RBA may keep powder dry amid mixed economic signals

There has been plenty of disappointing economic news since the RBA board packed up for the summer two months ago.

The Reserve Bank of Australia will be considereing a mixed bag of data. Picture: AAP

There has been plenty of disappointing economic news since the Reserve Bank board packed up for the summer two months ago, but it is likely to emerge from tomorrow’s meeting more optimistic about the outlook than it was then.

The global economy is looking stronger, business surveys are showing the pulse is picking up and the downturn in the mining states has come to an end.

The Reserve Bank’s statement on monetary policy, to be released on Friday, will still point to weakness in household consumption and the low rate of wage growth, but will make the case for patience.

The surprise 0.5 per cent contraction in the economy in the September quarter was announced the day after the Reserve Bank’s last board meeting. Although the bank had been expecting a weak result, it was not predicting a fall.

However, the bank will see the September quarter as an aberration, heavily influenced by unusually wet weather in south east Australia, which caused a huge 1.6 per cent fall in housing construction, while there was also a short-lived drop in iron ore exports. The July federal election was also thought to have depressed the result.

The one element of the September quarter weakness that rang true was the softness in household consumption, which rose by only 0.4 per cent, following a weak 0.5 per cent the previous quarter.

The Reserve Bank had been hoping that households would be encouraged to lift spending despite weak income growth by saving less. The national accounts showed they saved less, but the ABS said this was because of a sharp fall in contractor earnings, possibly also related to the bad weather disrupting the housing industry.

The Christmas retail sales report will be released by the ABS today, but the results released since the bank’s last board meeting have been poor. The National Australia Bank’s business survey highlights retail as one of the weakest industry sectors.

Retail is undergoing challenges, with new entrants, more online sales and a general shift in the balance of consumer spending away from goods and towards services.

The weak growth in consumer prices, with underlying prices rising at an annual rate of only 1.5 per cent, partly reflects the intensity of competition in the retail sector, which the Reserve Bank would welcome, while another part reflects the continuing fall in traded goods prices. The area of concern is weak wage growth, which is depressing growth in both consumption and in services prices.

The Reserve Bank may conclude that consumers will remain cautious until they start seeing wages rise more rapidly. Governor Philip Lowe commented at his last hearing before the House of Representatives economics committee that he thought it most unlikely that Australia would get stuck in a very low wage-growth world indefinitely.

“If we can get enough employment growth, workers will again ask for slightly larger wage rises, which will then return inflation to the 2 to 3 per cent range,” he said.

The labour force reports since the Reserve Bank’s last meeting have been mixed, showing a recovery in fulltime employment but a rise in the jobless rate from 5.6 to 5.8 per cent.

The Reserve Bank is likely to see the kick-up in unemployment in the last two months as “noise”, with the jobless rate averaged over a three-month period holding at 5.7 per cent for most of last year.

The boost in fulltime jobs in the last few months still leaves most of the employment over 2016 in part-time work, and this is consistent with what is known about industry trends, with sectors like personal services and hospitality, which are big employers of part-time labour, doing well.

The grounds for optimism come first from the global economy. The US economy is looking better, with Friday’s jobs report the best in four months. Consumer spending is strengthening while business surveys have also been upbeat both in the US and in Europe. Central banks in several major economies, including Japan and Britain have upgraded growth forecasts over the past two weeks.

China’s economy continues to record good growth, despite the perennial fears about the weight of corporate and local government debt. This has kept commodity prices aloft far longer than anyone expected. Most analysts expect the commodity price boom that has been under way since the middle of last year will wilt in the face of fresh supplies as resource-boom era projects are completed, but in the meantime the boost to income is supporting Australian growth.

This is most obvious in Western Australia, where the economy has stopped contracting. Because the price surge is not expected to last, there has been little fresh investment, although the $400 million lithium processing plant at Kwinana, announced recently, broke the drought of new projects.

West Australia’s economy is also being boosted by a record grain harvest, making four good seasons in a row. The beef industry is enjoying good prices and is supporting a new meatworks in the Kimberley region, the first in 20 years.

Although Western Australia is only about 15 per cent of the national economy, the reversal of fortune as resource prices crashed and the construction phase of the boom came to an end was enough to drag the national growth well below potential. BankWest chief economist Alan Langford says it is premature to talk about a turnaround — office vacancies in Perth are still about 22.5 per cent — but says the economy has stopped getting worse.

The January business surveys from the National Australia Bank and the Australian Industry Group show a reasonable level of activity. The NAB survey had been showing worrying signs of a slowdown in NSW and Victoria late last year. However, its first survey for the year released last week shows business conditions in these economies picking up again, with trading and profits above long-term averages.

The recruitment service Seek provides a good breakdown of state-based employment trends. It confirms that the fall in the West Australian economy has ended, with the rise in the number of applicants for every job coming to an end, and the number of new advertisements steadying. Job advertising is strong in NSW and Victoria, with the latter still showing growth. The number of job advertisements is also rising in South Australia, Queensland, and Tasmania.

It is an outlook that will leave the Reserve Bank happy with its growth estimates of 2.5 to 3.5 per cent for the next few years and content to wait for inflation to return to its target band without any further adjustment to its cash rate.