Key insights from the week that was.
Amid a relatively quiet week for domestic data, the Westpac-DataX Consumer Panel was published for Q4. Using an anonymised sample of over one million Westpac customers, the panel offers detailed insights on income, spending and saving. Over the past six months, it has proven well suited to tracing the impact of the Stage 3 tax cuts. On average, Australian consumers continue to save the vast majority of this income boost, an estimated marginal propensity to consume of 0.25, i.e. 25% of the increase in income, half the assumption used by the Federal Treasury and RBA ahead of time.
The marginal impact of the tax cuts on spending behaviour is also corroborated by Westpac’s Card Tracker. Both sets of analyses imply that, having experienced one of the most severe and prolonged shocks to real disposable incomes in modern history, Australian households are firmly focused on rebuilding savings buffers. The longer this preference remains in place, the greater the likelihood that the rebound in consumer spending will take longer to eventuate, even as pressure eases on disposable income through 2025. With public sector support for GDP expected to moderate, a ‘shaky handover’ of the growth baton from the public to private sector is a distinct possibility.
The timing of interest rate cuts could prove pivotal in deciding the strength and stability of the growth trend. Thankfully, next week’s official update on inflation will offer a clear indication of the near-term rates outlook. As per our preview, we anticipate headline inflation will print at 0.3% (2.5%yr) in Q4 and the trimmed mean at 0.6% (3.3%yr), with risks skewed modestly to the downside. The two key determinants underlying the Q4 results will be the degree to which cost-of-living assistance (including energy rebates and rental assistance) pulls headline inflation lower, and the persistence of the disinflationary trend in the housing group. Ahead of the Australian data, it is worth noting New Zealand’s own Q4 CPI was favourable this week, with both core and domestic inflation continuing to ease, setting the scene for another 50bp cut by the RBNZ at their February meeting.
In the northern hemisphere, the inauguration of Donald Trump as the 47th President of the United States dominated headlines. Political priorities were made clear in speeches given after his inauguration in both Washington and, via video link, at the World Economic Forum in Davos, but policy detail and timing remains in question.
Cutting through the noise, the swath of executive orders largely focussed on reducing energy prices, removing protections for undocumented migrants and investing in AI. On energy, President Trump left the Paris Climate Agreement and abandoned the ‘green new deal’ while declaring an ‘energy emergency’ to help bypass regulatory impediments for US oil and gas exploration/ production. Safeguards for AI development were reduced, and Trump also announced an AI infrastructure deal with SoftBank, Open AI and Oracle. There was little clarity around tariffs, a formal directive for relevant government departments to study trade relationships and report back followed quickly by repeated references to the potential for tariffs against a number of nations within weeks. Intriguingly, it was Mexico, Canada and European countries who have trade surpluses with the US that were President Trump’s focus, not China. The intent mentioned in his Davos speech, to use tariffs as a means to encourage US investment and jobs, arguably gives a sense as to why he may be taking this line. Chinese firms, and some from other Asian nations such as South Korea and Taiwan, have a far greater capacity to invest in production facilities in the US than European and Canadian firms – if allowed to and the terms deemed agreeable.
Westpac Chief Economist Luci Ellis this week considered the market’s expectations for monetary policy and the US dollar following inauguration and how these factors, along with the stance of fiscal policy, are likely to impact the health of the US economy.
In China meanwhile, further measures were announced to support their equity market. Broadly, as reported by Bloomberg, the policy adjustments seek to promote equity investment by institutional investors and share buybacks by corporates, with help from the central bank’s lending vehicle, while also attracting more retail investors into the equity market through new mutual fund issuance. These are medium-term initiatives, but the timing of the announcements indicates authorities are keen to promote stability in the near term and to take advantage of forthcoming stimulus initiatives to rebuild household wealth through 2025.
Elsewhere, employment data in the UK showed a further easing in the labour market in December. The payrolled employees count was down by 47k in December, while three-month growth in the official employment measure slowed to a seven-month low of 36k, leaving the headline three-month unemployment rate at 4.4%, 0.3ppts higher than three months ago. The ratio of vacancies-to-unemployment, an indicator of the overall labour market situation Bank of England officials follow closely, fell again and is now below pre-pandemic levels. Wages rose a steep 0.4ppts to 5.6%yr in November, however. This increase seems alarming, especially compared to the BoE’s 5.1% forecast for Q4 2024, but it follows more-timely survey data pointing to decelerating pay growth. The BoE’s MPC is therefore likely to look through this pick up in wage inflation and continue cutting interest rates at the next policy meeting, due early February.
