Key insights from the week that was.
In Australia, Q2 GDP printed broadly as expected at 0.2%qtr (1.0%yr). The themes of recent quarters were once again on display. The consumer remained weak, a 0.2% decline in Q2 leaving aggregate consumption just 0.5% higher than a year ago at June, and 2.0%yr lower on a per capita basis. Elevated inflation, interest rates and a historically-high tax take are increasingly putting household savings in a precarious position; on our estimates, around half of the pandemic savings ‘buffer’ has now been drawn down, and the savings rate held at just 0.6% in Q2. In tandem with weak sentiment, the status quo for income and savings suggests any pick-up in household spending will be gradual at best.
Other parts of the domestic economy were also soft in Q2. Despite rapid population growth and an existing need for additional capacity, new business investment and housing construction only managed to eke out a gain of 0.1%. Public demand continues to provide strong support for GDP growth however, its share of the economy rose to a fresh record high of 27.3%, with further gains likely over coming quarters. In this week’s essay, Chief Economist Luci Ellis puts the latest data in context.
On trade, the current account deficit slid further to –$10.7bn in Q2, in line with Westpac’s bottom-of-the-range forecast. The main surprise was the strength of spending from foreign students, which drove a 6.0% lift in total service exports. Contributions from other areas of the trade account were broadly as expected, service imports consolidating as outbound tourism flows normalised whilst the goods trade surplus narrowed on falling commodity prices and flatlining resource export volumes – a theme still evident in the July data for Australia’s trade in goods.
Before moving offshore, a final note on housing. The latest CoreLogic data continues to highlight a varied picture by capital city, the smaller capital cities of Perth, Adelaide and Brisbane recording solid gains while Sydney remains subdued and Melbourne goes backwards. The lack of sustainable upward momentum in dwelling approvals points to risks for residential construction activity once existing projects are worked through. For more detail on the housing market, see our latest Housing Pulse on Westpac IQ.
Elsewhere, US data was the focus. The ISM manufacturing and non-manufacturing indexes rose by 0.4 and 0.1pts to 47.2 and 51.5 respectively, remaining below their 5-year pre-COVID averages. The market showed particular concern over the surveys’ price measures; however, these indexes are still in line with their 2015-2019 averages, a period when core PCE inflation averaged 1.6%yr and peaked at 2.0%yr. The ISMs meanwhile suggest employment is declining in manufacturing and only edging higher in the service sector. A similar view was provided by the latest Beige Book from the Federal Reserve, with employment assessed as steady overall, but with “isolated reports” of reduced hours and shifts as three districts reported slight activity growth and nine districts no or negative growth.
More constructive was the July JOLTS report. Though job openings fell to 7.673mn, their weakest print since January 2021, the hiring and separation rates were little changed at 3.5% and 3.4%, consistent with pre-pandemic rates – a robust period for job growth.
The shift in risks now openly being discussed by FOMC members has led some market participants to fear a disappointing read for August nonfarm payrolls tonight. Overall though, the labour market data points to a continued moderation in employment growth not a sustained decline. The best response to such a turn of events is steady, confident policy easing, 25bps at a time at successive meetings, all the while noting a willingness to do more if necessary. This is why we expect a 25bp cut at each FOMC meeting from September 2024 to March 2025 and, after that, another cut per quarter to year end, bringing cumulative easing over the cycle to 200bps.
This looks to be the approach being taken by the Bank of Canada in the north, another 25bp cut delivered this week at its September meeting along with clear guidance more easing will follow assuming current trends persist. While GDP growth surprised in Q2, the quarter is assessed to have ended on a weak note. The labour market also continues to slow as excess supply puts “downward pressure on inflation”, limiting the significance of persistence in shelter and some other service prices.
. The themes of recent quarters were once again on display. The consumer remained weak, a 0.2% decline in Q2 leaving aggregate consumption just 0.5% higher than a year ago at June, and 2.0%yr lower on a per capita basis. Elevated inflation, interest rates and a historically-high tax take are increasingly putting household savings in a precarious position; on our estimates, around half of the pandemic savings ‘buffer’ has now been drawn down, and the savings rate held at just 0.6% in Q2. In tandem with weak sentiment, the status quo for income and savings suggests any pick-up in household spending will be gradual at best.){kind=link}