RBA pause fails to cheer Australia’s unhappy households

We were reminded by last Friday’s Statement on Monetary Policy that the RBA considers the outlook for household consumption a key economic uncertainty. On the upside, a strong labour market, the balance of savings buffers accumulated during the pandemic and the lift to wealth from the recent turnaround in house prices could potentially combine to see household spending outperform the RBA’s base case and keep inflation higher for longer.

Alternatively, however, weak growth in real disposable income due to the squeeze from higher interest rates and rising living costs could instead see the current slowdown in spending be deeper and/or more durable than expected, tipping the economy into recession. Household surveys have signalled consistently that the risks of this downside scenario remain significant, with consumers deeply uncomfortable with current financial and economic conditions.

This week’s data – in the form of the August 2023 Westpac-Melbourne Institute Consumer Sentiment Index and the latest weekly ANZ-Roy Morgan Consumer Confidence Index – suggest that the RBA’s decision last Tuesday to leave the cash rate unchanged for a second consecutive month has failed to improve the mood of Australian householders. Instead, consumers continue to report confidence levels stuck at recession-like levels. Part of the story here is that Australians are still worried that the RBA has more interest hikes in store, even if economists and markets are now saying that the odds of further hikes have fallen quite considerably. Another factor is likely to be the ongoing roll-off of fixed rate mortgages, which means a rising share of household borrowers will face higher interest rates, even in the absence of further changes in the policy rate from Martin Place. And of course, overall living costs continue to rise at a rapid rate, imposing further pain.

In contrast, conditions and confidence readings for the business sector in July (and therefore reflecting views before this month’s RBA pause) look more upbeat. However, here the latest survey results suggest that, despite the marked slowdown in headline inflation in the June quarter 2023, underlying cost pressures picked up last month.

Consumer confidence remains low despite RBA’s extended pause

The Westpac-Melbourne Institute Consumer Sentiment Index  slipped 0.4 per cent to a reading of 81 this month, down from an index reading of 81.3 in July. That left the index mired deep in negative territory and showed no post-pause bounce after the RBA’s decision to leave the cash rate unchanged this month. Indeed, according to Westpac, sentiment declined 4.9 per cent between those surveyed prior to the Board decision and those surveyed after it. Sentiment among respondents with a mortgage was down 7.2 per cent in August. Westpac attributed this to consumers continuing to anticipate further rate increases from Australia’s central bank, highlighting that two-thirds of those surveyed after the RBA meeting still expected rates to rise over the coming year. At the same time, weak household sentiment also likely reflects the continued squeeze from cost of living pressures. Still, there was at least some modest good news from this month’s survey findings: the Westpac-Melbourne Institute Unemployment expectations index fell 3.1 per cent, with a fall indicating that more respondents expect unemployment to decline over the coming year. That puts the index a bit below its long-term average, suggesting that households aren’t seeing signs of any imminent surge in joblessness.

Consistent with the monthly sentiment reading, the weekly ANZ-Roy Morgan Consumer Confidence Index fell 3.4 points to 75 in the week to 6 August, with confidence down across all mainland states.  The index was 5.3 points below the same week last year and has now been at sub-80 levels for 23 consecutive weeks, which ANZ notes is the longest weak streak on record.

Last week, the overall index was pulled down by sharp declines in the financial conditions sub-indices, with ‘current financial conditions’ slumping by 6.9 points and ‘future financial conditions’ plunging by 9.6 points. Again, the weekly decline in confidence came despite the RBA’s decision to extend the pause in its tightening cycle. And again, homeowners with debt continued to report much lower levels of confidence than other survey cohorts.

The ANZ-Roy Morgan survey’s measure of weekly inflation expectations fell 0.1 percentage point to 5.4 per cent last week.

Business conditions ease slightly in July, but cost pressures remain strong

According to the NAB July 2023 Monthly Business Survey, business conditions fell by one point last month, but remained above their long-term average at an index reading of +10 index points. Underlying readings on trading conditions (+16 index points), employment (+6 index points) and profitability (+10 index points) were all unchanged from June 2023 and remain comfortably in positive territory.

