The RBA, the cost of living and the next election

Famously, James Carville, Bill Clinton’s political advisor at the time of the 1992 US presidential election, said that when it came to political contests, it’s all about ‘the economy, stupid’. After three days in Canberra this week, where most of the talk was of the upcoming election (due to be held by 17 May next year), my key takeaway was, it’s the cost of living, stupid. Certainly, politicians seem laser-focused on the political implications of the current cost-of-living squeeze on voters. One consequence is that all eyes will be on the RBA Board when it next meets on 5-6 August, to see if Martin Place delivers the first interest rate increase since last November.

In theory, this week’s publication of the Minutes from the RBA’s June Board meeting should provide some clues as to what August might bring. And the report on the policy discussion does offer some insight into the central bank’s thinking. But that discussion predated the unexpectedly strong May 2024 Monthly CPI Indicator reading, and much will now ride on the extent to which the upcoming June quarter headline CPI and underlying inflation readings (due on 31 July) overshoot the RBA’s forecasts of an annual print of 3.8 per cent.

Meanwhile, the government is hoping that cost-of-living relief provided by the Budget in the form of revised Stage 3 tax cuts, plus its offerings on energy prices, rents and PBS co-payments will ease pressure on real incomes. For its part, the opposition is warning that with the Feds and the States collectively injecting yet more demand into the economy, the net effect is to make the RBA’s life harder. The Minutes’ take on all this was simply to note that ‘Energy rebates and rent assistance would lower headline inflation in 2024, though this direct effect would be reversed later in 2025’ and to flag that RBA staff would ‘incorporate an assessment of the impact of the budgets on the outlook for output and inflation in the August forecasting round’.

More detail on the RBA Minutes and this week’s data releases below.

RBA Board committed to its narrow path

According to the Minutes for the 17-18 June 2024 Monetary Policy Meeting of the RBA Board, those present once again found themselves debating the merits of an increase in the cash rate target, versus leaving policy unchanged. The context for that debate was that the April 2024 Monthly CPI Indicator reading had come in above expectations, while there had also been revisions to national accounts data suggesting that household consumption had performed more strongly than previous estimates had indicated. Against that background, the Minutes say,

‘Raising the cash rate…could be appropriate if members formed the view that policy settings were not sufficiently restrictive to return inflation to target within a reasonable timeframe. This could be the case if it was judged that inflation was returning to target more slowly than previously assumed or that the gap between aggregate demand and aggregate supply was not closing quickly enough.’

They then go on to list evidence in favour of those concerns. These include revisions to the consumption profile; a gradual strengthening in the global economic cycle; some easing in financial conditions for larger businesses; the possibility that weak productivity growth means aggregate supply will be more constrained than the central bank assumed; and a rise in the market-implied risk premium, which would suggest an increase in the risk of an increase in inflation expectations.

The Minutes then set out the case for no change, starting by noting that:

‘…the case to hold the cash rate steady at this meeting was based on the view that the economy was still broadly tracking on a path consistent with returning inflation to target in 2026, while preserving as many of the gains in employment as possible’.

Here the supporting evidence included the significant fall in inflation from its late-2022 peak; the fact that Martin Place reckoned inflation expectations remained consistent with the inflation target; evidence that the pace of wages growth had peaked; signs of weak output growth and a closing output gap; the presence of downside risks to the labour market and the risk of a continuation in the rapid rise in business insolvencies.

In weighing up the two options, the Minutes explain that while ‘the information received since the previous meeting had reinforced the need to be vigilant to upside risks to inflation’ it was also the case that ‘the collective data received since the May meeting had not been sufficient to change [the Board’s] assessment that inflation would return to target by 2026, despite some elevated upside risk around the forecast’ and likewise that ‘there had not been enough evidence that the outlook for aggregate demand had strengthened, noting uncertainty around the data for consumption and clear evidence that many households were experiencing financial stress’.

The bottom line, then, is that the Board continues to feel it can successfully navigate its way along the narrow path:

‘Members…affirmed their assessment that it was still possible to achieve the Board’s strategy of returning inflation to target in a reasonable timeframe without moving away significantly from full employment, even though this ‘narrow path’ was becoming narrower.’

In this context, however, and as noted above, the Board meeting took place before the release of the disappointingly high Monthly CPI Indicator reading for May. As discussed last week, those numbers suggest there are upside risks to the upcoming June quarter CPI release. The narrow path may well now be narrowing to the extent where it is starting to resemble something that looks more like a tightrope.

Job Ads see fifth consecutive decline

ANZ-Indeed Australian Job Ads fell 2.2 per cent over the month (seasonally adjusted) in June 2024 to be down 17.6 per cent over the year. That marked a fifth consecutive monthly drop, with ANZ noting that the pace of decline has increased from a three per cent quarter-on-quarter drop in the March quarter of this year to a 7.1 per cent drop in the June quarter. Even so, the level of Job Ads remains 17.8 per cent above pre-pandemic levels.

The story here is consistent with the broader narrative that most labour market adjustment to date has taken place not in terms of the unemployment rate but along other margins. Thus, Job Ads are now down almost 26 per cent from their June 2022 peak. Similarly, as of May this year,the ABS job vacancies series had fallen 26 per cent from its May 2022 peak. Hours worked have also adjusted, down 1.3 per cent from their April 2023 peak. Whether the adjustment process can continue to take this form, or whether there will be a shift to a more brutal change in job numbers is one of the risks along the RBA’s narrow path.

