The Reserve Bank kept interest rates on hold for the summer holidays yesterday at a record low and made little change the post meeting statement from Governor Phil Lowe.
Attention now turns to September quarter National Accounts and GDP numbers out late this morning and may show the first quarter-on-quarter contraction in growth since the first three months of 2011.
The Australian dollar reacting accordingly – down a touch to around at 74.55 US cents.
“In Australia, the economy is continuing its transition following the mining investment boom,” Governor Lowe said in the statement.
“Some slowing in the year-ended growth rate is likely, before it picks up again.”
That is an acknowledgement that the September quarter GDP will be low – between 0.2% and negative 0.2% according to market forecasts, and that the December quarter growth could also be lower.
Data out from the Bureau of Statistics showed exports rose 0.3% in the September quarter, and imports 1.3% – enough to slice 0.2 points off quarterly GDP growth. And in the government spending for consumption dipped 0.2% in the third quarter to an inflation-adjusted $77.64 billion.
Investment spending by the government and public enterprises fell 10.4% to $18.8 billion, implying total spending was likely a small dragon economic growth.
The biggest contribution to growth is likely to come from inventories which rose0.8% in the quarter and should add between 0.2% and 0.4% to growth. Retailing spending will add 0.1%, investment and construction work done are negatives.
The RBA Board changed its commentary around inflation to say “The continuing subdued growth in labour costs means that inflation is expected to remain low for some time, before returning to more normal levels”.
The bank has previously made no mention of ‘normal levels,’ (or what they are) and yesterday’s statement brings the statement into line with the last Statement of Monetary Policy in November which made a similar remark.
In other words, the bank sees no problems from inflation for sometime – 2018 at the earliest, even though there are clear signs that cost pressures are re-emerging here and offshore.
And it added to that belief with this comment:
Inflation remains below most central banks’ targets, although headline inflation rates have increased recently. Globally, the outlook for inflation is more balanced than it has been for some time.
The bank noted the rise in bond yields around the glove since Donald Trump’s election on November 8, saying "Financial markets are functioning effectively. Government bond yields have risen further with the adjustment having been orderly. Funding costs for some borrowers have also risen, but remain low. Globally, monetary policy remains remarkably accommodative.”
And finally there’s an acknowledgement of the resources boomlet:
"Commodity prices have risen over the course of this year, reflecting both stronger demand and cut-backs in supply in some countries. The higher commodity prices have supported a rise in Australia’s terms of trade, although they remain much lower than they have been in recent years. The higher prices are providing a boost to national income.” Our terms of trade will be up 4.5% in the quarter and the savings rate should be solid as well.
In a note yesterday afternoon, the AMP’s Chief Economist, Dr Shane Oliver said “its comments on Australia are a bit more mixed seeing growth slowing in the short term, the labour market as mixed and inflation remaining low before turning back up. In terms of the housing sector it now seems a bit more concerned acknowledging that conditions have strengthened overall.
“But while the RBA sees year ended growth slowing in the short term – which is presumably a reference to the high risk of a negative September quarter GDP outcome – it doesn’t appear to be too concerned and is expecting growth to pick up again as resources projects complete."
Dr Oliver said that “following a surprisingly correlated run of weaker than expected September quarter data for real retail sales, housing construction, private and public investment and trade volumes there is now a very high risk that GDP contracted in the September quarter with the consensus of economists now expecting -0.1% quarter on quarter or +2.2% year on year."
This he said would only be the fourth quarter of GDP contraction since the last recession ended in 1991 – the last three being in the December quarter 2000 (after the introduction of the GST), December quarter 2008 (the GFC) and March quarter 2011 (mainly due to a hiccup in exports due to flooding in Queensland coal mines and cyclones in northwestern WA iron ore ports).
“While a contraction will no doubt invite talk of a recession (usually defined as two consecutive quarters of falling GDP) we, like the RBA, see growth bouncing back again,” Dr Oliver wrote.
“Weak September quarter GDP looks like payback for stronger than expected GDP growth over the year to the June quarter of 3.3%. And looking forward the ramp up in resource export volumes has further to go, there is still a huge pipeline of housing activity yet to be completed, strengthening approvals for non-dwelling construction are a positive sign, the drag from mining investment is fading as it reduces as a share of GDP and its likely to be close to a bottom in the next 12-18 months, recent retail sales data have improved suggesting a consumer bounce back in the December quarter and the rebound in commodity prices tells us that the income recession in Australia is over.
"But despite this and although the tone of the RBA’s Statement remained basically neutral, absent a surprise bout of fiscal stimulus in Australia we remain of the view that its way too early to rule out further rate cuts next year. The risks to growth are on the downside, inflation is likely to remain below target for longer than the RBA is forecasting as wages growth remains weak, the RBA may also need to offset increases in bank mortgage rates that are being driven by the rise in global bond yields and the $A remains too high.
"So we are allowing for one rate cut in the first half of next year. Regardless of whether there will be further cuts or not, a rate hike remains a 2018 story at the earliest,”Dr Oliver wrote.
