Key insights from the week that was.
Unsurprisingly, with an election imminent, Budget 2019 focused on short and medium-term income support for households and long-term infrastructure investment while still promising a lasting return to surplus from 2019/20. Our analysis of Budget 2019 is now available at Westpac IQ. Here we focus on the implications for monetary policy.
For the RBA view, the take home from Budget 2019 is that, while supportive of activity over the long-term, the near-term impact on incomes and activity is limited. Labor’s alternative proposals, as per the budget reply, are also spread out over time. So no matter which party wins in May, the headwinds of persistent weak income growth and declining house prices are set to hold growth well below trend through 2019. This is clear justification for interest rate cuts from the RBA, which Westpac believes will come in August and November.
While the RBA is yet to adopt an easing bias, the April meeting decision statement did emphasise the fluidity of the situation, with a change in the wording of the final paragraph highlighting that the Board will continue to monitor developments and set policy accordingly. Albeit subtle, this is the first such change to the final paragraph since Governor Lowe took over in September 2016, and sets the scene for a more decisive shift in tone and forecasts in May, when the next Statement on Monetary Policy is due.
Turning to the Australian data released this week. On the positive side, Australia’s trade balance reached a record high in February on the back of the elevated iron ore price; and similarly, retail sales and dwelling approvals for February also beat expectations. That being said, the trend for retail sales remains weak, and for dwelling approvals, the upside surprise was solely due to a surge in high-rise apartment approvals that is unlikely to be repeated – note all other approval components were well below expectations. CoreLogic house price data for March meanwhile highlighted that the house price correction is still a fair way from stabilising.
Across the Tasman in New Zealand, Westpac has changed its view on the RBNZ outlook. We are now calling for a cut at the May 2019 meeting and another a year later in May 2020. The justification for this view is the clear concern that the RBNZ has shown over the global backdrop; inflation struggling to return to the 2.0%yr target; and our New Zealand team’s long-held concerns over the economic outlook in the early-2020’s. These rate cuts would take the RBNZ cash rate to 1.25% at May 2020.
Further afield in Asia, the data flow has been constructive, with both the NBS and Caixin manufacturing PMI’s rising above 50 once again – signalling growth for industry. The services sector meanwhile has continued to grow at a solid pace, pointing to still-robust momentum within China’s domestic economy despite external headwinds. We continue to hold a positive view on China, believing that fixed asset investment growth will slowly strengthen and broaden across the economy during 2019. GDP growth will however still be at the lower end of authorities 6.0-6.5% target range for this year, as the softer employment growth of the past year affects consumption.
For China and the broader Asian region, the focus of markets this week has not been the above data but rather signs that a trade agreement between the US and China may (finally) be close. Anecdotes from authorities have been positive, and there have also been press reports of agreement over some terms, including China purchasing more goods from the US over the coming decade – to reduce the US’ trade deficit.
For the US, the headline data print of the week, the employment report, is still to come. Other data has been mixed, with consumer spending and inflation soft, but business sector detail robust. We remain of the view that US GDP growth will end 2019 near trend despite a soft start to the year, in part due to the December/ January Government shutdown.
Finally to Europe and the UK. Updates on the European economy this week confirm a general softness in activity but also underscore sectoral divergence in the economy. While retail sales volumes were shown to be tracking at 2.8%yr and the services and construction PMI’s imply continued steadiness, the manufacturing industry remains in the doldrums. Most notably, German factory orders plunged 4.2% in February and the European manufacturing PMI was revised down to be at lows since 2013. With the latter front of mind, along with geopolitical uncertainty, the ECB are concerned about the economic outlook, as confirmed in the release of the March meeting minutes. Not much was offered in these minutes in regards to TLTRO-III incentives and the possibility of a tiered deposit rate. It is unlikely that a decision will be made on incentives at next week’s April meeting, but we expect an update in June.
A key uncertainty weighing on Europe regards the UK and Brexit. We are not surprised that little progress was made this week. While PM May and Labour’s Corbyn began negotiations – and reports are that they were “constructive” – a compromise is still yet to be found ahead of the April 12 Brexit date. At next week’s EU Summit on April 10, the UK will need to present a withdrawal deal to EU-27 leaders or provide guidance on a plan for the way forward. Given the resistance against leaving without a deal, this plan is likely to call for another extension to the Brexit negotiation process. However, this will need to factor in European Parliament elections scheduled for May 23-26.
