global economics - australia

8/6/2019 Global Economics - Australia

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Economic Research

Global Data Watch

May 6, 2011

59

J.P. Morgan Australia Limited, Sydney

Stephen Walters

Ben Jarman

Helen Kevans

Australia and New Zealand

RBA sidelined again, but commentary hints that ratehikes are on the way

Aussie retail volumes flat in 1Q; value of sales de-

pressed by lower prices

NZ employment bounced in 1Q, jobless rate unex-

pectedly dropped

Central bank commentary dominated events in Australia

this week, even though there also was a steady flow of eco-

nomic data. The RBA left the cash rate unchanged Tues-

day, as expected, but issued a statement that hinted officials

have become more anxious about the inflation outlook. In-

deed, on Friday, the RBA lifted the official inflation fore-casts to show core inflation above target in two years time.

The change reflects an unexpectedly high 1Q outcome and

is a matter of arithmetic, but also is a signal that rate hikes

are closer than many believe. We continue to forecast a

hike in August, but the risk of an earlier move is rising.

Prior to the release of the official forecasts, the RBAs

commentary Tuesday indicated that elevated AUD, which

hit a fresh post-float high this week, was doing some of the

heavy lifting in tightening monetary conditions, but played

down the significance of AUD on the economy.

Fiscal policy the focus next week

This weeks data flow in Australia showed a drop in house

prices in 1Q, but a big rise in approvals for new construc-

tion in March. The retail sales data Friday showed flat sales

volumes in 1Q and a fall in nominal sales in March, but

much of the weakness in the value of sales can be attrib-

uted to import price falls owing to high AUD.

Fiscal policy takes center stage next week when Federal

Treasurer Swan on Tuesday releases the annual Budget (see

research note Australias Budget to include long-overdue

austerity, in this GDW). We expect the Treasurer to an-

nounce a deficit of close to A$50 billion for the year ended

June 30, close to the record deficit he announced last year,and much larger than Treasury had forecast last November.

Receipt of the proceeds from the terms of trade boom has

been delayed, but eventually will fill the Treasurys coffers.

The Treasurers promise of delivering a budget surplus

within two years, therefore, seems reasonable.

In New Zealand data this week, the jobless rate unexpect-

edly fell in 1Q, and although figures were distorted by the

impact of the Canterbury earthquake, the labor market ap-

pears to be improving. Indeed, trend employment has

edged higher since September 2009, albeit at a frustratingly

slow pace. The highlight in NZ next week will be the elec-

tronic card transactions data, which have replaced the retail

sales report. Growth in electronic card transactions (ECT)accelerated in March following the earthquakes in

Christchurch (Feb. 22), but we suspect there will be some

payback in April. The fact that wage growth pulled back in

1Q (to 0.4%q/q from 0.6%) also implies that the retail sec-

tor will continue to struggle and that households will re-

main inclined to pay down debt.

RBA left cash rate unchanged ... again

The RBA this week left the cash rate unchanged at 4.75%,

as we and the majority of market economists had expected,

but there were notable, albeit virtually offsetting, changes

in the commentary. The statement, therefore, delivers amessage broadly consistent with what officials said a month

ago. Through all the statistical noise, natural disasters, the

soaring currency, last weeks inflation shock, and recent

offshore developments, not much has changed. The official

cash rate is headed up, but not yet.

Officials, for example, stepped up the tone of the language

in reference to the terms of trade, which is higher than they

expected. Importantly, they now have called the bottom for

the inflation cycle. The recent information suggests that the

0.8

0.9

1.0

1.1

Jan 10 Apr 10 Jul 10 Oct 10 Jan 11 Apr 11 Jul 11

AUD/USD

Australian dollar

-15

-10

-5

0

5

10

40

60

80

100

120

Index

Australia: terms of trade and budget balance

A$bn

90 95 00 05 10

Terms of trade

Budget b alance


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Economic Research


May 6, 2011


Stephen Walters

Ben Jarman

Helen Kevans

marked decline in underlying inflation from the peak in

2008 has now run its course. RBA officials did, however,

tone down the language elsewhere. For example, the com-

mentary says that high AUD (if sustained) will be a source

of restraint for the traded goods sector, and GDP likely will

have contracted in 1Q, owing to the floods in Queensland

and the later cyclone.

As we had expected, officials did not add an explicit quali-

fier to the paragraph at the end discussing the appropriate-

ness of the policy stance (such as for now or for the

time being). Doing so risked ringing alarm bells about an

imminent tightening. There was one addition to the last

paragraph, referring to the Board assessing carefully the

evolving outlook for growth and inflationbut dont offi-

cials do that every month? We doubt this sends any particu-lar signal about the likely timing of the next hike. For now

then, with the policy stance appropriate as before, Board

members seem happy to sit on the policy sidelines while

they watch how things unfold.

