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Ben Kingsley Blog post by Ben Kingsley

RBA Cash Rate July 2019: Twice in a Row?

Today Governor Lowe and the Reserve Board met and they changed the cash rate for the second consecutive month, dropping the cash rate down by another 25 basis points.

This is reasonably well-signaled, even though some economists still thought that the RBA may wait until August.

So, what is their agenda? Well, if you look at the minutes — and also a couple of speeches made by the senior executives inside the Reserve Bank over the last month or so — it’s very clear that they are going after unemployment. They want to move the unemployment rate down into the low 4’s. Why are they wanting to do that? Well, their argument is the spare capacity in the employment market is actually impacting wages growth. If they don’t get this wages growth, then they’re not going to get economic growth overall, and they’re also not going to get any inflationary pressure. So that is the big news story here.

They have really set out their agenda to go after unemployment. And so this could mean further rate cuts throughout the course of this year, and into the New Year, until they get that unemployment rate down and the spare capacity in the marketplace is moved. Ultimately, then we can start to see that wage growth flowing through, which means consumer spending — the whole story gets better and better as that rolls out.

 

Firstly, let’s go globally before we get into the domestic economy.  The big news story is still the trade tensions between the US and China. We have seen some reports come out in this past month — one, notably from the World Bank, which talked about these trade tensions impacting global GDP by 0.3%. Now, this is a significant number — so we’d like to see that this gets sorted out as sooner rather than later. We did see some positive tweets coming out from President Trump in regards to his meeting with the president of China; positive talks moving through. So hopefully we’ll see some more resolutions in regards to this. And that’s really the global story.

 

When we get into the Australian story, we’ll start with GDP. So we did see the March quarter numbers come out — growth for the March quarter of 0.4%, which meant that the annual pace of growth in the economy has dropped from 2.4% down to 1.8%. That’s the slowest rate of growth in our economy since 2009. So, again, you can see the reason why the Reserve Bank is trying to get stimulus back into the economy.

This is being weighed down, in most respects really, by the consumer sector and the housing downturn that’s been playing out since late 2017.

 

Then we move on to the unemployment story. The unemployment story looks like this…

We saw unemployment rate in May; steady at 5.2%. So, from a positive point of view, we did see 42,300 jobs created — and this is the strongest in the past 12 months. So that’s a good news story. The other interesting story is the participation rate. Coming back to what we were talking about earlier, in terms of the spare capacity — we’re now starting to see the participation rate at 66%, which is the highest it’s ever been in terms of people looking to get employment. So there’s positives and negatives with that — the additional introduction of more people looking for work still keeps this spare capacity in the marketplace, hence, there’s more work for the RBA to do. On a negative point of view — I think the only thing negative in the unemployment numbers was the part-time rate. It was actually 39,800 new part-time jobs created, whereas full-time was only 2,400 jobs. But that was the main number. Again, we had an election during that month so that’s something to look out for.

 

Let’s turn our attentions now over to the retail spending. This is the April numbers so it’s, again, Lag data and I think it’s important to note this April we had Easter school holidays and some uncertainty with the start of a federal election campaigning going on. We saw retail spending at -0.1 for the month. That’s the second time it’s fallen in the last five months. If you think about that, it doesn’t quite make sense, right? Because ultimately with a growing population, you have more people. You don’t like to see retail spending in contraction states — so the annual pace has now dropped from 3.5% in March down to 2.8% in April.

Over to the private sector — credit growth. We saw some very weak data in May there — just a 0.2% increase, bringing the overall increase for the year at 3.6%. Again, this is a very weak number — it’s the weakest has been for over six years. So, more work to be done in this area.

 And this was across the three sectors too — where we actually saw a weak credit growth in business and in housing and also in personal credit.

 

So this would also be playing on the minds of our regulators and also our politicians, in regards to getting the economy moving.

We move on now to consumer sentiment in June — so down from 101.3 down to 100.7. This was also despite that first rate cut, so I suspect that once again the RBA has seen this rate cut and said it’s not flowing through just yet. So that’s the reason why they pushed for this immediate second rate cut in July.  Consumers are really still worried about the overall economy — that’s what we saw coming out in regard to that consumer sentiment survey.

When it comes to the business sentiment survey, which is May data, we saw a sharp improvement post-election. We saw business confidence move from a zero reading to a +7 post-election — and this is the highest it’s been in ten months. So you can see that business people do want consistency; they want to make sure there is clarity around the future direction of policy. So we’ve seen that bounce.

