Australian economy no longer in transition

Posted on August 2nd, 2017

Our quick take on the RBA policy statement.  Recent economic reports suggest that the Australian economy has gained some momentum, and the market may not be as calm as the RBA may be about higher electricity/tobacco prices and higher commodity prices.  NZ labour data today may show little tightening or wage pressure.  AUD/NZD may continue to build on recent gains on improving relative economic performance, higher Australian commodity prices, and political risk as the NZ election generates policy uncertainty over housing and immigration. 


RBA to be patient

The RBA policy statement suggests that the outlook for the economy has changed little since the May Statement on Monetary Policy.  The RBA appears to be suggesting that rates are likely to remain steady for some time.

The key here is forecasting slack in the labour market and low wage growth.  It said, “The unemployment rate is expected to decline a little over the next couple of years. Against this, however, wage growth remains low and this is likely to continue for a while yet.”

Lowe’s speech on the labour market last week sets out the details here – unemployment is around ½% above neutral, and there is under-employment  (people that want to work more hours).

The views on the housing market remain little changed, and we know from Lowe’s speech last week that he is patiently waiting for further slowing house price growth.

On the lookout for RBA mood swings; 31 July 2017 –


GDP forecast little changed

The outlook for GDP growth is little changed since the May policy forecast round.  The statement said, “The Bank’s forecasts for the Australian economy are largely unchanged. Over the next couple of years, the central forecast is for the economy to grow at an annual rate of around 3 per cent.”


Inflation higher near term, same medium term

The RBA appears to have raised its forecast for inflation over the next year.  It said, “Higher prices for electricity and tobacco are expected to boost CPI inflation.” However, the RBA added a new medium term factor that may hold down inflation (The Amazon effect).  It said, “A factor working in the other direction is increased competition from new entrants in the retail industry.”  The RBA repeated its broad assessment that, “Inflation is expected to pick up gradually as the economy strengthens.”  This suggests that the inflation forecasts for 2 to 3 years out will also be unchanged; basically in the target zone in 2019.


Commodity prices higher, forecast to fall

It acknowledges that “Commodity prices have generally risen”, but downplays this by predicting that “Australia’s terms of trade are still expected to decline over the period ahead.”


Little guidance

The RBA retained its final statement that offers little guidance.  It said, “the Board judged that holding the stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time.”

The RBA could have emphasized its neutral stance by adding some guidance that policy is likely to be steady for some time.  It has done this in the past, but not since Lowe has been Governor.  He seems to prefer the flexibility to act if conditions change.


Exchange Rate – no longer about transition

The comment on the exchange rate has removed the line about appreciation complicating adjustment.  Perhaps the RBA is no longer viewing the economy in transition.  The mining investment boom/bust is largely over, and the economy is moving beyond this so-called adjustment.

On the basis of current forecasts, the exchange rate comment suggests that an appreciating exchange rate may reignite rate cut expectations if it goes too far.  But we know from other statements that the RBA is likely just to remain patient if the AUD rises, and accept a lower glide-path back to medium term target inflation.  As such, beyond a knee-jerk reaction, the new comment on the exchange rate may have little lasting downside influence on the AUD.

The statement said, “The Australian dollar has appreciated recently, partly reflecting a lower US dollar. The higher exchange rate is expected to contribute to subdued price pressures in the economy. It is also weighing on the outlook for output and employment. An appreciating exchange rate would be expected to result in a slower pickup in economic activity and inflation than currently forecast.”


Iron ore price surge

Iron ore, coking coal, and steel prices have extended their month long gains.  Base metals and energy prices are also up solidly in the last month.  The RBA suggests that this may be temporary, but industrial commodity prices gains are supported by a stronger global growth trend this year.


NZ Labour data

Our sense is that the New Zealand labour data due today will tend to be stable or a bit weaker, after its surge in employment growth in the last year, but some moderation in activity indicators in recent quarters.  Immigration remains high, so wage growth and unemployment should not show obvious tightening in the labour market.


NZ election looms

The NZ election is coming into focus.  The latest polls show a lift in support for NZ First and the Greens, with a dip in support for the ruling Nationals, and the largest opposition party, Labour.  As it stands, NZ First is likely to hold the balance of power and will demand some policy changes that will be seen as detrimental to immigration and foreign investment in the housing market. A loss of the outright majority of the Nationals and their closely allied small parties/independents would be seen as raising political uncertainty.

The Labour Party changed leaders yesterday, less than two months from the 23 September election in a desperate effort to arrest a slide in its polls.  The new leader, Jacinda Ardern, is seen as having the capacity to improve Labour’s standing, keeping this race in the balance


Australian economy showing stronger momentum

Recent economic reports suggest that the Australian economy has gained some momentum, and the market may not be as calm as the RBA may be about higher electricity/tobacco prices and higher commodity prices.