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Empower Wealth Blog post by Empower Wealth

RBA Cash Rate – February 2020

On this first Tuesday of February as part of the new 2020s, the new decade, the RBA had a tough decision to make today.

They had some really positive economic data flowing through from the end of 2019 that consisted of a really good unemployment story. It also said that retail spending had at a bounce in November, so that was positive. Ultimately, there was also some okay inflation data, which we’ll get to in a minute. Has the RBA kept the cash rate on hold? That’s a good question.

The second part of that though is on the cut argument, and the cut argument consists of the economy moving forward is going to face a lot of headwinds.

Firstly, we’ve had a horrible, horrible bushfire season. Lots of lives lost tragic circumstances thousands of properties are being destroyed. From that point of view, that’s going to have an economic impact. We’ve also seen the other big news really around the coronavirus out of China and what that’s going to mean for the economy here. Obviously, tourism numbers, the federal government on the weekend also deciding to ban travel into Australia from China to try and stop the spread of the virus. And also, what that means for one of our other biggest exporting industries, which is our education industry.

With that imbalance, what did the RBA decide to do? Well they’ve kept their powder dry.

They’ve kept the cash rate at 0.75 and that’s on the back of those unemployment numbers and they want to see some more data coming through to see exactly where the economy is moving. Now on the back of the coronavirus and what’s going to happen there and the impact on the Australian economy, there’s probably still a very very strong chance that we’re going to see a rate cut either in March or April of this year. So all they’ve really done is prolong that decision and so we will see what we’re looking at there.

Now, let’s take a look at some of the economic data supporting some of those decisions and as we do around the grounds.

Looking at the overseas markets, the three biggest stories over the last couple of months have really been these, and we’ve been talking about the first one for quite a while. And that is the US and China signed their phase one trade deal. Now, that has really meant that the outlook for most of the global economies has been more positive. We’re seeing that reflected in regards to the share prices, only until recently, which is another big event which I want to talk about. But effectively, what we have seen is that phase one deal’s done and now we get some certainty around global trade and what’s happening in the US and China. We’re seeing those equity markets really pop.

The second new story is the Brexit story. We saw just recently that the UK has left for Brexit, United Kingdom has left the EU, and so we will see that transition take shape. Now in terms of what does that really mean for the Australian economy? Not a lot. They’re not a big trading partner of ours. But still, any strong free trade agreement with a trading partner and obviously old friends in the UK, that would mean a positive new story for us but I don’t think it’s material enough to say that it’s going to be a bonanza for our economy here.

Finally, the story that I mentioned earlier, the coronavirus. This is a developing story. It is a significant event, obviously from a health perspective, but also economically. We saw the Australian government, as I mentioned, in terms of banning travel from China into Australia to stop the spread of this virus as they work on a vaccine. We’ve obviously seen the US do similar things. Globally as this story develops, it is going to have an impact on the global economy, and we’ve definitely seen that in terms of the last couple of days on the equity markets. The Chinese market is obviously re-opened after the Chinese New Year with a significant fall. US has also dropped significantly as well as the Australian market. That is playing out as I suppose the risk appetite grows around what’s happening in terms of this particular virus and the spreads. Hopefully, a vaccine will be developed and we will get on top of that particular virus, but that is definitely going to be a significant impediment in regards to global growth, and so we’ve got to keep an eye on that.

And now, what’s happening around here?

When we turn domestically, certainly as I was saying before, the bush fires here in Australia has been tragic. Thousands of properties lost, other assets included in that. From an economic point of view, we will see governments having to spend more in terms of not only fighting these fires at state and federal level but there’s also the recovery program and the rebuild program, which is going to cost many, many millions and potentially even billions of dollars.

In addition to that, we still got the ongoing challenges around the drought, certainly in the outback of Queensland and New South Wales. That’s continuing to negatively impact our economy. That’s also an important measure for us to consider.

When we go to the inflation data, we did see the headline inflation data push higher, which I was a little bit surprised.

