RBA holds, Trump returns

While markets waited on results of the US presidential election, Australia’s central bank announced it would leave the cash rate target unchanged for an eighth consecutive meeting. The last time the RBA changed interest rates was this month last year, when Governor Bullock oversaw a 25bp rate rise in only her second monetary policy meeting as governor. The latest decision to once again opt for the status quo was widely anticipated, so the focus this week was on the tone of the surrounding communication (would it signal a shifting appetite towards earlier rate cuts?) and any changes to the RBA’s forecast (what was the central bank thinking on growth and inflation?).

In terms of tone, the combined effect of the accompanying statement, the release of the November 2024 Statement of Monetary Policy and the governor’s press conference was to signal that the RBA is in no hurry to cut rates. Indeed, Governor Bullock insisted she could still imagine circumstances in which there would be a case for a rate increase. Hence the inclusion of the familiar mantra that the RBA board is ‘not ruling anything in or out.’

The new forecast is little changed from the August 2024 iteration. The core judgement remains that ‘demand for goods and services still exceeds the supply capacity of the Australian economy’. And the RBA still reckons it will take until late 2026 until inflation has returned sustainably to the midpoint of its target range. That said,  revisions that were made to the RBA’s projections involved small downgrades to expected growth and inflation, along with a modest increase in the expected unemployment rate. These are all consistent with a narrowing in that demand-supply gap and – eventually – the case for policy easing.

There is one more RBA meeting to come this year on 9-10 December. Once again, there is no chance Martin Place will deliver a rate cut, barring a truly dramatic shock hitting the domestic and/or global economy. The next meeting after that will be on 17-18 February 2025. Readers will be aware that I have long pencilled in a 25bp rate cut for this meeting. But the RBA’s messaging this week reinforces my comments last week that the risks to this timing are now clearly skewing later.

Of course, all of this was overshadowed by developments in the United States – which could also have their own impact on the timing of an RBA rate change. Indeed, the initial Australian market reaction to the news on Wednesday that Donald Trump would be the 47^th president of the United States was to push back the expected timing for a first Australian rate cut next year from May to July.

How might we think about the economic implications of a President-elect Trump beyond Australian interest rates? One approach is to look at what some of the other early market moves might be signalling:

• The US stock market hit a record high, with the S&P500 index enjoying its biggest rise in two years. Some of this reflects investors betting that a second Trump term will replicate the first in terms of being good for profits due to a mix of low(er) company taxes, more deregulation and stronger growth. It could also reflect a degree of relief at the removal of election uncertainty in general and some of the more troubling tail risks such as a disputed election outcome in particular – the VIX index (a measure of expected stock market volatility) fell to its lowest level since late September.
• US bond prices fell as their yields increased, with the US Treasury 30-year yield jumping by the most in a single day since the pandemic. This is in line with the consensus view that a second Trump presidency will deliver higher inflation and larger budget deficits, as well as a slower pace of Fed monetary policy easing.
• The US dollar surged, with the dollar index (a measure of the greenback against a basket of other currencies) recording its largest gain since September 2022. Higher US yields were likely an important part of the story here, but markets may also have been pricing in the anticipated impact of a new wave of tariffs on the exchange rate.
• Elsewhere, European shares went backwards slightly (export-dependent European economies are thought to be vulnerable to tariff threats), both the offshore and onshore Chinese RMB weakened along with ‘China proxy’ currencies including the Australian dollar (presumably related to the promise of swingeing China-specific tariffs) while commodity prices softened in what might indicate expectations for weaker global trade overall.
• The price of bitcoin hit a new record as the incoming administration is seen as favourable to crypto assets.

Of course, it is sensible to take all this with a decent dose of sodium chloride. While these early moves are indicative of markets’ best guesses as to what the election might mean in economic and financial terms, those guesses come with a lot of uncertainty attached. (The same disclaimer applies to the judgements collected in the linkage roundup below.)

We will be doing a bit of our own speculation along these lines in next week’s episode of the Dismal Science podcast. As we recorded this week’s episode early last Wednesday afternoon, we were too soon for the election results, although we did discuss some of some initial market movements before diving into the implications of the RBA meeting. More details on the latter, along with the rest of this week’s data releases and our usual linkage roundup below.

