Nothing really new from Bill Evans but a neat summary of recent data today on why rates are now on hold:
Firstly on business, we have already pointed out the evidence in 1996 when a Coalition victory (after a long period in opposition) was greeted with solid boosts to business confidence although business conditions were little changed.The NAB survey on business confidence which printed this week showed a similar story. The measure for business confidence surged from +4 to +12 – the highest read for 3.5 years; that contrasted with its average read over the past 6 months of around zero. The measure for business conditions also improved from –7.4 to –4.2. That compares with an average over the last 12 months of around –6 and an average in the 6 months to September 2012 of –1.8. Conditions, while showing improvement relative to the last 12 months, are still markedly weaker than a year ago. This result, however, will be sufficiently buoyant to tempt the Reserve Bank to await further developments. Similarly there was a modest improvement in the employment series. It improved from –9 to –6 but was still firmly in negative territory. Over the last 12 months the employment index has averaged around –6.6, compared to –1.6 in the six months to September 2012.
On the other hand, Consumer Sentiment failed to retain all the gains from around election time. The Westpac Melbourne Institute Index of Consumer Sentiment fell by 2.1% in October from 110.6 in September to 108.3. The shutdown of the US government and media speculation around a US government default would have unnerved respondents. The business survey was completed before the shutdown was announced.
Consistent with the weak reads for the employment component of the business survey, we saw that respondents remained concerned about their jobs. The Westpac Melbourne Institute Index of Unemployment Expectations rose by 0.6% in October, indicating ongoing concerns. The Index is 10.1% above the level in November 2011 (the date of the first rate cut in this cycle), indicating significantly more heightened concerns around job prospects than at that time. That contrasts with the overall Consumer Sentiment Index which is 4.7% above its level in November 2011.
The Employment Report for September showed a weak labour market. Total employment rose 9.1k in September. This is an insipid rate of employment growth as total employment has lifted just 0.8%yr, or by just 95.5k in the year to Sep. Total hours worked contracted 0.4%mth, bringing the annual pace down to 0.6%yr, more in line with annual growth in total employment. Surprisingly, the unemployment rate fell to 5.6% from 5.8% in Aug. At two decimal places, the fall was only slightly more than a 0.1ppt fall, from 5.76% to 5.65%.
Westpac estimates that underlying growth in the labour force is around 17k/mth. Were it not for the surprising fall in the participation rate, to 64.86% from 64.98%, the unemployment rate would have printed at 5.82% in September. Indeed if, in this cycle, the participation rate had held around its average since March 2008, the unemployment rate would now be 6.5% – not 5.6%.
The employment to population ratio is at 61.2%, below the low point hit in 2009. Growth in employment has been running well behind population growth.
So far this year, most of the growth in employment has been in part-time female employment. Total female employment is up 55.5k vs. 25.0k for male employment; part-time employment is up 69.6k, compared to a pitiful 10.8k rise in full-time employment.
Recent increases in house prices are another reason for the Bank to delay any move. Last week I wrote, “Our judgement remains that the housing recovery will continue to be a ‘stop-start’ one, uneven across both segments and states. There are significant headwinds that are yet to fully impact with some markets facing a significant increase in the supply of new dwellings (Vic, WA) and the mining downturn yet to play through fully to housing (WA, Qld).”
The Consumer Sentiment survey lent some credibility to those views of a “stop-start” housing market.
There was a shock reading on whether now is a good time to buy a dwelling. That index fell by 10.3% from 145.0 to 130.0. There were some big falls in individual states – particularly NSW (22.5%) and Queensland (11%). It may be that affordability issues, particularly in Sydney, are already weighing down the attractiveness of property.
Finally we received the latest global growth forecasts from the IMF. Readers will be aware that our downbeat global growth outlook for 2014 has been a key reason behind our view that the Bank will continue cutting rates in 2014. The IMF lowered its global growth forecast from 3.8% to 3.6% – in the right direction but still well above our forecast of 3%. The main reason behind the IMF downgrade is its view on developing economies and emerging markets. It retains an overly optimistic view on US and Europe.
It has lowered its forecast for China’s growth next year from 7.7% to 7.3% – still above our forecast of 7.1%. Other adjustments to India (5.1% to 4%); ASEAN–5 (5.4% to 5.1%) and Latin America (3.4% to 3.1%) are even lower than our own numbers. Indeed, if we were to take on board the IMF’s views on the emerging markets, we would lower our own global growth forecast in 2014 to 2.8%.
We are comfortable with both our decisions last week. There is enough evidence around business conditions and confidence for the Reserve Bank to seek further information before moving rates in February.
However global growth; labour market; housing and the consumer continue to point to the need for further stimulus next year.
Basically right. As I noted Friday, interest rate markets (which have done a much better job than economists on rates over the past few years) are signaling 16bps of hikes in the next year. The key factor will be house prices. There is no way the economy will support rate rises. In fact, it will demand rate cuts. Equally, there is no way they will be forthcoming while the nation’s largest housing market is in bubble blowoff. So Evans and markets are, in a sense, both right.
My own view remains that the next move will be down. The idea of the RBA hiking as we topple off the capex cliff with a disfunctionally high dollar makes no sense. With business investment tumbling, one or two hikes with jawboning aimed at housing a’la 2003 will crash the economy. The bank will surely embrace hated macroprudential policy first via some kind of coordination with APRA.
