As things stand I’m not looking for a solid increase in fourth quarter Australian GDP (Wednesday 1130 AEDT). We’ve still got inventories (today 1130 AEDT), net exports, and the public accounts (tomorrow, same time) to come but, at the moment, the indicators suggest a GDP outcome in the order of 0.4 per cent. Perhaps less. As I mentioned last Monday, this softer GDP outcome (if that is indeed what we get) isn’t anything to really worry about, driven as it is by weak investment for the quarter which, as we know, is just volatility.
Investment isn’t weak on any measure and the intentions data we saw last week suggests it will be extraordinarily strong over the next two years or so. So far so good. In the consumer space I’m expecting decent growth as well. The accounts have shown solid consumer spending over the last year or so and a rapid acceleration in retail spending.
We’ll see what happens but I haven’t seen any catalyst for this to change. The unemployment rate is low, interest rates are low, incomes growth is solid, etc. Indeed, company reports suggest volumes growth is very strong. Think of the price deflation we’ve been seeing for many electrical goods – 30 to 40 per cent isn’t unusual. Yet nominal sales are barely negative which means volumes growth must be very strong. So while I won’t be worried by a softer GDP print this Wednesday (and I doubt the RBA will be) I think it will certainly increase calls for the RBA to cut again.
Currently, the market is pricing a 14 per cent chance of a cut this Tuesday (1430 AEDT) but an 88 per cent chance of a 25 basis point cut in May. From there it’s fairly even odds as to whether we get another one. For mine I don’t think we will get another cut although that is certainly the bias. Recall that the RBA board said they would need to see a material decline in demand for another cut to materialise.
Noting that GDP could indeed show a slowing into the December quarter, I think the RBA would want to see more than just a headline deceleration in GDP. That’s because headline numbers don’t necessarily tell the underlying story, they don’t necessarily tell us what momentum is doing. People need to dig beneath the headline number and if, as I expect, GDP is softer due to investment volatility, then this can’t really be used as evidence of a material slowing. Especially with the unemployment rate hovering around the 5.25 per cent mark.
To get another cut I think we’d need to see the partials slowing, job shedding, weak GDP numbers and a sustained lift in the unemployment rate above 5.5 per cent. We’ll see another employment update this Thursday (1130 AEDT), but most forecasters are looking for a modest increase in employment (5000-plus, me at 10,000-plus) and an unemployment rate at 5.2 per cent). More broadly then, the way the data is coming in at the moment, the way the global data flow is going in particular, I don’t think we’ll see that material slowing over the next few months.
Across the Tasman, the RBNZ meets (Thursday 0700 AEDT) but isn't expected to change rates. The recovery may be patchy, strong in some areas, disappointing in other areas, but it’s the inflation numbers, the very low inflation numbers, that we saw in the fourth quarter that gives the bank plenty of time before it does anything. At this point I’m not looking for the first hike till the fourth quarter. A cut is probably more likely than a hike in the very near-term, but I think that is still a low probability while the recovery is in train.
Looking abroad it’s reasonably quiet in the US. Tonight we see the non-manufacturing ISM survey and then most of the data is to do with employment. We get the ADP employment figures on Wednesday night, initial jobless claims on Thursday night and then payrolls on Friday night. The sharp drop in jobless claims and economic momentum more broadly suggests a decent payrolls figure for February and indeed the market is forecasting a 210,000 increase, after a 243,000 lift in January. The unemployment rate is forecast to remain steady at 8.3 per cent.
Elsewhere, it's worth looking out for German factory orders on Wednesday night, industrial production on Thursday night and on Friday, Chinese inflation and industrial production figures.
Adam Carr is senior economist at ICAP Australia. See Business Spectator's glossary for definitions of technical terms used in SCOREBOARD articles.
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