RBA leaves cash rate target unchanged at 4.35 per cent

At its meeting this week, the RBA Board decided to leave the cash rate target unchanged at 4.35 per cent. The accompanying statement acknowledged that the September quarter 2024 saw the annual rate of headline inflation slow to just 2.8 per cent, but as expected, it attributed part of this decline to the temporary effects of cost of living relief. Meanwhile, while the rate of underlying inflation also eased last quarter, at 3.5 per cent the statement noted it remained ‘some way from the 2.5 per cent midpoint of the inflation target’ and this was still too high for the RBA’s comfort:

‘While headline inflation has declined substantially and will remain lower for a time, underlying inflation is more indicative of inflation momentum, and it remains too high.’

Still-high underlying inflation, plus the RBA’s judgement that it will not be until late 2026 that core inflation is both sustainably within the target range and approaching the mid-point (see the discussion on the central bank’s updated forecasts that follows) means Martin Place is still not yet ready to rule out the possibility of further policy tightening:

‘This reinforced the need to remain vigilant to upside risks to inflation and the Board is not ruling anything in or out. Policy will need to be sufficiently restrictive until the Board is confident that inflation is moving sustainably towards the target range.’ [emphasis added]

Reinforcing this caution is the RBA’s view that although growth in output has been weak, labour market conditions remain tight relative to what the central bank considers full employment. Likewise, while wage pressures have shown some signs of easing, low productivity has nevertheless led to ongoing pressure on unit labour costs. In addition, the RBA sees ‘a high level of uncertainty about the outlook abroad’ while on the domestic front it sees yet more uncertainties around the future path of household consumption, the lagged effects of monetary policy tightening and how firms’ pricing decisions and wages will trend from here.

Central bank modestly downgrades economic outlook

This week’s monetary policy meeting was accompanied by the release of the November 2024 Statement on Monetary Policy (SMP) which included revisions to the previous August 2024 forecasts. The governor said this week’s new numbers are similar to those published in the previous SMP and the revisions are all quite modest. As the SMP says, the ‘outlook for inflation and the unemployment rate…is broadly unchanged’. Still, the new forecasts do mostly paint a slightly softer picture than was the case back in August:

• Through the year GDP growth has been revised down by 0.2 percentage points (0.3 for the June quarter 2025) in each quarter out to the December quarter 2026. Real GDP growth is now expected to end this year at an annual rate of 1.7 per cent, before returning to the economy’s potential growth rate of around 2.5 per cent by the final quarter of next year.
• The projected unemployment rate has been increased by 0.1 percentage points from the June quarter 2025 to the December quarter 2026. The unemployment rate is now forecast to peak at 4.5 per cent in the final quarter of next year and then remain there through 2026.
• The headline CPI inflation rate is now expected to be lower in the near term (2.6 per cent in the December quarter instead of three per cent previously and 2.5 per cent in the June quarter next year instead of 2.8 per cent previously). But after spending this time back within the two-to-three per cent target band, inflation is then expected to bounce up to 3.7 per cent by the December quarter 2025, following the expiry of the current set of cost-of-living measures (this rate is unchanged from the previous forecast). Headline inflation through 2026 is then projected to be 0.1 percentage points below August forecasts.

• Underlying inflation (as measured by the trimmed mean) is now forecast to be a modest 0.1 percentage point lower than in the August 2024 SMP from the December quarter 2024 through to the December quarter 2025. That means underlying inflation is now projected to end this year at an above-target 3.4 per cent, but then return to the top of the target band by mid-2025, before ending next year at 2.8 per cent. By mid-2026 underlying inflation is forecast to be 2.7 per cent, falling to 2.5 per cent and the middle of the target band by the December quarter 2026.

It is also worth noting the slight change in cash rate assumptions underpinning these projections, which by SMP convention are assumed to move in line with financial market pricing at the time of the forecasting exercise. The new trajectory has the cash rate slightly higher for longer. Back in August, market pricing assumed that the cash rate would have fallen by 25bp by early next year, and then continue to slide to 3.6 per cent by end-2025 and then to 3.3 per cent by end-2026. By the time of the October SMP, market pricing had pushed back the timing of a first rate cut to mid-2025 and then saw the cash rate ending next year at 3.7 per cent, before falling to 3.5 per cent by end-2026.

