From Westpac’s Bill Evans this afternoon:
That is despite the recently revised forecast in the November Statement on Monetary Policy that growth in the Australian economy would be below trend at 2.5% in 2014. Momentum in the economy is broadly forecast to remain flat at 2.5% throughout the year with a pick-up to 3.5% expected in 2015. Of course there is also no inflation constraint around policy with core inflation forecast at 2.25% in 2013 and 2.5% in 2014.
Presumably the justification behind the decision to stay on hold is around the expectation that growth will be well above trend in 2015. However, given the wide confidence ranges around growth forecasts it seems to be more prudent to develop policy around the 1-year rather than 2-year forecasts, around which there must be considerably greater uncertainty. That uncertainty is evident in the wide forecast band for 2015, which is 2.75% – 4.25%.
Indeed, the Bank does appear to have decided that more stimulus is required for the Australian economy but not through interest rates. That stimulus is now being sought through the unconventional channel of ‘talking down’ the currency. Hence it is likely that the Governor’s Statement following the Board meeting will remain subdued and retain the wording: “it was prudent to hold the cash rate steady… but not to close off the possibility of reducing it further”.
The Governor also, at a public dinner on November 21, seriously raised the possibility of intervening in the currency market. The approach has been mildly successful with the AUD falling from US 92.5¢ to US 91¢ over the last week. Doubtless the board will be encouraged by this initial ‘success’ and will continue to pursue this policy over the next few months. However, in the speech at the public dinner he did not offer any views on the extent of overvaluation of the AUD. In the past the Bank has noted that a similar fall to the May– June US 10¢ depreciation would be helpful to rebalance the Australian economy.
It is my view that such a fall is unlikely given our expectation that ‘US tapering’ is much further off than is the current market (and presumably the RBA’s) view.
On the question of whether the Australian economy does need more stimulus we were keen to dissect the Q3 private capital expenditure survey released yesterday. The survey is the first test of whether the promising boost to confidence we have seen in business surveys is being reflected in business investment and providing some encouragement that it will also see a boost to employment.
Below I summarise our key take on the current dynamics of the Australian economy. Since the onset of the global financial crisis consumer sentiment has been volatile but in recent months has settled around pre-GFC levels. It also shows that a disturbing wedge has opened up between overall sentiment and how respondents assess their job security, as proxied by their expectatins for unemployment. Broadly speaking, consumers’ unemployment expectations stand around 20% below pre GFC levels. That is also true of surveyed business conditions highlighting another wedge that has opened up between consumer confidence and business conditions. The dynamic that appears to be operating here is a tentative approach by business that is manifesting in poor jobs growth and impacting the security assessments of households. While ever households remain insecure around job prospects, spending will be subdued.
The Capex survey was a good test as to whether business is coming out of its torpor with a potentially more positive attitude towards spending and hiring. Hopes were high given the boost to confidence since the election.
This survey included the fourth estimate of investment intentions for 2013/14. The interest is around how this estimate compares with the third estimate which printed in August. That earlier survey was conducted in late July/early August when the government was experiencing a recovery in the polls (due to a leadership change) and the Budget was announced to have an additional $40bn ‘hole’ due to the deteriorating terms of trade. It was a clear low-point for business confidence. As such, the November survey was expected to show a marked improvement to at least become comparable with the May survey.
There are many ways to assess this survey. We prefer to use a conservative approach which takes the 10 year average realisation ratio for manufacturing and services and the 3 year average for mining. A realisation ratio is required to ‘mark up’ Capex plans as historically these have shown systematic divergences with actual spending (plans usually undershoot final spend).
On that figuring, mining investment plans improved somewhat from an estimated fall of 6% in August to 4% in November; manufacturing plans showed a 12% fall in August compared to a 10% fall in November; and service sector plans showed a 4% rise in November compared to a flat outlook in August. Overall the November survey pointed to a 1.6% fall in investment in 2013/14 compared to a 4.2% fall in August.
So, overall, we saw a modest improvement in November with the key result being a move from flat to a 4% rise in the services sector. However given the extreme circumstances of the August survey I would argue that the improvement is fairly modest.
For instance, the November results are significantly weaker than the results in May when mining was expected to expand by 7.6%; manufacturing to contract by ‘only’ 4.2%; and, most importantly, it appeared that services, which is the key to rebalancing the investment spend, was planning to increase Capex by 11%.
Overall, given the circumstances, this survey was disappointing and consistent with our concern that business is not responding to the potentially uplifting news around the change of government.
Further stimulus will be needed for the Australian economy. For now the RBA appears content to address that through the currency. However, given the heavy reliance on offshore developments and the uncertainties around actually adopting an intervention policy we expect that, in due course, the Bank will have to revert to the more conventional interest rate approach.