At the same time, the business confidence index rose two points to +2 index points, although while the index moved back into positive territory it also stayed below its long-run average. Forward orders rose by one point to -1 index point, while the rate of capacity utilisation rose 0.9 percentage points to a well-above average 84.5 per cent.

Survey measures of price and cost growth both rose strongly in July, with labour cost growth rising from 2.3 per cent in June to 3.7 per cent in July (in quarterly equivalent terms), purchase cost growth up from 2.2 per cent to 2.6 per cent and final price growth climbing from one per cent to two per cent. Retail price growth jumped from 1.4 per cent to 2.6 per cent over the same period. NAB reckons that the marked rise in labour cost growth reflects the impact of wage increases taking effect from the start of the financial year on 1 July, including the effect of minimum wage and awards changes. Meanwhile, the parallel rise in purchase cost growth may reflect higher energy prices.

Last week, the final estimates for the Judo Bank Australia Composite PMI showed the index falling to 48.2 in July, down from 50.1 in August. A reading below 50 indicates that activity in the Australian private sector fell last month, albeit by only a modest amount. By subcomponent, activity in the services sector fell for the first time since March this year, with the Service PMI Business Activity Index falling from 50.3 in June to 47.9 in July, marking the fastest decline seen since the start of the RBA tightening cycle in May 2022. Respondents pointed to the adverse impact of higher interest rates on spending, business confidence and new orders. Notably, activity in services fell at a faster rate than manufacturing output for the first time since December 2022,

Consistent with the NAB survey results, PMI survey respondents also said that cost pressures worsened in July, with both input costs and output charges rising at faster rates than in June.

What else happened on the Australian data front this week?

ANZ-Indeed Australian Job Ads rose by 0.4 per cent over the month in July (seasonally adjusted) but were down 8.9 per cent over the year. ANZ said that despite the modest increase, the series had fallen 2.1 per cent over the past three months and was down 10.4 per cent from its September 2022 peak, which it said implied that last month’s rise ‘is likely to be a blip’ with labour market conditions expected to soften from here.

The ABS said weekly payroll jobs for the week ending 15 July 2023 were down 0.2 per cent over the month, but up 3.7 per cent over the year. That was down from the 4.5 per cent annual growth recorded at this time last year, consistent with a slowdown in the labour market. According to the Bureau, the data showed some easing of job growth around the school holidays, together with the usual end of financial year variability.

The ABS monthly Household Spending Indicator rose by 1.8 per cent over the year in June 2023 on a current price, calendar adjusted basis. That was the smallest growth rate for household expenditure recorded since February 2021. Annual spending growth rates were down in June, relative to May across all states and territories. Spending on services rose 4.6 per cent year-on-year, while spending on goods was down 1.2 per cent in its largest decline since July 2021. Over the same period, spending on non-discretionary items was up 4.2 per cent, while discretionary spending slipped by 0.7 per cent, dropping for a third consecutive month.

In June 2023, the ABS monthly Business Turnover Indicator rose over the month in eight of the 13 published industries, with the largest rise in Electricity, gas, water and waste services (up 12 per cent, boosted by the combination of a cold start to winter and higher energy prices), followed by the Information, media and telecommunications sector (up 4.6 per cent). The largest monthly fall was recorded in Accommodation and food services (down 2.6 per cent). In annual terms, rises were recorded in 10 of the 13 industries, with the largest increase in Construction (up 18.8 per cent) and the biggest decline in mining (down 18.1 per cent on lower commodity prices).

Other things to note . . .