Indeed, there are enough lingering uncertainties to keep the

RBA sidelined in the near term. As these recede, though,

we expect the tightening cycle to resume. While Board

members seem comfortable that a mildly restrictive

policy stance is the one to maintain, we still believe the

next rate hike is likely within months. Our preferred timing

is the August Board meeting but, with inflation already

having bottomed, the intervening meetings also are live.

RBA lifted inflation forecasts in SoMP

On Friday, the RBA released its much-anticipated quarterly

Statement on Monetary Policy (SoMP), which included ma-

terial official forecast revisions. The most striking of these

were the upward revisions to the Banks inflation forecasts,

with the official forecasts for headline and core inflation

above the RBAs 2%-3% target range for the year ending

December 2013. Indeed, the Board flagged that underlying

inflation would increase gradually over the forecast hori-

zon, but by end-2013 would be above target at 3.25%.

The clear message from the SoMP is that further policy

tightening is warranted. While higher AUD and household

caution are helping to cap the inflation pressures associated

with the resources boom, with the underlying inflation fore-

cast to be at the top end of the Banks target over much of

the next couple of years, our assessment remains that the

cash rate still has further to rise. We forecast another two

rate hikes this year. Indeed, it seems to us that the flood

rebuilding effort will boost aggregate demand when the

economy already has little spare capacity. And, with GDP

growth expected to be at or above trend over the next few

years, at a time when spare capacity is limited and the labor

market continues to tighten (the RBA now forecasts the

unemployment rate at 4.25% by end-2013, comfortably

below the 5% level consistent with full employment).

The impact of the natural disasters has been greater than

officials assumed in the February SoMP, mainly owing to

problems in removing water from flooded coal pits, which

has delayed the resumption of coal production. These ef-

fects would, though, be temporary. The medium-term eco-

nomic outlook continues to be dominated by the booming

terms of trade (which the RBA expects will rise further in

2Q to be above the level assumed a few months ago) and

building mining investment. An important offset to this

strength remained the household sector, which remainedcautious and reluctant to spend despite continued strength

in the labor market. The RBA assumed in its forecasts that

households would remain cautious, and the saving rate

would remain steady at elevated levels, but acknowledged

the risks around this view. On the one hand, recent house-

hold austerity could become even more pronounceda

result of a structural shift in behaviorbut, on the other,

should consumers become more confident as labor market

conditions tighten and wage growth accelerates, then stron-

ger consumption growth could follow accordingly.

-30

-20

-10

0

10

20

-1

0

1

2

3

4

5

%6m ar

Australia: NAB survey and employment growth

Index, advanced 4 mo.

2006 2007 2008 2009 2010 2011

NAB employment

Employment

0

6

12

%oya

Australia: retail sales

2005 2006 2007 2008 2009 2010 2011

Food

Total


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Economic Research

Global Data Watch

May 6, 2011

61


Stephen Walters

Ben Jarman

Helen Kevans

Indeed, the most significant risk to the RBAs assumed out-

look revolves around the labor market. The RBA high-

lighted that, should companies compete more aggressively

for labor, upward pressure on wages may intensify. Offi-

cials discomfort with this scenario stems from past experi-

ence. In the early stages of the last resource boom (in 2006-

08), labor market pressures appeared contained, but domes-

tic inflation soon picked up significantly amid high levels

of economy-wide capacity utilization and stronger growth

in global commodity prices. As such, while our base case is

for the next hike to be delivered in August, an upside sur-

prise in the upcoming employment and wage data prior to

the RBAs June Board meeting would significantly in-

crease the likelihood of an earlier rate hike.

With respect to the employment numbers next week, after aparticularly strong labor force survey in March, which

showed a spike in employment (mainly owing to full-time

jobs) and a drop in the unemployment rate (despite a rise in

participation), we expect some payback in April. We fore-

cast a sharp pullback in job growth from a jump of 38,000

jobs in March to just 10,000 last month. A steady partici-

pation rate should allow the unemployment rate to remain

unchanged at 4.9%.

Retail sales and house prices weak in 1Q

The Aussie March retail sales report involved twin shocks:

an unexpected fall in the value of sales in March, and a

very weak volumes report for the March quarter. Sales vol-

umes were flat over the quarter; we had anticipated a 1.0%

rise. The weak volumes result means GDP for the quarter

now is much more likely to have fallen. We had thought

that higher retail volumes would partly offset the drag on

output from the floods in January.

Total retail sales values dropped 0.5%m/m in March. The

more discretionary areas of retailing were weakest, with

department store sales, for example, plunging 3%m/m. The

impact of higher day-to-day living costs on consumer

spending was most evident on discretionary sales, with our

measure of discretionary spending falling 0.8%m/m. Non-discretionary spending also was weak, however, falling

0.3%m/m, thanks mainly to a drop in food sales (-0.4%).

The value of food fell, partly as prices dropped back from

the flood-induced highs reached in February.

