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Australia’s inflation rate, at 1.3% (March quarter), remains well below the Reserve Bank of Australia’s official target range of 2-3%. The unemployment rate, at 5.2%, is unchanged from the previous month yields of benchmark 10-year government bonds have continued to tumble, making new record lows. The RBA Shadow Board’s conviction that the cash rate should remain at the new, low rate of 1.25% equals 48%, while the confidence in a required rate hike equals 21% and in a required rate cut equals 30%.
Based on latest ABS figures, the seasonally adjusted unemployment rate in Australia remained steady at 5.2% (May), coinciding accompanied by a further increase in the labour force participation rate (from 65.8% to 66.0%). Full time employment increased slightly, while part-time employment increased by nearly 40,000. The rising labour force participation rate, ceteris paribus, is a good sign. However, the weak growth in full time employment gives cause for concern, as there is growing evidence that the relatively high part-time employment rate in Australia reflects significant under-employment as well as a high casualisation of the workforce. Neither is helping to boost private consumption expenditure which remains subdued. New data revealed that nominal wages growth, as measured by the seasonally adjusted wage price index, was the same in the March 2019 as in the previous quarter, namely 2.3% year-on-year. Since the inflation rate has previously fallen to 1.3%, real wage growth has accelerated to 1%. While positive, this number still falls short of the long-run average and what is required to sustain a healthy expansion of household consumption expenditure.
The Aussie dollar (relative to the US dollar) has rallied after its recent lows and is trading again above the significant 70 US¢ mark. Yields on Australian 10-year government bonds, anticipating weakness in the Australian economy, have continued their decline and now stand at a historical low of 1.35%. The yield curve in short-term maturities (2-year versus 1-year) remains inverted. The Australian share market, like the rest of the world, rallied to new highs, to above 6,600 for the S&P/ASX 200 stock index.
The global economy remains a significant source of uncertainty and thus poses a genuine risk to the Australian economy. The trade dispute between the US and China plays a key part in this. Recent statements by US President Trump during the G20 meeting in Osaka, sound a little more conciliatory, but clearly for global growth not to suffer a lasting deal between the two trading partners is needed. Other regions in the world, including Europe and Latin America, remain fragile. Geopolitical tensions, such as the skirmishes in the Gulf, also pose a threat to global stability. Moreover, the ever-growing debt positions of households and governments worldwide put brakes on the household sector and constrain governments’ fiscal space to act in the face of a possible recession.
Consumer performance measures again are unchanged; business performance measures are mixed, with the manufacturing PMI flagging somewhat and the services PMI improving noticeably. Overall business confidence, according to the NAB business confidence index also jumped from 0 to 7 in early June, probably in response to the Federal election outcome. The real estate sector continues its slowdown. Dwelling approvals, new home sales, and the construction PMI are all down, forming the backdrop for a 3% quarter-on-quarter decline in house prices. Last month’s interest rate cut, especially if followed by another rate cut, may halt the decline in the housing market, at least temporarily, but at the cost of yet higher household mortgage debt. This poses a lasting danger as Australian households are among the most highly leveraged in the world.
After last month’s rate cut, the Shadow Board now attached a 48% probability that the overnight interest rate should remain unchanged at 1.25%. It attaches a 30% probability that a further rate cut, to 1%, is appropriate and a 21% probability that a rate rise, to 1.5% 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 1.25% equals 23%. The probability attached to the appropriateness for an interest rate decrease stands at 42%, while the probability attached to a required increase equals 35%. The numbers for the recommendations a year out paint a similar picture. The Shadow Board members’ confidence that the cash rate should be held steady equals 17%, while the confidence in a required cash rate decrease equals 38, and in a required cash rate increase 44%. The distribution of the probability distributions over the 6 month and 12 month horizons is narrower than in previous rounds, extending from 0.5 to 2.5.
Little has changed over the past month to warrant a further rate cut, and given the likely ineffectiveness of that cut it would seem that sitting on one’s hand would be the best course for this month. At the 6 months and longer horizons a formal change in inflation target to 1 to 3 percent with rates then allowed to rise would be the best path.
The weakness in GDP growth and the labour market revealed after the June2019 Board meeting justified the cash rate cut at that meeting. Another cut in July is needed to help consolidate the intended future effects on the real economy. If fiscal stimulus measures are sufficiently established by the new Morrison government, further cuts in the cash rate may be unnecessary within the next 12 months. However the global outlook for the next 12 months does not look promising for the Australian economy, and it is possible that both fiscal and monetary easing may be further required.
Updated: 26 September 2021/Responsible Officer: Crawford Engagement/Page Contact: CAMA admin
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