Below trend growth to continue
This week we look at the 4.9% rise in SEEK new job advertisements recorded in April; and two important aspects of the Australian Budget – the likely impact on confidence; and the continued reliance of the Budget forecasts on a recovery in revenues.
This week we look at:
It looks likely to be a relatively quiet week for Australian data and events. That of course is not to predict that markets won’t be moving around a lot as they have done in recent weeks from offshore influences, primarily from the rise in bund yields and oil prices and constantly fluctuating views on the timing of Fed lift-off.
The main data of note in Australia are the weekly ANZ and the monthly Westpac consumer confidence releases. Both will be closely scrutinised for evidence of a positive impact from last week’s budget on consumer confidence. As a weekly series, the ANZ measure will provide the best discrete measure of this impact. NAB’s social media tracking suggests a relatively positive reaction, which suggests each index should record a rise, given the general absence of bad news and the presence of some positive measures for small businesses in particular. The extent to which these rises are sustained in coming weeks and months will be important.
Otherwise, the only other events are the RBA Minutes (Tuesday) and a speech by RBA Deputy Governor Phil Lowe, which was released today at 9.30am. The speech highlighted the two transitions that were happening in the economy. The first is the familiar story of the economy rebalancing towards non-mining growth. The second was the less familiar story of lower global interest rates for an extended period of time. In terms of policy implications the speech noted the RBA’s recent interest rate decisions as seeking to “strike a prudent balance – to help encourage consumption growth and thus business investment, but avoid the type of imbalances that could cause problems later on. We will continue to assess that balance carefully”. We interpret this as the RBA being on hold for some time to assess how recent easing is impacting on the economy.
There will no doubt be ongoing discussion about whether the RBA still has an easing bias – given the Bank has just eased twice and downgraded its economic forecasts twice, it definitely will be inclined in that direction. There was some chatter after the RBA cut in early May that because the statement didn’t have an explicit easing bias that the RBA had gone “neutral”. The Deputy Governor cleared this misunderstanding up in Q&A this morning. He said “If you look back through the interest-rate decisions of recent years, on the months where we’ve changed the cash rate we haven’t provided any guidance about what’s likely to happen in the future and I think that’s appropriate. The focus on that month is really on the decision rather than what comes in the future. He went further and added “So we still have scope to lower interest rates if we need to. That doesn’t mean we’re going to, but we have scope to do that if we need to and nothing has changed in that dimension.”.
We continue to view the RBA as being on hold for some time to assess how recent easing is impacting on the economy.
SEEK released its new job advertisements for April last week. The results were a very strong rise (+4.9% m/m in April) taking the level of advertising to 12.1% higher than a year ago. The two largest (and predominantly non-mining) states (NSW and Victoria) led the gains with increases of 5.8% m/m and 5.7% m/m respectively, continuing their relatively strong trends of late. Encouragingly, there was also a relatively strong 4.4% rise recorded in Queensland, which had seen weak advertising trends in February and March, after the change of government. This provides tentative evidence that the change of government may not have had a lasting impact on hiring intentions, or the beginnings of a moderate improvement in the Queensland labour market.
The charts in the attached PDF highlight the strength in hiring emerging in the non-mining economies and sectors and the continuing (but not-unexpected) weakness in mining, reflected especially in the weakness in WA and NT new job advertisements, these states having the largest exposure to mining. Importantly, the emerging strength in non-mining advertising is currently sufficient to outweigh the weakness in mining advertising, even in Queensland, though the restraining influence in this state is clearly evident.
These trends are the latest incarnation of Australia’s two-speed economy. However, at face value they also provide support for the argument that monetary policy is not well equipped to deal with the current dichotomy of the economy: those sectors that react most to monetary policy easing, interest sensitive sectors such as housing are reacting with some vigour, while mining and related sectors currently dragging on the economy, will largely be unaffected by monetary easing, being mainly impacted by commodity prices and to a lesser extent the $A.
The past few months continues to reveal the $A’s fortunes being more in the hands of US$ and Federal Reserve interest rate trends, with the $A now higher than before the first of the RBA’s interest rate reductions in February. That said, NAB continues to expect the Fed to begin to raise US interest rates in September, which is anticipated to produce a restrengthening in the US$. This leaves our end-2015 $A forecast at US$0.74.
While the most important aspect of the Budget for markets in the near term will be whether it produces a lasting positive impact on confidence, the forecasts of a return toward balance continue to rely heavily on the return to a more normal revenue environment. Both sides of politics have continued to budget expenditures on the basis of this assumption in recent years. However, as lower commodity prices produced lower nominal growth and contributed to slower wages growth, revenues have disappointed and deficit forecasts have been revised higher.
This dynamic (and vulnerability) in Australia’s budget remains in force this year, though the economic forecasts underpinning the budget appear credible. One cannot criticise the Government for not seeking to recoup weaker than expected taxation revenues at a time of relatively moderate economic growth. One could suggest that perhaps more constrained expenditure could have more of a role to play, as it must as the economy strengthens, given the Government has more control over its expenditures than revenues. Most of all, the current budget forecasts again highlight just how poorly Australia managed the terms of trade boom by failing to run much tighter fiscal policy in the boom years. The cost of this is a very slow return to a stronger fiscal position and increased vulnerability to any renewed global downturn, given our substantially depleted fiscal reserves.
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