Key insights from the week that was.
For Australia this week, the main data event was the release of the Q4 CPI. Headline inflation rose 0.7% in the quarter, a touch ahead of Westpac/market expectations. Notably, 0.63ppts of the 0.7% increase came from tobacco (0.29ppts), fuel (0.14ppts) and food (0.20ppts), the later in large part due to the impact of the drought. Given the concentration of inflation in this small number of components, it is unsurprising that core inflation (the trimmed mean) remained soft at 0.4%.
Contrasting the quarterly trimmed mean print against the annual change of 1.7%yr and the 1.6% six-month annualised rate highlights that the underlying inflation trend is not only soft but also stable. This is expected to remain the case hence, with the six-month annualised pace of core inflation forecast by Westpac to only touch the lower bound of the RBA’s 2-3%yr target range once in 2020. This highlights the difficulty the RBA faces in meeting its mandate and the need for additional easing.
Economic slack was also clearly evident in the December NAB business survey (note the survey was actually conducted in the first half of January). Business conditions remained sub-par in the month, and forward orders point to this weakness persisting. This corresponds to our own Westpac–MI Leading Index which, in December, pointed to growth well below trend three to nine months ahead for a thirteenth consecutive month. Unsurprisingly given current conditions and the outlook, NAB business confidence deteriorated again in December to its weakest reading since July 2013.
The positive from the December NAB survey is that the employment sub-component continues to indicate the unemployment rate will remain stable over the next six months. The caveat to this finding is that the overall tone of the NAB survey as well as other forward indicators such as job vacancies point to a weaker outturn for employment and hence a rising unemployment rate – as Westpac is forecasting. Note that this survey coincided with summer’s bushfires but preceded the coronavirus outbreak.
Turning then to the US, the FOMC kept the stance of policy unchanged at their January meeting. Only two changes were made to the decision statement, but both were material.
First, the description of consumption growth was revised down from “strong” to “moderate” after disappointing retail sales in November and December. Following the January FOMC meeting, Q4 GDP confirmed a broad-based softening in consumer spending through 2019, with annual growth printing at 2.6%yr in Q4 2019, materially below the 3.4%yr peak seen in mid-2018. Ahead, we look for consumption growth to slow to around 2.0%yr as job growth slows and wage gains remain modest. Coupled with weak business investment, which contracted for a third consecutive quarter in Q4 2019, this will see GDP growth materially-below trend in the first half of 2020.
Also evident in the FOMC’s January statement and press conference was increased concern over inflation remaining persistently below target. This has been a feature of the US economy (and the world) for much of the past decade, but with little-to-no progress seen during two above-trend GDP growth years and with momentum now slowing, arguably the FOMC is running out of patience.
As a result of both trends, from June we see a sequence of three cuts from the FOMC. This is assuming the status quo for trade is maintained and absent a material economic shock from the spread of coronavirus.
In China, this week saw the number of coronavirus infections rise to rival SARS, circa 8000. This is a concerning development, particularly given the short timeframe in which it has occurred. However, the rapid rise in cases is arguably, at least in part, due to the prompt action of authorities and better screening. Moreover, thankfully the mortality rate remains a fraction of that for SARS, and person-to-person contagion outside of China has been limited. The World Health Organisation’s declaration of an ‘international public health emergency’ overnight will further help to contain the spread of the virus, with resources to be provided to countries in need to restrict the virus’ spread.
An economic assessment of the virus’ impact is impossible at this time. Its capacity to have a meaningful impact on the Chinese and global economies is clear from its rapid spread and the consequent suspension of transport and manufacturing activity in affected regions. However, for the economy, the persistence of the outbreak is as important as its scale.
If the quick actions of authorities contain the virus, then economic activity will quickly return to normal. This was seen in China in 2003 when SARS was active, with a weak Q2 (annualised growth of 4% versus 12% in Q1) followed by a resurgent Q3 (growth of 15%) and stabilisation in Q4 (growth of 11%). That said, if the virus continues to spread, then the shock could be materially larger and broader based. For Australia, restrictions on travel will be key, affecting the key services sectors of tourism and education, as highlighted by Chief Economist Bill Evans.