• Last Friday, the RBA published the August 2023 Statement on Monetary Policy (SMP) which included updated economic forecasts. The adjustments to the May 2023 SMP projections were modest, with the central bank continuing to predict a gradual disinflationary process. The new numbers show headline inflation back in the target band (at 2.75 per cent) by the December quarter of 2025. There will be a cost in terms of higher unemployment, but the expectation is that this cost will be modest, with the unemployment rate expected to peak at 4.5 per cent by mid-2025, which will still be more than half a percentage point below the pre-pandemic rate.
• Also from the RBA, a speech on Australian Financial Markets and Climate Change highlights the rapid growth (from a small base) in green bonds and green loans, while also noting that ‘financing for sustainable activities will need to increase substantially…if we are to decarbonise and meet net zero goals.’
• ABC Business reckons that the Australian dollar is going into hibernation.
• The ACCC’s rejection of authorisation for ANZ to acquire Suncorp. The AFR’s Chanticleer column is sceptical of the ACCC’s arguments. (Note that inadequate competition has been an increasingly important theme in recent debates around Australia’s lacklustre productivity performance.)
• Also from the AFR, Robert Breunig calls for levelling the tax playing field.
• Greg Earl considers the implications for Australia of a new world of government intervention in trade and industry.
• Grattan’s Tony Wood suggests how to get Australia’s energy transition back on track.
• An update on ABS methodological news for the June quarter 2023.
• From Foreign Affairs, Adam Posen on the end of China’s economic miracle.
• Two interesting infographics (via The Big Picture). The 100 Most Valuable Global Brands and the world’s largest landowners.
• A WSJ piece asking if the era of ultracheap stuff is over. One noteworthy data point here on changing demographics. Back in 2001, Nike reported that more than 80 per cent of its factory workers were in Asia and that the typical one was aged 22, single and raised on a farm. Today, Nike’s average worker in China is aged 40 and in Vietnam is 31.
• Also from the WSJ, a nice piece on the relationship between slowing global trade and a fracturing world economy.
• Barry Eichengreen assesses Bidenomics.
• Dani Rodrik and co-authors have a paper on the new economics of industrial policy.
• Two linked FT Big Reads on the new commodity superpowers and how China cornered the market for clean tech.
• Related, the Economist magazine asks if Latin America could become this century’s commodity superpower.
• Angus Deaton says misreading Adam Smith contributed to deaths of despair.
• Recent IMF research on the role of asset prices in predicting financial crises and the crypto cycle and US monetary policy.
• A new report from the McKinsey Global Institute on Generative AI and the future of work in America.
• Four key questions for the role of large language models (LLMs) in economic research. The role of replicability, how should LLMs be adopted for economic research, what’s the trade-off between transparency and predictive success, and how should output be evaluated?
• Goldman Sachs on rising global investment in AI.
• Daron Acemoglu and co-authors on new technologies, automation and productivity across US firms. Using data on the adoption and use of five advanced technologies (robotics, dedicated equipment, specialised software systems, AI and cloud computing) between 2016 and 2018 across more than 300,000 firms, they found that adoption is limited overall across firms. Larger firms are much more likely to use advanced technology than smaller ones; older firms are significantly less likely to be adopters; there are sizeable productivity differences between adopters and non-adopters (but some of this reflects selection effects); and while most firms report that adoption does not change their employment level, between 20 and 40 per cent say it does raise their demand for skills.
• Noted, the latest edition of the Journal of Economic Perspectives includes symposia on supply chains (including a piece looking at the evolution of goods transportation and cost over the last 55 years) and the international dimensions of climate change policy (including a piece on whether developed economies have really ‘outsourced’ pollution).
• How UK firms set prices in a high-inflation environment. About 60 per cent said price-setting reflected specific events, while 40 per cent adjusted their prices at fixed time intervals. With the former group changing prices more often and earlier, this could explain why UK inflation rose so much while also offering hope for a faster fall (all else equal).
• Ray Dalio on the Great Wealth Transfer (LinkedIn). Dalio reckons a big shift in wealth from the US public sector and government bond holders to the US private sector and the resultant strengthening in private sector balance sheets, has made the latter more resilient to higher Fed interest rates.
• The OECD has some suggestions for better housing policy in the post-pandemic era.
• The Macro musings podcast talks to Ricardo Reis on the macroeconomics of financial crises. 
• The Behind the Money Podcast examines how Dubai is reshaping the global oil trade.