index is near its ten-year high, at 56.7 in May. However, there are signs that house price inflation is slowing in the major Australian capital cities.
The Shadow Board’s policy preferences remain stable. It is 59% confident that keeping interest rates on hold is the appropriate policy, three percentage points up from June. It attaches a probability of 2% that a rate cut is appropriate (3% in June) and a 39% probability (42% in June) that a rate rise, to 1.75% or higher, is appropriate.
The probabilities at longer horizons are as follows: 6 months out, the estimated probability that the cash rate should remain at 1.50% equals 23%, unchanged for two months in a row. The estimated need for an interest rate decrease is 6%, while the probability attached to a required increase equals 71%, both unchanged. A year out, the Shadow Board members’ confidence that the cash rate should be held steady equals 14% (unchanged from the previous month), while the confidence in a required cash rate decrease also remains steady at 7% and in a required cash rate increase at 79%.
The global environment remains mixed, though key central banks continue to move towards normalising rates, giving room for the RBA to consider the same. However with the currently elevated level of the exchange rate and mixed signals in the domestic economy a hold at current levels remains appropriate. However it is most likely that the next rate move should be up, with one to two increases in the cash rate appropriate in the coming year.
I am basically staying where I was last time. We should be slipping further into slower growth but it does not seem to be happening.
Updated: 31 August 2017/Responsible Officer: Crawford Engagement/Page Contact: CAMA admin
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