[HSC] Economist: 28 October — 24 November
The month in review.
There have been a number of key developments in the Australian economy over the past four weeks. The Australian Bureau of Statistics published inflation data for the September quarter, which returned yet another headline inflation figure below the Reserve Bank’s target band. Taking this — and much more — into account, the Reserve Bank decided to maintain the cash rate at 0.75%. News from the external sector was slightly more positive, with Australia recording another large surplus, which will boost economic growth. Finally, last week’s labour market figures provided further proof that there is substantial spare capacity within the economy and neither inflation nor wages are expected to return to desired levels any time soon.
1. Inflation
The Consumer Price Index (CPI) rose by 0.5% across the September quarter, giving rise to an annual inflation rate of 1.7% — a ten basis point increase from the figure recorded for the year to June.
The cost of international holiday, travel and accomodation rose most significantly throughout the quarter, up 6.1%. Tobacco (3.4%). Property rates and charges (2.5%) and child care (2.5%) also saw notable increases. On the other hand, the cost of necessities such as fruit (-3.1%), vegetables (-2.5%) and fuel (-2.0%) all decreased during the September quarter.
The effects of the ongoing drought were also apparent, with prices for meat and seafood, dairy and related products and bread and cereal products rising by 1.7%, 2.2% and 1.3% respectively.
Headline inflation has now been below the Reserve Bank’s 2–3% target band for the last five quarters in a row and eighteen of the past twenty.
HSC Relevance
- Australia’s inflation rate increased marginally to 1.7%, however, it still remains below the Reserve Bank’s target band of 2–3% average inflation over the medium term.
- The RBA forecasts that inflation will remain low — around the lower end of the target band — throughout 2020 and 2021.
- Underlying inflation was measured at just 1.4%, with a weighted median result of 1.2% and a trimmed mean figure of 1.6%.
2. Monetary Policy
When the Reserve Bank Board met earlier this month, they decided to leave the cash rate unchanged at 0.75%. This decision was taken after considering both the domestic and global economic outlook.
The trade and technology dispute between the United States and China is having a detrimental impact upon both trade and investment flows around the world. It is the latter that has had a greater impact upon Australia thus far, with investors being more cautious in the face of growing uncertainty about the economic outlook.
The main weakness within the domestic economy remains household consumption, which is being constrained by slow growth in incomes. The ongoing drought is another unfavourable factor, adding to uncertainty within the economy. However, as relayed by Philip Lowe:
“The low level of interest rates, recent tax cuts, ongoing spending on infrastructure, the upswing in housing prices in some markets and a brighter outlook for the resources sector should all support growth.”
As discussed below, there remains substantial spare capacity within the Australian labour market. This spare capacity is contributing to the prolonged period of weak inflation and reductions in both unemployment and underemployment would be of significant benefit to the Australian economy.
The Reserve Bank projects that interest rates will need to remain low for some time in order to resolve this spare capacity and is open to the idea of further lowering the cash rate in order to achieve its objectives of full employment, price stability and economic prosperity.
HSC Relevance
- The Reserve Bank voted to keep the cash rate at the historical low of 0.75% when they met at the beginning of November.
- The trade war and weak levels of household consumption remain the two most significant threats to the economic outlook, whilst there have been positive developments in the housing market and resources sector.
3. Balance of Payments
Australia recorded a trade surplus in excess of $7 billion in both trend and seasonally-adjusted terms in September — slightly higher than what was recorded in August. The strong result was a byproduct of the continuing weak exchange rate and high commodity prices, which make up approximately half of what Australia sells overseas. Specifically, liquified natural gas exports were up 8% and gold receipts rose by 26%. On the other side of the ledger, the importation of capital goods rose by . 12% across the month, a positive sign for Australia’s investment prospects.
HSC Relevance
- Australia’s run of large trade surpluses continued in September, with the $7.5 billion figure setting a new record for the trend measure, whilst the seasonally-adjusted result was the third largest on record.
- The external sector is likely to make a positive contribution to aggregate demand and economic growth in the September quarter.
4. The Labour Market
Australia’s unemployment rate was measured at 5.3% in October. This represented a 10 basis point increase in seasonally-adjusted terms, whilst the trend figure was steady. Overall, 19,000 jobs were lost across the month, consisting of both full-time and part-time positions.
Underemployment increased to 8.5%, leaving an underutilisation rate of 13.8% — considerably above the 12% that is required to place serious upward pressure on wages. Furthermore, there was a marginal dip in the seasonally-adjusted measure of labour force participation to 66.0%, although this is still 0.4 percentage points higher than this time last year.
Unemployment has increased steadily since February, when it was measured at an eight-year low of 4.9%. The Reserve Bank forecasts that unemployment will remain elevated for some time before falling back towards 5% in 2021. Investors responded cautiously to the news, with the Australian dollar falling by half a percent to 68 US cents due to heightened expectations of additional interest rate cuts.
HSC Relevance
- Australia’s unemployment rate increased to 5.3% in October, 0.4 percentage points higher than where it was eight months earlier.
- There remains substantial spare capacity in the labour market, which is contributing to subdued growth in both incomes and consumption.
Further Reading
This series of weekly articles aims to compile the important economic news of the week into bite-sized summaries with HSC-specific takeaways.
You can expect a new article every Sunday!
