Key insights from the week that was.
Australian Q4 GDP printed broadly as expected, rising 0.2% (1.5%yr). Once again, consumer spending was in the spotlight, up just 0.1% in Q4 following a –0.2% decline in Q3 (revised down from zero) to be broadly unchanged versus end-2022. The picture is much weaker when one considers population growth, per capita consumption declining 2.5% over 2023. It was encouraging to see household real disposable income rise 1.5% in Q4 – in line with the gross income gain as the impact from inflation, interest costs and tax payments offset – but given its weak performance over the past year (0.3%yr), consumer financial health remains fragile.
Other parts of the domestic economy were soft too. The main detractor from domestic demand was housing investment, contracting –3.8% in Q4, with weakness reverberating through both new dwelling construction (–3.5%) and renovation activity (–4.2%). Business investment was unable to make up for this weakness (+0.7%). Highlighting the growing breadth of the economic slowdown beyond the consumer, private demand was flat in the quarter. If it were not for the ongoing support of the public sector – up 0.4% (4.7%yr) – the domestic economy would be weaker still.
As elaborated on by Chief Economist Luci Ellis in this week’s essay, the outlook for the consumer – and by extension the broader economy – is set to improve through the remainder of the year as inflation slows and, in the second half, the stage 3 tax cuts take effect and the RBA begin a modest easing cycle. Still, it is important to emphasise that we believe recovery will prove gradual, with growth not anticipated to return to trend until end-2025.
On trade, Australia’s current account surplus widened from a thin $1.3bn in Q3 to $11.8bn in Q4. That was associated with a pull-back in import volumes (–3.4%) and a rising terms of trade (+2.3%), together driving a $10.2bn improvement in the trade surplus – a trend which extended into January for goods. In real terms, the decline in import volumes (–3.4%) more than outpaced that of exports (–0.3%), leading net exports to add a material 0.6ppts to GDP in the quarter.
Before moving offshore, a final note on housing. This week’s updates were on the softer side. The value of monthly housing finance approvals tumbled 3.9% in January, an extension of weakness present at year-end. Raising questions over the strength and quality of loan demand, the past two months have retraced roughly half the gains in total approvals over the past year and closer to three-quarters for the owner-occupier segment. This, together with signs of weakening turnover and softer price growth, suggest the impact of the RBA’s tightening cycle is still crystalising. Tightness on the supply-side will remain a driver of housing market outcomes near-term too. While January’s update on dwelling approvals provided little new insight given seasonal volatility at this time of year, another monthly decline is consistent with the weak underlying trend present over the past year.
Over in Europe, the European Central Bank (ECB) kept its key rates steady. New projections showed a downgrade for inflation over 2024 and 2025 while the Council remained constructive on growth’s recovery, expecting above-trend growth in 2025 and 2026 following two weak years. To ward off any speculation that there would be a rate cut at the next meeting, President Christine Lagarde emphasised more data was necessary before any decision. Lagarde also emphasised that discussion within the Governing Council was focussed on conditions needed to start discussing a rate cut rather than when a rate cut would occur. Concerns around services inflation and wages remain. Highlighting this, Lagarde outlined a wide range of wages measures the ECB is assessing beyond the national accounts measure. A June first cut is most probable despite the market pricing some chance for April.
Earlier in the week, the Bank of Canada held rates steady at 5.0% citing strong underlying inflation and risks that inflation remains above the 2% target. Inflation eased to 2.8%yr in February, but shelter prices remain sticky and are at risk of keeping inflation higher for longer. Governor Macklem cited it was still too early to consider rate cuts. The statement was little changed reflecting the continuity of data since their last meeting in January. Market pricing for the first rate cut remains for July. The April meeting will offer a suite of new forecasts and greater context of the risks.
In the US, key releases and Chair Powell’s testimony before Congress gave market participants further reason to believe the FOMC is also on track to begin cutting in June. The Beige Book pointed to materially slower growth in early-2024 than late-2023. And regarding the labour market and inflation, balance between demand and supply was being seen.
In a similar vein, the JOLTS report showed little change in the hiring and separation rates. The ISM non-manufacturing PMI meanwhile signalled downside risks for the labour market, the employment index more than 4pts below its average of the past 20 years. Released last week, the ISM manufacturing survey’s employment measure is similarly positioned.
Back across the pond, February’s Decision Maker Panel Survey in the UK for February showed easing inflation expectations. Over the last three months, CPI expectations fell to 3.6% for the year ahead and 2.8% for three years hence. However, expectations of output prices remained robust, highlighting some lingering risk. Expectations of wage growth, a metric the Bank of England looks at closely from the survey, remained steady at 5.2%yr. Strong wages growth and ensuing services inflation are a key risk preventing the BoE from moving on rates despite a deteriorating economy. Chancellor of the Exchequer Jeremy Hunt also delivered the Budget, manoeuvring tight public finances to amend tax rules among other policies which are expected to have little impact on inflation but should support the economy.
Coming back to Asia, China’s 2024 National People’s Congress met expectations with respect to key policy actions, but disappointed in terms of sentiment – market participants clearly hopeful the new year would bring a more aggressive policy style. As was the case throughout 2023, the market and China’s authorities currently have very different perspectives on the economy’s immediate health and the long-term path to prosperity, with authorities’ confidence in the dividend from trade and investment ex-housing intact but the market of the belief that housing must again take a leading role in China’s growth story. We expect time will prove authorities’ case, with growth of “around 5.0%” probable in both 2024 and 2025.
. Once again, consumer spending was in the spotlight, up just 0.1% in Q4 following a –0.2% decline in Q3 (revised down from zero) to be broadly unchanged versus end-2022. The picture is much weaker when one considers population growth, per capita consumption declining 2.5% over 2023. It was encouraging to see household real disposable income rise 1.5% in Q4 – in line with the gross income gain as the impact from inflation, interest costs and tax payments offset – but given its weak performance over the past year (0.3%yr), consumer financial health remains fragile.){kind=link}