SMP key judgements and key risks

The SMP includes a helpful summary of key judgements that underpin the RBA’s central forecast, along with what it thinks are the key risks to those same projections. There are three key judgements:

1. That household consumption growth will recover in line with real income growth, although the RBA now thinks this will happen a bit later than it did at the time of the August SMP. The SMP concedes that actual consumption growth to date has been weaker than it had expected, but still thinks that higher income and wealth will eventually feed through into stronger spending.

2. That the labour market will continue to ease at a gradual pace – mainly in the form of lower vacancies and average hours worked – and will then stabilise at an unemployment rate of around 4.5 per cent – the rate that the RBA thinks is consistent with full employment in the economy. However, the SMP cautions that some recent indicators such as the underemployment rate could signal that the labour market has stopped easing.

3. That there will be a gradual closing of both the unemployment and output gaps, which will return inflation to target.

The SMP says risks to its inflation and growth forecasts are broadly balanced and highlights three of them:

1. That the current period of subdued growth in private sector activity proves to be more persistent than forecast, with consumer behaviour turning out to be more cautious and/or constrained than assumed under the central case forecast. Alternatively, recovery in private activity could surprise to the upside if households respond more quickly than expected to stronger income growth, and if business investment then responds accordingly.

2. That continued weak productivity growth means the RBA has overestimated the degree of supply capacity in the economy, which in turn would mean slower progress with disinflation.

3. That global uncertainty manifests in either downside (for example, intensified regional conflicts) or upside (for example, a larger than expected fiscal stimulus in China) shocks to the central case scenario.

The SMP also notes the ‘risks associated with the fiscal and trade policies that may follow the US election’. As discussed above, early market signals are consistent with this last set of risks having risen following this week’s election results.

How well have past RBA forecasts performed?

Another useful inclusion in the November SMP is the RBA’s annual review of staff economic forecast. This time the review said that, compared with forecasts in the November 2023 SMP, ‘underlying inflation and employment in Australia have evolved broadly in line with expectations’. At the same time, however, GDP growth has ‘proven significantly weaker than forecast a year ago, driven by weaker-than-anticipated growth in private demand’. That weakness in private demand was only partially offset by stronger than expected growth in government spending.

The combination of lower output plus higher employment relative to forecasts indicates that the supply side of the economy has also done less well than expected, which has manifested in weaker than expected labour productivity. The SMP notes that the RBA’s persistent forecast misses on productivity have generated internal debate within the central bank about the forecast assumption that current productivity growth will return to around one per cent per annum in the medium term, adding that ‘this remains a key judgement and the staff will continue to assess its validity.’

What else happened on the Australian data front this week?

The ABS published updated Living Cost Indices (LCIs) for the September quarter 2024. The strongest quarterly (up 0.6 per cent) and annual (up 4.7 per cent) growth rates were for the Employee LCI. The September quarter increase in the Employee LCI was the smallest quarterly increase since the same quarter in 2021, as a rise in mortgage expenses was offset by falls in automotive fuel and electricity prices, with the latter reflecting federal and (some) state government cost of living measures. The Bureau noted that most employee households did not qualify for previous electricity rebates, so the new round had a larger impact on their electricity bills than for those categories of households that had benefited from the previous rebates. Higher annual growth in the Employee LCI relative to the other four LCIs reflects the impact of mortgage interest charges which were up 18.9 per cent over the year. Still, that was well down from the peak of 91.6 per cent recorded in the June quarter of last year, when the overall Employee LCI rose 9.6 per cent in annual terms. All five LCIs reported smaller quarterly and annual increases in living costs last quarter, compared to the June quarter of this year, with the other four LCIs seeing their slowest quarterly growth since 2020.

ABS data on public sector employment and earnings for 2023-24 reported there were 2.5 million public sector employees as at June this year, comprising 365,400 Commonwealth government employees (including defence force personnel), more than 1.9 million State government employees and 213,500 local government employees. The number of public sector employees was up 3.6 per cent on last year, with the strongest growth reported in Commonwealth government employment, which rose by 4.3 per cent. The total public sector wage bill was $232 billion in 2023-24, up eight per cent from 2022-23. The Commonwealth Wage bill was $37.3 billion and was up 10 per cent over the year.

