Key insights from the week that was.
In Australia, market participants were left with little to dissect this week. The latest NAB business survey pointed to the domestic economy remaining weak in late February, the detail of the survey broadly consistent with last week’s Q4 2023 National Accounts. Although business conditions rose to +10 in February, on a multi-month view the index continues to trend lower, consistent with modest but persistent declines in forward orders over the past ten months. Against this backdrop, businesses are circumspect on the outlook, with confidence fragile for much of the past year. More positively, the deceleration in upstream price pressures is ongoing, final product prices tracking a modest 1.2% rise for the March quarter.
Next week, the RBA Board will meet to discuss recent economic data, including the Q4 National Accounts and Wage Price Index, to decide whether it warrants a shift in policy. Our view is that the RBA will be comforted by recent developments, given the Board’s aim to bring demand back into line with supply and ensure inflation continues to trend toward and then into the target range. We continue to expect the RBA to remain on hold until September at which time they should have enough confidence in the inflation outlook to slowly begin easing policy.
In this week’s essay, Chief Economist Luci Ellis looks beyond the end of our current forecast horizon to consider some of the factors that will determine growth and inflation from 2026. Critical will be the stance of monetary policy and the degree of labour market slack. Also important to the state of the economy is work related to the green transition.
Over in the US, February’s CPI came in a touch firmer than expected at 3.2%yr. The shelter component once again drove the increase, however. Excluding shelter, on both a 6-month annualised and annual basis, inflation is consistent with the FOMC’s 2% inflation target. Clear from the detail of the report is that demand-side inflation has successfully been reigned in, leaving only supply-side pressures which monetary policy has little-to-no impact on, at least in the near term. For housing in particular, it is investment that is needed to ease price pressures; this is unlikely while interest rates are contractionary and the outlook for the labour market uncertain.
Retail sales again signalled that consumer demand is waning, February’s 0.6% gain below expectations and only a partial offset to January’s downwardly revised 1.1% decline. The control group, which excludes volatile items like fuel, was flat, also below expectations. While inflation has essentially come back to target, the cumulative change in the cost of living since the beginning of the pandemic is substantial and unlikely to be made up by real income gains in the near term. Consumption growth is likely to be materially weaker in 2024 and 2025 than was the case in 2023. Our latest edition of Market Outlook provides key forecasts for Australia, the US and the world.
Finally to Japan, where Q4’s initial 0.1% contraction (the second in a row, signalling recession) was revised away on stronger business investment. In the revised figures, capital expenditure rose 2% in Q4 compared to the 0.1% decline initially reported. This put Q4 GDP growth at 0.1%qtr after a 0.8%qtr decline in Q3. Still, household consumption remains weak having declined over the last three quarters, a time when consumers benefitted from historically high wage growth. It is hard to see evidence of a virtuous cycle of wages, consumption and inflation beginning. As such, the Bank of Japan will want to remain patient with policy, waiting to see how inflation and wage outcomes develop beyond this year’s wage decisions before moving their policy rates materially above zero.
