Key insights from the week that was.
The September Westpac-MI Consumer Sentiment survey once again emphasised the deep pessimism entrenched among Australian households, with the headline index ticking down –0.5% to 84.6. Concerns over the economic outlook are starting to have more of an impact on consumers’ attitudes, the sub-indexes tracking views on the economy down –2.6% and –1.0% respectively for the ‘one year ahead’ and ‘five years ahead’ measures.
Cost-of-living pressures are not as intense at the margin as they once were; however, ‘family finances vs a year ago’ and ‘family finances next 12 months’ remain 16.4pts and 9.7pts below their respective long-run averages.
Increasingly we are seeing a spillover of consumer weakness into the business sector. This was evident in the Q2 national accounts and is echoed by the latest NAB business survey. The business conditions index fell –3pts to +3, leaving the index in a clear downtrend from post-reopening highs. Highlighting the persistence of this trend, August was the 11th consecutive negative reading for forward orders; the employment index is at its lowest level since January 2022. It is not surprising then that business confidence slid from broadly neutral to pessimistic, down 5pts to –4.
Chief Economist Luci Ellis’ essay this week focuses on the implications of these developments for the growth outlook.
Offshore, there was plenty of data to guide views on the monetary policy outlook, particularly in the US ahead of next week’s FOMC meeting.
The US CPI rose 0.2% in August as expected, and 2.5% over the year. Core inflation was a touch stronger in the month at 0.3%, but in line with expectations for the year at 3.2%yr. Strength in the shelter component again accounted for the marginal upside surprise in core prices; however, market indicators of rents continue to point to a marked deceleration in shelter inflation over the coming year. Car prices were also less weak than in recent months, but goods prices continued to contract overall.
We continue to see CPI ex-shelter as the best gauge of underlying inflation, and consequently the outlook for policy. At August, annual CPI ex-shelter inflation was just 1.2%yr, having held either side of the 2.0%yr target since May 2023. The overall trend in prices should see the FOMC comfortable in reducing rates by 25bps at next week’s meeting, then following up with 25bp cuts at the next four meetings (to March 2025). Thereafter, we expect the pace of easing to slow to once per quarter and the fed funds rate to settle at 3.375% at end-2025. For our full analysis of the US and global economic outlook, see September Market Outlook.
The European Central Bank cut rates by another 25bps at their September meeting, as widely expected. Data was characterised as coming in as expected, limiting the need for revisions to their forecasts. Projections for headline inflation remain at 2.5% in 2024, 2.2% in 2025 and 1.9% in 2026. Core inflation was nudged up slightly in 2024 and 2025, reflecting the effect of persistent wage pressures on services inflation; though these pressures are expected to dissipate as labour demand moderates. Projections for activity growth were revised down by 0.1ppt to 0.8%yr in 2024, 1.3%yr in 2025 and 1.5%yr in 2026. In the statement and press conference, President Lagarde affirmed that the ECB was not on a predetermined path. Still, policy remains quite restrictive, and the ECB are confident they will achieve their mandate. We therefore expect another cut by year end and further modest easing in 2025.
In the UK, there were three crucial pieces of data ahead of the Bank of England’s meeting next week. First, average weekly earnings decelerated to 5.1%yr in July, from 5.4%yr in June, reflecting easing labour market conditions. Further easing in wages will be welcomed, relieving concerns over a potential structural uplift in wage growth and services inflation, as expressed by BoE Committee member Catherine Mann. Immediate progress continues to be made with services inflation too, now 5.2%yr as of July. In considering the near term policy outlook, while services inflation remains elevated and the headline CPI rose in July, it was on to 2.2%yr, just above the BoE’s medium-term target. GDP meanwhile came in flat in July, and the industrial production detail released the same day also disappointed. Overall, the data flow appears to be moving in line with the BoE’s views, setting the stage for another cut.
Finally, in China consumer prices lifted by 0.1ppt to 0.6%yr in August. The sub-1%yr reading continues to reflect entrenched weakness in consumer demand and also the impact of China’s continuing capacity expansion. Also highlighting the impact of capacity, as well as the recent deterioration in commodity prices, producer prices fell 1.8%yr in August compared to -0.8%yr in July. These price trends will persist as long as Chinese authorities and businesses seek to expand supply ahead of demand, potentially for some years yet.
