Rates to stay on hold
WESTPAC’S prescient economic analyst and rate forecaster Bill Evans says the Reserve Bank of Australia is likely to keep rates on hold for a while yet.
He says economic conditions, while showing improvement relative to the last 12 months, are still markedly weaker than a year ago. The economy, however, will be sufficiently buoyant to tempt the Reserve Bank to await further developments.
To sum it up, he says, the factors are these: Confidence is solid; housing strength is uncertain; there’s a weak job market; and the world economy is soft.
Firstly on business, ‘‘we have already pointed out the evidence in 1996 when a Coalition victory (after a long period in opposition) was greeted with solid boosts to business confidence although business conditions were little changed.’’
The NAB survey on business confidence which printed this week showed a similar story. The measure for business confidence surged from +4 to +12 the highest read for 3.5 years; that contrasted with its average read over the past 6 months of around zero.The measure for business conditions also improved from 7.4 to 4.2. That compares with an average over the last 12 months of around 6 and an average in the 6 months to September 2012 of 1.8.
There was only a modest improvement in the employment series. It improved from 9 to 6 but was still firmly in negative territory. Over the past 12 months the employment index has averaged around 6.6, compared to 1.6 in the six months to September 2012.
On the other hand, Consumer Sentiment failed to retain all the gains from around election time. The Index of Consumer Sentiment fell by 2.1 per cent in October from 110.6 in September to 108.3.
Consistent with the weak reads for the employment component of the business survey, we saw that respondents remained concerned about their jobs. The Westpac Melbourne Institute Index of Unemployment Expectations rose by 0.6 per cent in October, indicating ongoing concerns.
The Index is 10.1 per cent above the level in November 2011 (the date of the first rate cut in this cycle), indicating significantly more heightened concerns around job prospects than at that time. That contrasts with the overall Consumer Sentiment Index which is 4.7 per cent above its level in November 2011.
The Employment Report for September showed a weak labour market. Total employment rose 9100.
This is an insipid rate of employment growth as total employment has lifted just 0.8 per cent per annum, or by just 95,500 in the year to September. Total hours worked contracted, bringing the annual pace down to 0.6 per cent a year, more in line with annual growth in total employment. Surprisingly, the unemployment rate fell to 5.6 per cent from 5.8 per cent in August.
So far this year, most of the growth in employment has been in part-time female employment.
Recent increases in house prices are another reason for the bank to delay any move. ‘‘Last week I wrote, ‘Our judgement remains that the housing recovery will continue to be a ’stop-start’ one, uneven across both segments and states. There are significant headwinds that are yet to fully impact with some markets facing a significant increase in the supply of new dwellings (Vic, WA) and the mining downturn yet to play through fully to housing (WA, Qld)’,’’ Mr Evans said.
The Consumer Sentiment survey lent some credibility to those views of a "stop-start" housing market.
There was a shock reading on whether now is a good time to buy a dwelling. That index fell by 10.3 per cent from 145.0 to 130.0. There were some big falls in individual states particularly NSW (22.5 per cent) and Queensland (11 per cent). It may be that affordability issues, particularly in Sydney, are already weighing down the attractiveness of property.
‘‘Finally we received the latest global growth forecasts from the IMF. Our downbeat global growth outlook for 2014 has been a key reason behind our view that the RBA will continue cutting rates in 2014.
‘‘The IMF lowered its global growth forecast from 3.8 per cent to 3.6 per cent - in the right direction but still well above our forecast of 3 per cent,’’ Mr Evans said. ‘‘The main reason behind the IMF downgrade is its view on developing economies and emerging markets.
‘‘It retains an overly optimistic view on US and Europe.’’
‘‘ We are comfortable with both our decisions last week. There is enough evidence around business conditions and confidence for the Reserve Bank to seek further information before moving rates in February. However global growth; labour market; housing and the consumer continue to point to the need for further stimulus next year.’’