Weak consumer sentiment and retail spending figures say that it is starting to feel like a recession, but the latest unexpectedly...
Weak consumer sentiment and retail spending figures say that it is starting to feel like a recession, but the latest unexpectedly strong May labour statistics say the opposite. True, labour force data are lagging the current state of the economy, but home buying data revealed in very current high auction clearances and prices are usually at the leading edge of economic activity. Recent economic readings paint a very mixed picture of where the economy is at and not the consistent signs of softness the RBA needs to provide comfort that it has still too-high inflation on a reliable downward trajectory to 2-3% target range over the next two years.
Last week we altered our cash rate forecast to perhaps two more rate hikes in this cycle to a 4.60% peak. That forecast has firmed with the May labour force data released last week showing a 75,900 rise in employment and a one notch fall in the unemployment rate to 3.6%. Those figures come close to confirming that in the near term, the labour market is running tighter than the RBA forecast in the latest quarterly Monetary Policy Statement produced in early May.
In those early-May RBA forecasts employment was predicted to grow 2.5% y-o-y in June 2023 sliding to 1.6% y-o-y in December. Employment grew 3.1% y-o-y in May placing the RBA’s June annual employment growth forecast too low, unless employment falls around 30,000 in the month of June.
Even if there is a freakish 30,000 one-month blip down in employment in June, beyond in the six months to December, average monthly employment change would need to be around 12,000 a month to get annual employment growth down to 1.6% y-o-y RBA forecast for December. Pointing to how the RBA’s lower employment growth forecasts are becoming out of reach, average monthly employment growth in the first five months of 2023 is 44,000.
Ahead of the next set of RBA economic forecasts out in early-August, there is only the June labour force report in mid-July. It is unlikely, the employment numbers in that report can be weak enough to ratify the RBA’s earlier June employment growth forecast and prevent the need for some upward revision to its annual employment growth forecast for December 2023.
If the RBA revises higher December employment growth, the December 4.0% unemployment rate forecast will need to be revised lower placing pressure to revise higher the December annual wage growth forecasts published in early-May, 4.0% y-o-y for the wage price index and 5.3% for average earnings per hour.
These likely early-August RBA forecast revisions to December 2023 employment growth and wage growth also imply some upward revision to the RBA’s forecasts of inflation – in early-May CPI inflation forecast to be 4.5% y-o-y in December 2023 and trimmed mean inflation at 4.0% y-o-y.
Taken in isolation, the need for these revisions to the RBA’s labour market, wage and inflation forecasts in early-August place pressure on the RBA to hike the cash rate in July and August ahead of the August Monetary Policy Statement with its revised forecasts. That is unless something changes to show that while the labour market and inflation have been stickier and higher than forecast so far, an abrupt move weaker is in sight.
At present strong home buying activity is working in the same direction as strong labour market data to persuade the RBA that more rate hikes are needed. It is possible that high auction clearance rates around 70% in Melbourne and Sydney plus house prices rising at 1%+ per month nationally are a function of temporary forces – shortage of listings of existing homes and high cost generated downturn in new home building relative to high demand for homes bolstered by rising immigration.
Listings of homes for sale currently running around 20% down on last year could lift rapidly as some homeowners seek to take advantage of the lift in house prices in recent months. Also, the cohort of homeowners experiencing distress from rising home interest rates is rising and is being added to in large numbers over the next few months by the peak of the wave of those moving off old low-interest fixed-rates. Distressed sales of homes are likely to rise. It is likely that the supply of homes for sale will lift materially over the next few months.
At best, a pause in rising house prices seems likely as probably still strong demand meets rising supply. A softer change in the home buying story, if it occurs at all, is unlikely to be sufficient to dissuade the RBA from hiking rates more.
What could be a game-changer for the cash rate outlook is if retail spending falls sharply. Retail spending has been slowing in 2023 so far and was flat in April 2023 after rising only 0.4% m-o-m in March and 0.2% m-o-m in February. These small changes in retail sales over recent months have taken the annual growth rate down to 4.2% y-o-y (below the annual inflation rate, 6.8% y-o-y in April) from 7.5% y-o-y at the end of 2022 and a peak reading in 2022 of 19.3% y-o-y in August.
May retail sales will be released next week and based on anecdotal reports from major retailers could show a sharp fall. If that is the case, it would likely herald a fall in real household consumption spending in Q2 increasing the odds of negative growth in real GDP in Q2. It is an ill wind, but the RBA could draw comfort that weak economic growth will cut labour market strength at some stage.
With economic indicators so mixed-strength at present and with the key labour market indicators relating to the inflation outlook still sitting on the strong-side of the ledger, the RBA needs the weaker side indicators, such as retail sales, to turn much weaker to provide cause to stop hiking the cash rate. It could happen, but the greater likelihood is that weakening will be insufficient to prevent the need for one or two more rate hikes.