Meanwhile, house prices keep on rising

CoreLogic said Australian national dwelling values rose by 0.7 per cent over the month in June 2024 to be up eight per cent over the year. The combined capital cities index was also up 0.7 per cent over the month and 8.3 per cent over the year. CoreLogic said growth in the national index appears to have ‘found a groove,’ rising between 0.5 per cent and 0.8 per cent per month since February this year, shrugging off high interest rates, the cost-of-living squeeze, significant affordability pressures and tight credit policies. It reckons the key driver here is tight supply levels, noting that total advertised supply is currently running nearly 18 per cent below the previous five-year average. But demand is playing a role too, with the average number of homes sold across the nation is up 8.6 per cent over the year and running 4.8 per cent above the previous five-year average.

Turning to the rental market, CoreLogic said rental growth is now showing signs of easing, even as it continues to run well above the past average growth rate. Thus the CoreLogic national rental index recorded a monthly rise of 0.4 per cent last month (the lowest growth rate since last September) and was ‘only’ up 8.2 per cent over the year (the lowest rise since last November). Note however, that the pre-pandemic average annual rate of rental growth was just two per cent.

The slowdown that has occurred to date has been steepest in the unit sectors of Sydney, Melbourne and Brisbane, which are the cities that have the most exposure to net overseas migration (NOM). With NOM rates having slowed markedly from last year, CoreLogic reckons this effect together with affordability pressures (national rents are up 22 per cent over past two years) has been an important driver of recent developments.

And retail sales growth rebound in May this year

The ABS said retail sales rose 0.6 per cent over the month (seasonally adjusted) to be 1.7 per cent higher over the year in May 2024.

The monthly pace of growth was up quite sharply from just 0.1 per cent in April and a 0.4 per cent decline in March and represented the strongest result since January this year. It also came in at double the 0.3 per cent monthly growth rate expected by the market consensus. The data showed the largest rises for clothing, footwear and personal accessory retailing (up 1.6 per cent) and household goods retailing (up 1.1 per cent).

The retail sales numbers are important because they offer some insight into what is happening with household consumption. In terms of the two-sided risks currently facing the economy, the recession risk component is centred around the resilience of household sector, with stronger spending numbers indicative of household resilience and vice versa. However, while May numbers look good on the surface, the Bureau cautioned that the increase largely reflected a boost from consumers taking advantage of early end of financial year (EOFY) promotions and sales events, noting that retailers were still reliant on discounting and sales to drive discretionary spending. The ABS said many retailers started their EOFY sales early, offered larger than usual discounts and told the Bureau that shoppers were still price-sensitive. It also noted that in trend terms, sales were flat over the month and up just 1.5 per cent over the year.

What else happened on the Australian data front this week?

The ANZ-Roy Morgan Consumer Confidence Index rose 0.9 points to 81.3 in the week ending 30 June 2024. The ‘time to buy a major household item’ subindex rose by a strong 2.2 points, which ANZ suggested may be linked to EOFY sales. Weekly inflation expectations jumped by 0.4 points (the largest weekly increase in nine months) to a two-month high of 5.2 per cent.

Australia’s goods trade balance fell by $254 million to a surplus of $5.8 billion (seasonally adjusted) in May 2024. According to the ABS, exports were up $1.2 billion (2.8 per cent) while imports rose by $1.4 billion (3.9 per cent).

The ABS said total dwelling units approved rose 5.5 per cent over the month (seasonally adjusted) to 14,175 in May 2024. That was still down 8.5 per cent on approvals in May 2023. There were 9,163 private sector houses approved (up 2.1 per cent month-on-month) and 4,858 approvals of private sector dwellings excluding houses (up 16.3 per cent in monthly terms).

Other things to note . . .

• The June 2024 edition of Resources and energy quarterly forecasts that after peaking at $466 billion in 2022-23, the value of Australian resource and energy exports will fall to an estimated $417 billion in 2023-24, before easing again to $380 billion in 2024-25.
• The Productivity Commission’s latest Productivity Bulletin.
• CoreLogic on what another rate rise could do to the Australian housing market.
• A summary of ABS findings on Disability, Ageing and Carers. More than one in five people (21.4 per cent) had disability in 2022, up from 17.7 per cent in 2018. There were three million carers, representing 11.9 per cent of all Australians living in households, up from 10.8 per cent in 2018.
• The Future Fund’s position paper on the implications of geopolitics for the new investment order.
• How 29 forecasters see Australia’s economic recovery in 2024-25.
• Michael Boskin on policy lessons from recent economic crises.
• The BIS Annual Economic Report 2024 takes a cautiously positive tone, suggesting the world economy ‘appears to be finally leaving behind the legacy of the COVID-19 pandemic and the commodity price shock of the war in Ukraine’. Indeed, with the world avoiding the worst fears, global inflation falling towards targets, and both economic activity and the financial system having proved ‘remarkably resilient’, it says that this is ‘a great outcome’. There is of course a ‘but’ (or a series of them) in the form of sticky inflation, persistent financial vulnerabilities, fragile fiscal positions and subdued productivity growth.
• Torsten Slok on the Japanese yen, JGB yields, and the demand for US Treasuries.
• This IMF paper on Japan’s Fertility reckons the international evidence is that provision of childcare facilities represents the most successful measure to support the fertility rate.
• Goldman Sachs asks, will the current surge in spending on generative AI ever pay off?
• Another question: Is there a new critical minerals curse?
• An FT Big Read on climate change, food prices and monetary policy.
• A new OECD report on the Economics of Space Sustainability.
• The Economist wonders whether services will make the world rich.
• Viruses are us.
• On watching Euro 2024.
• Will we ever feel the same about wind turbines as we now feel about windmills?
• The UnHerd podcast talks to Niall Ferguson who wonders, are we the Soviets now?
• As the UK goes to the polls, the Past Present Future podcast has been discussing previous landmark UK elections, including Margaret Thatcher’s transformative win in 1979 and Tony Blair’s landslide victory in 1997.