Most economists didn’t think it would go that high. Headline inflation was up 0.7 for the quarter, while the trimmed main measure rose, just .4. The annual rate of inflation sits at 1.6, which is below the two to 3% target range for the RBA has set itself.

Now, what was in that data? Fruit promises up 6.9% over the quarter, beef and veal process rose 2.9% on the back of the drought conditions that we mentioned. Higher oil price has also led to a 4.4% rise in automobile fuel prices and higher tobacco. Taxes have also flowed through with an 8.4% increase on tobacco. So kids, everyone don’t smoke. It’s not good for you.

In terms of non-tradeable inflation, that jumped 1% in the December quarter. Now, this is the biggest quarterly gain in nearly five years. What this reflects is, because it’s important to understand what is non-tradable inflation. This is what we talk about when our Australian dollar guys down. So when the dollar goes down, our imports cost more to bring in and retailers pass their margin on, and that flows through to high prices. That is not something that we can manage easily, because if those goods cost more to acquire and import, that’s obviously going to fly through to the inflationary price.

In terms of the contrasting, which is tradeable inflation, which is basically where demand and supply are really taking shape. We did see that that has only increased by 0.2. Again, we don’t necessarily have that sort of price pressure based on wages pushing prices up to see that inflation moving forward. That would be is still a concern for the RBA in regards to the trimmed inflation that we look.

 

Let’s look at unemployment now.

We definitely saw a strong number in the lead up to December. The December number data was really strong. We added 28,900 jobs, led mostly by part-time jobs. Obviously, our Christmas and summer jobs numbers was good. There was a minor fall in full-time positions, but overall that led to the unemployment rate falling to 5.1%, and that means that we end 2019 with the lowest in nine months. That’s a good news story.

That’s what the RBA is seeing in regards to these positive data coming through.

Let’s recap the whole all of 2019. We saw the Australian economy add 262,500 new jobs. Now, to put that in perspective, in 2018, we created 269,500 new jobs, so very similar to 2018. But 2017 was obviously a very strong year for job creation, where we created 415,300 jobs in 2017. Now, the other thing that we need to focus on more and more is the participation rate. The labor force participation rate was steady at 66%. That is what we’re talking about in terms of spare capacity in the labor market. There’s still room for movement in regards to that, and that’s why the RBA still maintains its focus on getting full employment, and that full employment figure looks around 4.5% to maybe 4.75% as a full employment figure, which will put pressure on wages growth. That’s our unemployment story for the month of February.

 

In terms of the credit and lending data, we have seen some positive stories here.

What’s happening with credit is the decline in credit growth are stabilising. We did say housing credit grow by .3 of 1% in December. The upswing of the housing market has been led by owner occupies. They are out in force and they’ll continue to be in force into 2020. They expanded by 0.5 of 1% and there was no change in investor lending. As mentioned in regards to housing and mortgages, it’s going to be one of those times where households with those low interest rates are going to continue to pay down debt and improve their balance sheets. It’s important to understand that, that when the reserve bank adjusts interest rates down or we’re at these historically low levels, that money is still flowing into the household. Whether we’re spending it now or putting it into our savings or to pay debt down, it’s still having an impact in regards to the overall economy.

Now on the back of all the landing story, I think there will be a housing pickup in 2020. We’ll see more momentum and I expect those credit numbers to improve and continue to grow through 2020.

We’ll keep an eye in the coming months on building approvals. We did see some positive numbers coming out on the back of our November data. We saw high rise numbers improved, but they do bounce from month to month. We want to see that trend line improving, because construction and lending are only going to be led when those approvals are starting to come through. We’ll keep an eye on that.

In terms of business credit, we saw a .2 rise in December, and that’s the second month in a row where we have seen an increase. But it’s still overall annually unchanged at 2.5% and there is still some concerns in the business sector. But there’s uncertainty around the coronavirus, around what’s happening at the domestic and global economy, and that is obviously leading to less business lending.

 

Let’s focus now at the Australian business conditions.

