Weak wages and weak household consumption (as we saw with the December monthly retail sales figures yesterday which showed a fall of half a percent, after two strong months in a row) are now front of centre of thinking for the Reserve Bank which left its key cash rate on hold for yet another month.
While recognising the wider economy was travelling well – especially the jobs market, the central bank’s governor, Dr Phil Lowe noted in his post-meeting statement yesterday that “the outlook for household consumption was a “continuing source of uncertainty”, with household incomes growing slowly and high debt levels.
The first post meeting statement read like a summation of the first Statement On Monetary Policy that the RBA will issue on Friday morning (and which Dr Lowe will discuss in a speech in Sydney tomorrow night).
Both are likely to be a mixture of optimism and continuation concern about weak spending consumers.
The bank said business conditions were positive (as successive National Australia Bank business surveys confirm) and the outlook for non-mining investment had improved, while increased public infrastructure investment was also supporting the economy.
The central bank said data over the summer had been consistent with its central forecast for gross domestic product growth to pick up to average a bit above 3 per cent over the next couple of years.
“The low level of interest rates is continuing to support the Australian economy," Dr Philip Lowe said. "Further progress in reducing unemployment and having inflation return to target is expected, although this progress is likely to be gradual."
"The various forward-looking indicators continue to point to solid growth in employment over the period ahead, with a further gradual reduction in the unemployment rate expected. Notwithstanding the improving labour market, wage growth remains low.
"This is likely to continue for a while yet, although the stronger economy should see some lift in wage growth over time. There are reports that some employers are finding it more difficult to hire workers with the necessary skills.”
And for those interest rate panic merchants who see a rise in rates later this year, a note of caution in yesterday’s statement:
"Inflation is low, with both CPI and underlying inflation running a little below 2 per cent. Inflation is likely to remain low for some time, reflecting low growth in labour costs and strong competition in retailing. A gradual pick-up in inflation is, however, expected as the economy strengthens. The central forecast is for CPI inflation to be a bit above 2 per cent in 2018,” the bank said.
It must be remembered that the bank has an inflation target of 2-3% over time. So no worries there.
And rather discuss the recent rise in the value of the Aussie dollar against the US currency (which has partly reversed by rise in the greenback since Wall Street fell out of bed on Friday) the RBA looked wider and noted:
"On a trade-weighted basis, the Australian dollar remains within the range that it has been in over the past two years. An appreciating exchange rate would be expected to result in a slower pick-up in economic activity and inflation than currently forecast.” So no worries there. The important final paragraph of the February RBA statement from Dr Lowe contained an important change from his December statement (in bold):
"The low level of interest rates is continuing to support the Australian economy. Further progress in reducing unemployment and having inflation return to target is expected, although this progress is likely to be gradual. Taking account of the available information, 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.”
This was the final paragraph of the December statement:
"The low level of interest rates is continuing to support the Australian economy. Taking account of the available information, 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.”
So no rate rise for quite a while.
The December retail sales and trade data, released yesterday by the Australian Bureau of Statistics was weaker than forecast.
Retail sales eased more than expected in December and the country’s trade account posted a surprise $1.3 billion deficit after confident forecasts for a small surplus.
As the RBA noted in Dr Lowe’s post meeting statement consumer spending has been under pressure from record-high household debt and the long period of sluggish wage growth.
Retail sales fell 0.5% in December, from November when they rose a solid 1.3%, led by Black Friday discounts, and sales of the new Apple iPhone models.
Economists had forecast a fall of 0.2%.
Economists said December’s fall in part reflected the impact of online discounting sales in November, which brought spending forward. Online sales growth slowed to just 6% in December from the 20% surge in November.
Household goods led the falls with department stores, clothing, footwear, cafes and restaurants all posting losses.
For the fourth quarter as a whole, retail sales beat expectations to rise a rapid 0.9% in inflation-adjusted terms. That followed a very sedate 0.1% gain the previous quarter.
The ABS commented: "In seasonally adjusted volume terms, turnover rose 0.9 per cent in the December quarter 2017, following a rise of 0.1 per cent in the September quarter 2017. The rise in volumes was led by household goods (3.4 per cent), which benefitted from strong promotions and the release of the iPhone X in the November month.”
December’s trade balance recorded a deficit of $1.36 billion, compared to a revised $36 million surplus in November, falling short of market expectations of a $200 million surplus.
A 6% surge in imports drove the deficit (up $1.9 billion), led by more costly imports of oil and fuel (petrol). Exports jumped by $500 million, most iron ore and coal.