As already highlighted, from the RBAs standpoint, such

household austerity continues to provide scope for officials

to sit on the policy sidelines. If consumers were less con-

servative, at the same time that the terms of trade and in-

vestment were booming, the RBA likely would be much

closer to tightening policy. But this weeks retail data sug-

gest that consumers remain cautious, in keeping with the

recent theme prominent in RBA commentary. Indeed, the

RBA this week highlighted the weakness on the consumerfront, with credit growth to households having softened

and house prices having headed south.

House prices nationally fell in 1Q, but the physical approv-

als data for March showed a 9% rise. The latter, though,

comes after large falls in recent months. Approvals are still

running well below housing demand, so we expect house

prices to be supported, at least for now. Indeed, the under-

lying pulse of building approvals and housing finance is

weak. Turnover in the housing market is skittish, and now

prices are beginning to suffer as well. We continue to ex-

pect dwelling prices to perform better than weakening de-

mand for housing finance would imply, given that the ab-sence of a forced sellerdue to robust national income

growth and low unemploymentshould generate some

withdrawal of supply to compensate.

NZ labor market heading in right direction

The recovery in the New Zealand labor market continued

into 2011, with the economy adding 30,000 jobs over the

March quarter. The labor force data were, though, affected

by difficulties with data collection in Canterbury following

0

2

4

6

8

10

%oya

New Zealand: electronic card transactions

2008 2009 2010 2011

Total

Retail

Core retail

3

4

5

6

7

%

New Zealand: unemployment rate

00 02 04 06 08 10 12


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Economic Research


May 6, 2011


Stephen Walters

Ben Jarman

Helen Kevans

the February earthquake, such that a different method from

usual had to be used to estimate data from this area. In the

week after the earthquake, Statistics New Zealand sus-

pended interviews in some areas, resulting in 800 responses

of the 2,200 Canterbury households in the survey sample

not being collected. This implies, though, that just 5% of

the nationwide survey sample of 15,000 was affected; thus,

the impact on the national estimates from this disruption to

data collection was small.

The steady rise in the trend employment rate since the Sep-

tember 2009 quarter suggests, however, that a modest re-

covery is under way in the labor market. Indeed, on an an-

nual basis, trend employment rose by 39,000 in 1Q, or

1.8%. The trend unemployment rate also has remained

fairly stable since 3Q09. Furthermore, on a seasonally ad-justed basis, the unemployment rate fell 0.1%-pt from 6.7%

to 6.6% in 1Q, with the sharp spike in employment growth

being offset by one in the participation rate.

Australia:

Data releases and forecasts

Week of May 9 - 13

Tue Trade balanceMay 10

11:30am Dec Jan Feb Mar

A$ mn 1778 1433 -205 500

Tue NAB business confidenceMay 10 Net balance

11:30am Jan Feb Mar Apr

Index 4 14 9 10

Thu Labor force surveyMay 12 Sa


Unemployment rate (%) 5.0 5.0 4.9 4.9Employment (ch. 000s) 14 -9 38 10Participation rate (%) 65.8 65.7 65.8 65.8

Review of past weeks data

House price indexSa

3Q10 4Q10 1Q11

%q/q -0.3 -1.1 0.7 0.8 -1.0 -1.7%oya 10.8 9.9 5.8 5.0 0.5 -0.2

RBA cash rate announcement

No change delivered. See main text.

Building approvalsSa

Jan Feb Mar

%m/m -11.6 -10.7 -7.4 -5.3 3.2 9.1%oya -16.4 -15.6 -21.8 -13.3 -25.8 -18.1

Retail salesSa

Jan Feb Mar

%m/m 0.4 0.3 0.5 0.8 0.3 -0.5%oya 1.6 3.6 3.1 2.3

Retail sales ex. inflationSa

3Q10 4Q10 1Q11

%q/q 1.2 0.5 -0.4 1.0 0.0

%oya 3.82.7

1.91.1

2.81.8

New Zealand:

Data releases and forecasts

Week of May 9 - 13

Tue Electronic card transactionsMay 10


Total %m/m 2.3 0.4 0.5 -1.1Total %oya 5.5 6.1 5.6 5.5

Retail %m/m 2.4 -0.2 1.3 -0.9Retail %oya 6.4 6.2 5.9 6.5

Review of past weeks data

Private sector wages (ex. overtime)Sa

3Q10 4Q10 1Q11

%q/q 0.6 0.6 0.6 0.4%oya 1.6 1.9 2.2 2.0

Building permitsSa

Jan Feb Mar

%m/m 9.0 -9.8 2.5 2.2%oya -14.9 -29.1 -25.9 -26.2

Labor force surveySa

3Q10 4Q10 1Q11

Unemployment rate (%) 6.4 6.8 6.8 6.6Employment (000) 23.0 -11.0 13.3 30.0Participation rate (%) 68.3 67.9 68.2 68.7

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