Surveys hint at slowdown ahead of RBA meeting

Surveys hinting at weaker activity and price pressures may give solace to the RBA board, but its decision on interest rates hangs on the impending release of significant economic data.

Reserve Ban deputy governor Andrew Hauser.

Private surveys hinting at weaker domestic activity and price pressures may give solace to the RBA board when it meets next month, but its rates decision still hangs in the balance as major economic data looms.

Market pricing on the chance of an August rate rise continued to cool to about 28 per cent, after spiking to about 50 per cent in the wake of the latest blowout in the monthly CPI indicator two weeks ago. But the chance of a rate rise in the final three policy meetings of the year remained at about 50 per cent ahead of official data on jobs, retail sales and inflation in the next three weeks.

Surprisingly large price increases for mobile phones announced by Telstra on Tuesday may raise eyebrows at the RBA in the context of sticky services sector inflation.

Telstra announced price increases for postpaid mobile plans equivalent to 4-4.8 per cent, compared to the latest annual CPI increase of 3.6 per cent for the March quarter, as well as increases for prepaid plans ranging between 7 per cent and 11 per cent.

While communication services is a small part of the CPI, the price increases announced by Telstra for later this year were the latest indication that services inflation remains “sticky”.

“The persistence of services price inflation is a key uncertainty,” the RBA board said last month.

However, in the spirit of bad news on the economy giving hope of interest rate relief, the overall weakness in NAB’s business survey for June and the Westpac-Melbourne Institute consumer sentiment survey for July can be crossed off the list of potential concerns for the RBA.

While business confidence surged last month, according to NAB, its more important business conditions index continued to fall, and price and cost measures reversed last month’s rise.

Business conditions fell two points to four index points and were now “clearly below the long-run average”, driven by falls in employment and profitability, while trading conditions were broadly unchanged, according to the NAB Monthly Business Survey for June.

It continued a long-running fall in the trend of business conditions to below average levels, reflecting the slowing in the economy late last year and early this year. A sharp fall in the jobs index was also a notable feature of the business survey.

“While it’s only one month’s read, the employment index is now below its long-run average and may be signalling that the broader slowing in the economy is flowing through more strongly to labour demand,” NAB head of Australian economics Gareth Spence said.

Business confidence rose six points to four index points, led by manufacturing and wholesale. Forward orders were flat at minus six index points, capex fell five points to zero index points, and capacity utilisation rose to a “well above average” 83.5 per cent.

But labour cost growth eased to 1.8 per cent in quarterly equivalent terms, from 2.3 per cent in May, and purchase cost growth also eased to 1.3 per cent, from 1.7 per cent.

Product price growth fell to 0.7 per cent, from 1.1 per cent. Retail price growth was broadly stable at 1.5 per cent, while recreation and personal services prices fell to 0.7 per cent, from 1.1 per cent.

“Encouragingly, the key price and cost growth measures reversed their increase from last month,” Mr Spence said.

“Retail price growth was broadly stable and is high despite the weaker activity outlook and confidence in the industry.

“However, also important for consumer prices on the services side, recreation and personal services price growth fell back to 0.7 per cent on a quarterly basis.”

The survey continued to signal another soft quarter for the economy, but capacity utilisation was still high with demand and supply yet to fully normalise, he added.

“Price pressures continue to ease in a trend sense though the data certainly remains bumpy.”

CBA head of Australian economics Gareth Aird said the relative strength of the labour market had looked at odds with well below trend GDP growth over recent quarters. That may be starting to see some convergence between employment growth and GDP growth.

“Forward orders from the NAB business survey have for some time been signalling that employment growth would step down more materially,” he said.

“On that score, all eyes are on the ABS June labour force survey due to be released on July 18.”

RBA deputy governor Andrew Hauser said “it would be a bad mistake to set the basis of policy on one number”, and that NAB’s business survey would be looked at by the RBA.

Meanwhile, consumer sentiment remains “deeply pessimistic” after falling back this month on rate rise fears, according to Westpac.

The Westpac Consumer Sentiment Index fell 1.1 per cent to 82.7 points, with family finances again under pressure, and a big jump in rate rise expectations.

The survey found 60 per cent of consumers now expect rate rises as a number of economists call for an increase at the RBA board meeting next month.

A steady outlook for the labour market was still the main source of support.

“Sentiment remains stuck in the same deeply pessimistic range that has dominated for two years now,” Westpac senior economist Matthew Hassan said.

“The July update shows that fears of persistent inflation and further interest rate rises are again weighing more heavily on the consumer mood, offsetting any boost from the arrival of the stage three tax cuts and other fiscal support measures.

“While these measures came into effect from July 1, many consumers would not have seen any cash flow impacts so far given that payment cycles – for both incomes and for the electricity and rent expenses set to receive more cost-of-living support – are often fortnightly or monthly.”