The devil in the economic data detail

Investors and economists have been spoilt this past week thanks to a packed calendar of economic data. But what does it all mean?

The RBA isn’t out of the woods on inflation but some of the fundamental drivers over the longer term are moderating. Picture: Christian Gilles

Investors and economists have been spoilt this past week, with a packed calendar of economic data. Even the Reserve Bank governor added to the action last week, appearing before a parliamentary committee.

So first to the data. The headline grabber this week was the quarterly national accounts. This data showed the economy grew just 0.1 per cent in the three months to March, a soft outcome. However, as is always the case with the national accounts, there is lots of devil in the detail. For investors, it is worth highlighting a couple of interesting developments revealed in the data.

The first is the upward revision to household consumption over the past year.

Overall, the first quarter national accounts tell us that the Australian consumer has been more resilient for longer than data initially suggested. This is interesting, not least because soft consumption outcomes have been one major factor keeping the RBA on hold of late. While the better consumption outcomes for 2023 won’t change the RBA’s near-term view, they will provide central bank officials with a sense that households have coped with higher interest rates and elevated inflation a little better than previously envisaged.

We also learnt in the national accounts that while unit labour costs – wages adjusted for productivity growth – remain elevated, they have moderated a touch.

This does not mean the RBA is out of the woods yet with respect to inflation, but it does show that some of the fundamental drivers of inflation over the longer run are moderating, albeit very slowly. The question for the RBA is whether this process will happen fast enough such that the bank can hit its forecast of target consistent inflation by the end of 2025.

The news on productivity growth in the national accounts wasn’t especially encouraging, with GDP per hours worked unchanged in the quarter.

The RBA has cautiously optimistic expectations on productivity growth embedded into its forecasts, so this outcome won’t be cause for celebration. If annual wages growth is to settle around 3.5 per cent, then productivity growth will need to settle around 1 per cent in order for the RBA to be confident that overall wages growth is consistent with an inflation outcome around 2.5 per cent, the middle of the RBA’s target band.

But on the positive side for labour costs, the minimum/award wage announcement by the Fair Work Commission printed close to most economists’ expectations, at 3.75 per cent.

This outcome will help underpin the view that aggregate wage growth has likely peaked for the cycle and will gradually move lower from here. This should give central bankers confidence that their forecast trajectory for wages growth is on track. All they need now is for productivity growth to pick up.

Other data this week, such as housing finance, show that borrowers are still willing to borrow to buy houses – both as owner-occupiers and investors.

Strength in these series is particularly evident in NSW and Queensland; the monthly value of investor loans in NSW reached a peak of $4.8bn in Covid-19, and now sits at $4.4bn. And perhaps importantly, the data reveal that this strength in lending is not simply a function of rising house prices. The total volume of loans is rising too; if sustained in coming months, this will likely prompt the RBA to question whether a cash rate of 4.35 per cent is truly restrictive.

The Reserve Bank governor appeared before the Senate Economics Legislation Committee during the past week.

There wasn’t much new in the governor’s comments; she highlighted that the economy remains on its “narrow path” while at the same time emphasising the current guidance that all policy options are on the table and nothing is being “ruled in” or “ruled out”. She made clear that if inflation exhibits persistence, the Reserve Bank board will respond with further rate hikes. The governor was also at pains to communicate that the board will look through the volatility in headline inflation as a result of government subsidies for rent and energy bills, preferring instead to focus on core measures of inflation.

So, after all this information, what are investors to think? Our view would be as follows: a slight moderation in unit labour costs and a reasonable outcome on the minimum/award wage are at the margin, helpful for the inflation outlook. For this to be sustained, however, productivity growth needs to improve.

Elsewhere, upward revisions to household consumption for 2023 and evidence of a pick-up in housing-related lending suggests that households are perhaps a little more resilient than previously expected. Stronger consumption from here, together with rising demand for credit, will challenge the consensus expectation that the next move in interest rates is down.

On net, a week full of data hasn’t done much to resolve the uncertainty around the economic outlook, nor the interest rate outlook. Diversified portfolios, sensible risk management and exposure to quality companies remain three anchors that can help investors navigate through an environment that remains still difficult to chart.

Sally Auld is the chief investment officer at JBWere