Westpac’s forecast for RBA rate cuts in 2019, set down on February 21, has gained significant support over the last week. Updates on business and consumer confidence show the growth slowdown over the second half of last year is carrying into 2019 and starting to affect decision making. The case for cuts may build further with the release of next week’s labour market data.
Markets are now giving about a 50% chance of an RBA cut by June, up from a 40% chance immediately following the December quarter GDP release. We continue to favour moves coming later in the year – August and November the likeliest timing – with the Bank still seeming reluctant to cut and likely to require more evidence around the ‘consumer-housing nexus’ and the labour market outlook before taking action.
The NAB business survey indicates that both business conditions and business confidence weakened in February – with both at below average levels. The business conditions index fell by 3pts to +4, down sharply from the average +18 read over the first half of 2018. Business confidence also fell by 2pts to +2.
We see the soft business update as a significant development. The February read is less affected by holiday season volatility, and is a clearer confirmation that the sharp loss of economic momentum since mid-2018 has extended into 2019. That is consistent with Westpac’s view of GDP growth running at a below trend 2.2% pace in 2019.
The detail shows particularly weak conditions for retail, the December–February period marking the weakest three month run since 2013, and construction which saw conditions dip into contractionary territory. The state breakdown continues to show a sharp loss of momentum in NSW and Victoria. All of this is consistent with increasing negative spillovers from the Sydney and Melbourne housing corrections.
Importantly, the shift is clearly starting to affect businesses willingness to hire and invest. While the employment component of the survey moved sideways in the February month, at +5 it continues to show a clear easing from the +11 averaged over the first nine months of 2018. Meanwhile, the March survey points to downside risks around investment, with capacity utilisation falling to below average levels and capital expenditure plans down to a three year low.
Consumer confidence is also starting to falter. The WestpacMelbourne Institute Consumer Sentiment Index fell 4.8% to 98.8 in March from 103.8 in February. The move takes the index back below 100, indicating pessimists again outnumber optimists, in contrast to the ‘cautiously optimistic’ reads that prevailed throughout 2018.
At 98.8, the index is still only ‘cautiously pessimistic’ and comfortably above the average level recorded in 2017. However, the March fall looks likely to be sustained with the survey detail indicating the poorer run of economic news is starting to weigh more heavily. Indeed, responses collected after the March 6 GDP release were much weaker, consistent with an Index level of 92.7. We suspect that the national accounts release clarified what were previously somewhat mixed signals about the extent of Australia’s growth slowdown. As such this aspect of the March weakening in consumer sentiment looks likely to be sustained.
Other aspects of the March consumer sentiment survey also suggest the shift is starting to have a bearing on decisions.
Job loss concerns rose sharply in the month, the WestpacMelbourne Institute Unemployment Expectations Index recorded an 8.9% jump, indicating more consumers expect unemployment to rise in the year ahead.
Responses to additional questions on the ‘wisest place for savings’ also show risk aversion rising to extremely elevated levels. Two thirds of consumers favouring safe options – bank deposits, superannuation or paying down debt – and just 17% nominating risky options such as real estate and shares. The mix is more risk averse than at the height of the global financial crisis.
Both job loss concerns and rising risk aversion raise the risk of a further move by households to rein in spending and increase savings, all of which would be consistent with Westpac’s expectation of a significant ‘wealth effect’ drag on demand.
The labour market is the main focus domestically over the coming week with the February labour force survey to be released on March 21. Leading indicators have softened in recent months and we are expecting next week’s update to be softer with employment dipping 5k and the unemployment rate nudging up to 5.1%.
However, this is within the range of monthly volatility for the labour force survey. A clearer moderating trend is only likely to emerge through March–April–May, as the slower growth pulse combines with businesses putting hiring on hold around the Federal election (a feature of the two previous elections in 2016 and 2013).
The Reserve Bank Board next meets on April 2. While Westpac expects the RBA to cut the cash rate by 50bps by the end of 2019, we do not expect the Bank to move rates at its April meeting. The weak December quarter national accounts will undoubtedly prompt a further downward revision to the RBA’s growth forecasts to be released in the next Statement on Monetary Policy on May 10. However, this is unlikely to shift its views on the labour market – an area of strength that the Bank has highlighted as key to its policy considerations – by enough to warrant a policy easing.
The Federal Budget, due on the same day as the April RBA Board meeting, adds another layer of uncertainty. With the government’s budget position improving, boosted in part by recent gains in commodity prices, and an election looming in May, there is certain to be significant stimulus measures tabled. That said, whether these will be sufficient or credible enough to turn the dial on confidence and the wider economy in a timely manner is unclear. Fiscal policy still looks to be constrained by the perceived need of both political parties to predict a surplus in 2019/20.
The case for monetary policy easing is clearly continuing to build, very much in line with Westpac’s view. However, we still see the situation favouring a first 25bp rate cut from the RBA coming in August, once the extent of spillovers from the housing downturn, on the labour market in particular, become more apparent, with a follow-up 25bp cut in November.
I still think we’ll get there sooner. Just got to clear a path through the intellectual dead wood first.