Key insights from the week that was.
The RBA’s minutes from their November meeting and a subsequent speech by Governor Lowe carried a confident but unhurried tone. Meanwhile the US economy showed early signs of the slowdown in activity that we anticipate will take growth back to trend over the coming year.
Beginning with the RBA, though the consumer is still seen as a ‘source of uncertainty’, the Board is more confident in the sector’s outlook. In the RBA’s view, on the back of strong gains for employment and a nascent acceleration in wages growth, consumption is set to support above-trend growth through 2019 and 2020, along with strength in infrastructure investment and non-residential construction. With the savings rate near historic lows, this requires an acceleration in income growth to the 3.0% annual pace currently being seen for consumption.
We remain unconvinced on growth, instead anticipating that it will slow back to trend in 2019. Housing and the consumer are critical to this view. On housing, in contrast to the RBA, Westpac anticipates that GDP will be materially affected by declining residential investment – a trend increasingly evident in dwelling approvals. On top of this investment effect, further declines in house prices will reduce household wealth and, we believe, impede consumers’ willingness to spend. Consumers’ spending capacity also continues to be restricted by a very modest wage uptrend, with full employment remaining elusive. The above outturn would clearly warrant the RBA remaining on hold not only through 2019, but also 2020.
Confidence in the real economy is also critical for the US. There the market has taken recent communications by FOMC officials as dovish overall, resulting in a paring back of near-term expectations for policy. For us, the ‘dovish’ remarks of the Committee are merely recognition that neutral is nearing and the growth cycle maturing, not that policy will shift abruptly.
Westpac remains of the view that, following a rate hike at their December meeting, the FOMC will increase the federal funds rate a further three times in 2019 to a September peak of 3.125%. At this level, the stance of policy will be mildly contractionary, but still accommodative enough to allow growth to persist at trend given the underlying strength of the US labour market. October’s weak durable goods orders and shipments update was in line with our view that growth in business investment will weaken over the coming year. However, as long as the consumer remains robust, which labour market strength and household wealth currently point to, the FOMC is unlikely to waver. Global risks are being watched, but will only affect policy if/ when they threaten domestic momentum.
Across the Atlantic, Brexit remains the focus. Negotiations achieved enough this week to allow the EU Summit on the matter to go ahead this weekend, but the key event to watch out for remains the UK parliament’s vote to pass or reject the current draft deal. On that matter there remains considerable uncertainty. For Europe more broadly, there was a subtle change in the ECB’s November meeting minutes. Risks continue to be considered broadly balanced with the broad-based expansion still intact, but a remark was made by a member “that a number of arguments pointed towards risks to the growth outlook tilting to the downside”. The ‘balance of risks’ will gain greater prominence in 2019 as the first rate hike of the cycle (potentially) comes into view.
Before closing out for the week, our New Zealand economics team has just released their latest quarterly update. Notable in this edition is the unusual pairing of stronger NZ GDP and inflation forecasts with softer RBNZ cash rate and currency profiles. Reconciling this divergence, it is increasingly evident that the RBNZ’s behaviour has changed, with the cash rate kept lower for longer than the RBNZ of old would have.