New annual data on barriers and incentives to labour force participation reported that in 2023-24 there were 19 million people aged between 18 and 75, of which 13.7 million (73 per cent) were employed. According to the ABS, of the 5.3 million (27 per cent) who did not have a job, 1.8 million were retired or permanently unable to work, 1.2 million wanted work and 2.1 million did not want a job.

The ABS said the balance on Australia’s goods trade fell by $675 million to a surplus of $4.6 billion (seasonally adjusted) in September 2024. Exports were down $1.8 billion over the month, while imports fell by $1.1 billion. The fall in export values reflected declines for coal and gas exports.

ANZ-Indeed Australian Job Ads rose 0.3 per cent month-on-month (seasonally adjusted) in October 2024, but were down 15.8 per cent relative to October 2023. That leaves the index down 27 per cent from its June 2022 peak but 16.1 per cent above pre-pandemic levels. Job Ads have now increased over the past two months, which ANZ suggested could signal that the previous downward trend may have stabilised. Over the past three months, ads have increased in half of all sectors, moving away from broad declines across the economy seen earlier this year.

The ANZ-Roy Morgan Consumer Confidence Index edged up by just 0.1 points to 86.5 for the week ending 3 November. The index has now been above 85 for three consecutive weeks for the first time since January 2023. Weekly inflation expectations were unchanged at 4.6 per cent.

Last Friday, CoreLogic reported that its national Home Value Index (HVI) rose 0.3 per cent over the month in October 2024 to be six per higher in annual terms. The national HVI has now increased for 21 consecutive months. Monthly growth in the combined capitals index fell to just 0.2 per cent last month while the pace of year-on-year growth slowed to 5.9 per cent. Values fell over the month in Sydney (down 0.1 per cent), Melbourne (down 0.2 per cent), Darwin (down one per cent) and Canberra (down 0.3 per cent), with Sydney recording its first fall since January 2023. In contrast, values were up in Perth (1.4 per cent), Adelaide (1.1 per cent), Hobart (0.8 per cent), and Brisbane (0.7 per cent). CoreLogic said slower growth in home values overall has been accompanied by a rise in advertised stock levels and slowing momentum in the number of home sales, as selling conditions have eased.

CoreLogic also reported that national rents rose 0.2 per cent over October. The latter was a stronger result than the previous three months but was still well down on the 0.7 per cent monthly increases reported over the same month in the previous three years. In annual terms, rental growth slowed to 5.8 per cent last month, the lowest increase since April 2021.

Also last Friday, the ABS said new loan commitments for housing fell 0.3 per cent over the month (seasonally adjusted) in September 2024 to $30.2 billion, but were up 18.9 per cent over commitments made in September 2023. Commitments to owner occupiers at $18.6 billion were up 0.1 per cent month-on-month and 13.1 per cent year-on-year, while commitments to investors at $11.6 billion were down one per over the month but 29.5 per cent higher through the year. This was the final monthly release of the ABS Lending Indicators publication. A new quarterly publication will be released next February, covering the December quarter 2024.

According to the ABS’s Monthly Household Spending Indicator, the dollar value of household spending fell 0.1 per cent over the month (seasonally adjusted) in September 2024, but was up 1.3 per cent over the year. September’s monthly fall followed a 0.2 per cent increase in August and no change in July. Spending on goods fell 0.4 per cent over the month, driven by falls in expenditure on Motoring goods, Purchase of vehicles, Clothing and footwear, Alcoholic beverages and tobacco and Goods for recreation and culture. In contrast, spending on services was up 0.4 per cent month-on-month, reflecting increased spending on Accommodation services, Rail and road transport, Air passenger and sea transport, Motor vehicle repair maintenance and miscellaneous expenditure and Total health services. Discretionary spending fell 0.2 per cent in monthly terms while non-discretionary spending rose 0.2 per cent. In volume terms, household spending in the September quarter fell 0.4 per cent over the year (original basis), driven by declines in five of the nine spending categories tracked by the ABS (Alcohol beverages and tobacco, Clothing and footwear, Hotels, cafes and restaurants, Transport, and Food).

Other things to note . . .

