The latest batch of Australian economic readings have been curiously strong going against the widely held view that high interest...
The latest batch of Australian economic readings have been curiously strong going against the widely held view that high interest rates are pummelling the economy and heralding a firmer Q3 GDP report (materially higher than 0.2% q-o-q recorded in each of the previous three quarters) due in December. Firmer than expected economic reports may also mean that progress will slow reducing inflation and raise the possibility of rekindling inflation in 2025. At the very least the bar has been raised higher before the RBA can deliver a rate cut.
Turning to the various recent economic reports, last week October Westpac consumer sentiment showed an unexpectedly strong increase, up 6.2% m-o-m. The September NAB business survey showed improvement in the indices of both business conditions (past performance) up to +7 from +3 in August and business confidence (expected future performance) to -2 from -5 in August. The latest ANZ survey of job vacancies also showed improvement, up 1.6% m-o-m and continues to track at a high level.
Released the week before, August retail sales increased 0.7% m-o-m, the strongest monthly increase in 7 months and taking the annual change to 3.1% y-o-y, the strongest reading in 15 months and well above the cycle low point reading of 0.9% y-o-y recorded in March this year. The value of home loans continued to rise in August, up 1.0% m-o-m, 23.0% y-o-y – owner-occupier loans up 0.7% m-o-m and 16.8% y-o-y and investor home loans, up 1.4% m-o-m and 34.2% y-o-y.
Also released the week before, Australia’s international merchandise trade surplus continued to hold firm, up marginally from $A5.636 billion in July to $A5.644 billion in August. Allowing for falls in key Australian export commodity prices such as iron ore in July and August, the real merchandise trade performance was likely materially better than the nominal trade performance providing a positive contribution to GDP in the first two months of Q3.
But the strongest of recent Australian reports was the August labour force report released a month ago and showing employment up much more strongly than widely expected and for a third consecutive month. Total employment was up 47,800 in August after a revised 48,900 gain in July. Over the year ending August employment was up 374,700, or 2.7% y-o-y.
This week on Thursday the latest labour force report for September will be released. Employment is expected to rise by around 25,000 and with the participation rate holding at a record high 67.1% that would leave the unemployment rate at 4.2% for a third consecutive month. If the September labour force report comes in as expected or close by it will add to the list of economic reports running at odds with the common perception that economic growth is still weak.
A 25,000 employment gain in September would mean that employment is up around 120,000, or 0.8% q-o-q, in Q3. Add wage growth of around 1.0% q-o-q in Q3 and total wages paid in the economy will be up close to 1.8% q-o-q. After tax the increase in wage income will be greater with the stage 3 tax cuts in play from July 1st. The large increase in total wages in Q3 is likely to drive a bigger increase in GDP in Q3 GDP than occurred in Q2 or Q1.
Taken together with other firmer economic readings over the past month, Q3 GDP seems to be tracking around 0.5% q-o-q, or higher, taking annual GDP growth up to 1.3% y-o-y from 1.0% in Q2.
When the RBA Board meets next in early November it will be presented with a new set of economic forecasts that will need to take account of recent economic indicators that have been curiously strong, on balance.
The RBA’s labour market forecasts need the greatest stronger revision in November. Back in August, the RBA forecast employment would be up 1.9% y-o-y in December 2024. In the August labour force report, employment was up 2.7% y-o-y. Employment would have to fall over the next few months to bring annual growth down to 1.9%. The RBA’s August forecasts also had wage growth moderation to 3.6% y-o-y in December, a tall order given wage growth in the latest report for Q2 2024 of 4.1% y-o-y.
Other RBA forecasts that may need a tweak firmer in November include GDP growth forecast at 1.7% y-o-y for Q4 2024, but more likely to be 1.8% y-o-y or higher given noticeably stronger GDP growth in Q3 probably extending into Q4.
Firmer GDP, employment and wage growth than forecast previously for the end of 2024 means inevitably firmer inflation than forecast previously. While headline annual CPI inflation will still move below 3% y-o-y in the first half of 2025 reduced by one off electricity subsidies, it will bounce back above in the second half of 2025 and to more than the 3.7% y-o-y the RBA forecast for end 2025 back in August.
With these changes in prospect for the RBA’s economic forecasts when released in early November, the RBA is unlikely to deviate from its current policy course of keeping the cash rate high and unchanged at 4.35%, a policy course that is unlikely to change for longer than is widely expected after the curiously strong economic reports over recent weeks.