Also positive — we saw the unemployment index inside that that survey from NAB moving from a -1 to +2. On the negative side, the business condition index, which was sitting at 3, has moved down to zero. So the result in April was +3 and we’re now down to zero. I think this is also a consequence of people seeing how poor the economy has been operating in the first 3 – 4 months of the new calendar year.

 

This leads me into one of the big observations inside this Business Survey — and it’s something that is correlating into the results we’re seeing. Now, this was just released yesterday from CoreLogic, and that big bounce was this…. so when the question was asked inside that survey “time to buy index” — the time to buy index increased by 1.8% to a reading of a 116.9. Any reading above 100 is optimistic, any reading below 100 is pessimistic, but here’s the big one: house price expectations.

House price expectations increased by 22.7. So from a reading of 89.7 — so we were pessimistic about house prices back in the April —  it has now bounced incredibly to a 109.7. So people think the value of their properties will grow, and that is the perfect segway into the CoreLogic data we’ve just received yesterday.

 

The CoreLogic data showed for the first time that house prices in Sydney grew by 0.1%. So they’re still down for the quarter — down for the quarter -1.1, but positive growth. Melbourne also had positive growth for the month — it grew by 0.2%.  The quarterly result for Melbourne is -0.6%. So this means that since July of 2017, which was the peak of the Sydney market, we’ve now see our first growth month. In regards to Melbourne; the peak of the Melbourne market was in November of 2017 — we’ve now seen our first peak month. Overall nationally, we’re still down -0.2%, and overall for the quarter we’re down 1% overall nationally annualised, we’re still down 6.9% — but, fundamentally, down by our two biggest cities. So when we do the wrap-up of the other centres — Brisbane down -0.6%, Adelaide down -0.5%, Perth down -0.7%, Hobart positive 0.2%, Darwin -0.9%, Canberra down -0.9%. So, combined capital cities is -0.1%, combined regional centres -0.4%; giving us our overall national -0.2% story. But this is June, okay? So one month after the Federal Election.

What we’re seeing with the rate cut starting to flow through is buyers are on the ground and Auction Clearance Rates are improving — so we could see further improvement in July. I anticipated that we would be at flat or positive by August/September — but it could be even early than that. We could see a positive price growth story as early as July of this year (this month). But one thing’s for sure: we are definitely moving in the right direction there. When we get to this stage, what’s ultimately going to happen is people’s confidence will return and, hopefully, so will their consumer spending.

 

This week also sees the return of the 46th Federal Parliament of Australia, and the big agenda item we do need to see from an economic point of view is these tax cuts. So we want to see these tax cuts passed as quick as possible through the House of Reps and then through the Senate. This is going to provide further stimulus to the economy and, hopefully, get retail spending and consumer confidence moving in the right direction. That will be an interesting story here.

 

I want to finish on a couple of points. Firstly, I want to say that what is interesting about the RBA’s decision to go aggressively after unemployment, and try and lift the real wages in this nation, is that from their observations around what APRA did, in regards to impacting credit policy and also now effectively giving them a second lever — so I’m now calling this a top-down lever —the RBA has confidence that they have a top-down lever in regards to APRA. So, APRA will have the ability to control credit, whereas traditionally monetary policy was a bottom-up lever that would allow to bring cash into the economy.

Now, the RBA can bring cash into the economy, but you can start to see APRA playing a bigger role in controlling property value.

So it means that that money can be cheaper for business, for personal credit — which, in business sense, is actually very, very good for the economy because it means growing jobs — but you can actually still see a APRA playing a more important role, in terms of ensuring property prices don’t get ahead of themselves like they did in 2017. So it’s going to be an interesting time. I don’t want to see property prices blast off again, nor do the regulators and nor is it good for the economy. What we do want to see is steady gradual growth over the course of the next couple of years.

 

Finally, what does this mean in terms of this cash rate cut — what are the lenders going to do?

So we saw the ANZ and also Westpac receiving a lot of negative press and scrutiny, in regards to not passing on the first cut. For the very first time we saw our Federal Governor Philip Lowe accuse them of not doing the right thing by their customers and to shop around. That’s never been done before. So what will ANZ and Westpac do? Will they pass on the full 25? And then what will see the CBA and NAB do, considering that they did pass on that full 25? And that’s the balance, in regards to borrowers versus deposit holders; in regards to the interest that they earn on their money in the bank.

So, interesting times ahead. I don’t think we’re done. Now that the RBA has laid out a clear agenda — movement on unemployment — so we’ll probably see further rate cuts later this year after that tax stimulus rolls through, and then we’ll see where wages growth goes. And that will ultimately decide on what the RBA does in the future.

Thanks for watching.

 

 

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