• I strongly suspect readers will already have overdosed on US election analysis by now. But if that’s not the case, here’s a short roundup of initial reactions from the financial press: The AFR reckons the consensus local view is that a Trump win means higher interest rates and a weaker Australian economy; the FT has the global economy preparing for a Trump ‘macro shock’; the WSJ’s Greg Ip sets out his take on what Trump’s win means for the US economy; and the Economist magazine argues that the return of Trumponomics excites markets but frightens the world.
• The opening statement from Secretary to The Treasury Steven Kennedy to the Economics Legislation Committee. Among other points, Kennedy made the case that much of Australia’s current poor productivity reflects two cyclical (that is, temporary) factors: the rapid absorption of a large number of new workers over a compressed time period has reduced average productivity; and the capital stock is taking time to adjust to the speed of this increase in employment, leading to capital shallowing (that is, a fall in the capital-labour ratio). He also flagged that lower-than-expected migrant departures mean net overseas migration is likely to be higher in 2023-24 and 2024-25 than forecast in the Budget.
• The RBA’s November 2024 chart pack.
• From the AFR, is the economy hot or not?
• The 2024 State of the Climate report says Australia’s climate has warmed by an average of 1.51C ±0.23C since national records began in 1910, while sea surface temperatures have increased by an average of 1.08C since 1900. This warming has led to an increase in the frequency of extreme heat events. The report also finds that: Heavy short-term rainfall events are becoming more intense; there has been an increase in extreme fire weather and a longer fire season across large parts of the country since the 1950s; there has been a decrease in the number of tropical cyclones observed in the Australian region since at least 1982; Oceans around Australia are becoming more acidic; and sea levels are rising around Australia, including more frequent extreme high levels that increase the risk of inundation and damage to coastal infrastructure and communities.
• Related, ABC Business’s Gareth Hutchens reckons Australia needs a population plan.
• The ATO’s latest Corporate Tax Transparency (CTT) Report provides tax data for 2022-23 for 3,985 entities with an income of $100 million or more. The ATO said tax paid in 2022-23 was the highest since CTT reporting began, with the ATO collecting a record $100 billion in taxes (including revenue collected by the Tax Avoidance taskforce), up 17 per cent on the previous year. This was also the second consecutive year that the mining sector paid more tax than all other sectors combined, paying more than five times the tax it paid in 2014-15.
• Related, the Conversation explains how more than 30 per cent of large companies operating in Australia that year paid no tax. This includes a mix of accounting losses, tax losses, utilised losses from previous years and utilised offsets. Note the CTT points out that the share of companies paying no income tax has fallen from 36 per cent in 2013-14 to 31 per cent in 2022-23.
• Analysis from the ABS on export and import invoice currencies in 2023-24. The numbers show almost 89 per cent of Australia’s merchandise exports were invoiced in US dollars compared to about nine per cent invoiced in the Australian dollar. The US dollar share has increased by more than seven percentage points since 2015-16. A bit more than 55 per cent of merchandise imports were invoiced in the US dollar, while about 32 per cent were invoiced in the Australian dollar. The share of imports invoiced in Chinese RMB has doubled since 2015-16 but remains low at just 1.4 per cent of the total.
• The WSJ maps out how the Middle East conflict has been spiralling across the region.
• The Asian Development Bank’s Climate Report 2024 estimates climate change could lead to a 17 per cent drop in GDP across Asia and the Pacific region under a high emissions scenario.
• As Germany’s auto, chemical and engineering industries all slump and Volkswagen warns of domestic plant closures for the first time in its history, this FT Big Read asks, Is Germany’s business model broken?
• Also from the FT, Ruchir Sharma thinks the US economic boom is a mirage. (This one serves as a counterpoint to the link two weeks ago to an Economist magazine piece trumpeting the amazing strength of the US economy.)
• New research from Harvard Business School analyses how Generative AI could change the nature of work. Drawing on evidence from the deployment of GitHub Copilot (a generative AI tool for software developers) the authors argue there is large potential for AI to transform work processes and flatten organisational hierarchies in the knowledge economy.
• The MIT Technology Review considers the implications of AI search for the economics of the web and efforts to regulate online value.
• The OECD’s How’s Life? 2024 presents evidence on more than 80 indicators to measure whether life is getting better for people living in OECD countries.
• Brian Klaas argues social scientists should embrace chaos theory. And in the same edition of Aeon magazine, Jamie Zvirzdin writes about physics, stories and metaphors.
• Calhoun’s rodent dystopia.
• A fun guide (yes, really) on how to be a central banker. Via FT Alphaville.