What did that look like? We saw the NAB Business Survey come in with some soft numbers. Business confidence fell to the lowest level since 2013, that’s July 2013.

Now, that’s going to be compounded by bush fires and drought conditions, which were occurring really early, if you remember in December. So that was playing out. Now we’ve got what would be considered some sluggish demand through the Christmas period. The confidence index fell at two points to be -2. The business conditioning index slipped one point. Still +3, so the conditions still remain above the lows that we reached earlier in the middle of the year, so they have definitely improved as we started to say the RBA cutting rates. But they had remained below the 2018 averages. We’ve got to keep an eye on that.

And as I said, the coronavirus is going to play out negatively in regards to those business confidence numbers. That’s something we need to keep an eye on.

 

Consumer spending.

We did see really positive numbers in November as I mentioned those earlier. Led by Black Friday sales. The consumers opened their wallets, they became buyers again, and we did retail sales record the biggest monthly gain in two years arising, .9 of 1%. A good news story there. I just wanted to highlight some of the best performing sectors: department stores 3.4%, climbing footwear and personal accessories 3.1% up, which were the fastest growth rates for some time, household goods saw a 1.2% rise, and while spending in restaurants and cafes also posted a healthy .9% rise over that time.

Now, we don’t get the December data until Thursday, so we can’t report on that, but the commentary and the feedback so far has been that it’s been a weaker Christmas and Boxing Day sale period. We don’t think that the consumer has continued to keep their wallet open. That’s obviously not necessarily great for the economy because we need that consumption spending to improve, remembering that almost 60% about GDP is on consumer spending.

 

Now, I want to turn the attention now to house prices.

I don’t put too much weight into the January result, so I want to focus more on the end of the year. The reason why I don’t focus too much on the January results because there’s isn’t a lot of activity happening in our big centers. It’s mainly regional sales, and obviously with the bush fires and everything that’s been going on, I don’t suspect it’s been a standard year or a standard selling season for our regional and seaside location. With that in mind, I don’t think the data is reflective, so I want to, again, focus really on what happened in 2019.

For the dwelling prices in December, we’re up 1.2% for the month, which is a six straight months of gains. On the year, dwelling prices for the capital cities rose 3%, led by Sydney, which was also up 1.7% and on Melbourne, also 1.4%. Our houses are outperforming units at the moment, obviously with the large concerns around medium and high-density accommodation. The premium markets are the ones who have bounced back. They were the ones that led the falls the most, but they have had a terrific rebound. They are up 5.6% in 2019, compared to only 1.1% rise across the lower quartile. So the top quartile, the top 25%, of properties have really bounced and those property process gains have been significant.

That’s the story right now for the housing.

I will talk more about the housing story in our podcast over the coming weeks as we’ve finished our 2019/20 Summer Series, so tune into some conversations around the outlook with Bryce and myself as we look in more depth into 2020 and what we think is going to happen in the property market.

 

So in closing the RBA has kept the cash rate on hold at 0.75%. I don’t think it’s going to stay there for long given the economic headwinds that we are going to experience both globally with the coronavirus but also domestically in regards to what’s happening on the jobs front. From my point of view, it’s going to come it’s either going to be a March or an April cut but for now, the RBA has kept their powder dry.

 

Finally, again on the property front, if you’re thinking about investing in property or you’re going to make a downsized move, or an upsized move, or you’re a first-timer coming in, it’s always important at the start of the year to start doing your research. Really, really important. There is going to be strong demand from owner occupiers. We’re seeing that ad in the field. Our first time buyers were definitely seeing that happening out in the fields. Our buyers agents are getting that feedback already.

Positively, we’re going to see some new listings. So if you’re looking to do your research, now’s the time to start to see what’s coming online, what new listings, because those new listings are going to flood in over the course of the next couple of weeks and we’ll start to see the new auction season starting to take shape.

So get out there, do your research, get your understanding of value, and all the best in terms of your property pursuits for 2020. Again, if you need help, you know where to find us.

Until next month, remember, knowledge is empowering, but only if you act on it.

 

 

 

 

 

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