Key insights from the week that was.
Despite the RBA leaving policy unchanged for a second consecutive month, Westpac-MI Consumer Sentiment fell by 0.4% in August. At 81.0, the headline index suggests extreme pessimism remains firmly entrenched, with confidence at levels only seen during periods of major economic dislocation over the survey’s near fifty-year history.
With no constructive response to the RBA pause, it remains clear that fears around the interest rate outlook and cost-of-living pressures are continuing to weigh heavily. This is evident across many of the survey’s sub-indexes, with households’ assessment of economic conditions, family finances and spending intentions on ‘major household items’ all well below their long-run averages. Housing affordability is also a major concern, with house price expectations rising to a cycle-high whilst ‘time to buy a dwelling’ held at historic lows. This pressing reality will weigh on the housing market recovery into the medium-term.
The latest NAB business survey provided further confirmation of a slowdown in business conditions, the headline index down 1pt to +10 in July. An area of growing concern has been the deterioration in forward orders. Having remained in contraction for three consecutive months (–5 in May; –2 in June; –1 in July), the survey points to a subdued near-term outlook, particularly for retail. That said, the trends in overall business conditions look to be broad-based by industry and state. Given these circumstances, it is unsurprising that business confidence is soft and fragile, with a sustained reprieve unlikely in the months ahead.
Offshore, the key data for the week came from the US and China.
US CPI inflation met the market’s expectation in July, headline and core consumer prices rising a benign 0.2%. Annual headline inflation ticked higher given July 2022’s flat print, from 3.0%yr to 3.2%yr; but annual core inflation edged down, from 4.8%yr to 4.7%yr. The detail of the report was also constructive. Having been broadly unchanged April to May, the price of ‘food at home’ rose 0.3% in July, but this uptick was offset by a deceleration in ‘food away from home’ from 0.4% to 0.2%, signalling less pressure from wages growth.
Core prices meanwhile signalled a further softening in discretionary demand. For a second consecutive month, core goods prices declined, led lower by used car prices and as apparel prices held steady. For services, ‘lodging away from home’ fell 0.3% following a 2.0% decline in June. And airfares dropped 8.1% for a fourth consecutive decline. Helpfully, June’s step-down in shelter inflation was sustained in July; although, at almost 5% annualised, shelter inflation remains much higher than the pre-pandemic average near 3%.
In August, headline inflation is likely to be higher given the recent energy prices uptrend. And, over the next few months, core prices may also strengthen given the recent sizeable falls in a number of key sub-categories. But the trend into year-end continues to point towards six-month annualised inflation being around 2% at December, and annual inflation returning to target over the first half of 2024. Such an outturn would set the stage for rate cuts beginning March 2024 as per our forecast.
Turning the clock back to June, the US trade deficit narrowed to US$65.5bn largely due to a US$3.1bn drop in imports as exports slipped US$0.3bn. Slowing consumer demand saw most import categories tick down; however, there was notable strength in car imports as order backlogs are filled.
Over in Asia, China’s annual inflation rate fell to –0.3%yr in July, the first annual deflation print outside of COVID since 2009. On a monthly basis, prices did rise 0.2% in July, but this followed five consecutive negative outcomes. Food prices were responsible for the annual decline, food prices falling 1.7%yr while CPI ex food was flat and CPI ex food and energy up 0.8%yr. The perspective given by services inflation is also constructive, the annual rate accelerating to 1.2%yr in July having averaged 0.9%yr the three months prior.
Still, a rapid reversal of recent weakness is highly unlikely. Excess capacity in the economy has meant that the reopening has not led to price pressures. With producer prices –4.4%yr, further disinflation for consumers in China and, via exports, across the world is still to come. The uptick in the input prices component of the manufacturing PMI to an expansionary 52.4 in July however suggests downside risks regards inflation and activity are receding.
The July trade surplus also received a lot of coverage this week as export and import growth plunged, respectively –14.5%yr and –12.4%yr (from –12.4%yr and –6.8%yr in June). Note though that the trade surplus actually widened from $70.6bn in June to $80.6bn in July. This is a striking outcome, only $20bn inside the peak trade surplus of mid-2022 and almost three times the average surplus of 2017-2019. Weakness in exports is broadly-based across all goods except transport, but stronger demand from Asian trade partners is compensating for weaker demand from Europe and the US.
