Key insights from the week that was.
This week, inflation and business conditions were the key points of interest for Australia. Offshore, the FOMC focused on the risks to the outlook.
With the market having shifted from pricing in the probability of a rate hike to a rate cut in recent months, there was considerable interest in Australia’s Q4 2018 CPI report. While the headline reading did beat expectations (0.5% versus 0.4% consensus) for the first time in two years, the primary talking point remained the dearth of underlying inflation pressures. The average annual pace of the two core measures came in at just 1.8%, and the six-month annualized pace was weaker still at 1.5%. Both outcomes are a long way from troubling the 2.5% mid-point of the RBA’s target band. The detail of this update confirms to us that this trend will persist hence.
Key to enduring weakness in aggregate inflation is housing. Disinflation in rents and house purchase costs continue to hold this key component of the CPI (15% of total) at multi-decade lows. Inflation for appliances and furniture has firmed over the past year, arguably owing to pass-through from the weaker Australian dollar, but inflation in this sector is still very soft at just 1.0%yr. The effect of competition in the retail sector is also on display in ongoing deflation for clothing and footwear. Come Q1 2019, headline inflation will be hit by oil price declines (0.1%; 1.4%yr). Annual underlying inflation is set to remain unchanged at 1.8%yr, on our preliminary forecasts.
The January update for the NAB business survey was certainly attention grabbing, with business conditions suffering their largest monthly decline since the GFC to +2 – the softest read since September 2014 and a long way below the +18 average of the first half of 2018. Business confidence was unchanged in the month at +3, but that reading is still below average and also well down from +9 in the first half of 2018. Admittedly, this survey can suffer from abnormal seasonal fluctuations, but if taken literally, these outcomes indicate policy makers’ expectations for above-trend growth should be marked materially lower.
On that point, ahead of the RBA’s first meeting for 2019 next Tuesday and the subsequent release of their February Statement on Monetary policy on 8 February, Chief Economist Bill Evans this week provided his view on likely changes to the RBA’s forecasts. While we see the RBA marking down their growth forecast to 3.0% for 2019 and 2020, this will still imply they believe the Australian economy can and will grow above trend. In line with the deterioration in the NAB business survey, Westpac instead see growth slowing below trend to 2.6%yr in 2019 and remaining there in 2020. This will occur as a result of a weak consumer and declining housing investment, both affected by ongoing declines in house prices. On the back of their optimism, Westpac continues to believe that the RBA will remain on hold through 2019 and 2020.
Shifting offshore, the FOMC’s January meeting was the key event this week. In the decision statement and Chair Powell’s press conference, caution over the outlook was paramount. This is not because their view of the US real economy has soured, but rather owing to the many cross-currents (risks) they perceive. Top of their list of concerns are decelerating growth in China and the broader global economy as well as the potential effect Brexit could have on the UK and Europe, and hence on the US. Also being watched carefully is US fiscal policy. While their Federal government has been reopened, it is only for three weeks. A lasting solution to this political malaise seems a long way off, so too the safe-guarding of confidence. We continue to see two further hikes from the FOMC in June and September 2019, but this is conditional on the above cross-currents abating and the US real economy asserting its strength.
In Europe, Q4 GDP met market expectations for a subdued 0.2% increase. Annual growth of 1.2% through the year saw the annual average for 2018 decline from 2.5% to 1.8%, slightly below the ECB’s December projections of 1.9%. As this is only the initial flash estimate, detail is scarce, but national agency releases provide some information on the country breakdown. Here, France recorded 0.3% as exports offset stalling consumption; Spain surprised to the upside with 0.7% growth, continuing a robust trend; while the headline-grabber was Italy, a 0.2% contraction marking a technical recession. On a more positive note, employment data in the week showed the unemployment rate finished 2018 at 7.9%, continuing progress from the 8.6% recorded at the end of 2017, and consumer confidence readings edged up from earlier declines. Ultimately that paints a picture not too dissimilar from other global economies: a strong labour market counterpoised by fading growth momentum amidst a cloud of general geopolitical uncertainty.
Finally on China, the official NBS PMI remained below 50 for a second consecutive month in January as a result of continued weakness in external demand (new export orders remained at a low back to end-2015) and the backlog of work to be completed being depleted further. This clearly highlights the effect of softening global growth on China’s economy. Pleasingly though, the services PMI strengthened in the month to be in line with the average of 2017 and 2018. This result highlights the robust health of their domestic economy in trying circumstances. With authorities having seen results from their drive for quality growth, and given cyclical momentum is now being encouraged, domestic momentum should remain robust in 2019.
