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September, 2017 9:43 PM



RBA focuses on AUD, wages & debt

RBA focuses on AUD, wages & debt

Reserve Bank Board minutes; Consumer sentiment; New vehicle sales; Tourism

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15.08.2017 04:04 PM

RBA focuses on Aussie dollar, wages and debt

Reserve Bank Board minutes; Consumer sentiment; New vehicle sales; Tourism

Reserve Bank Board minutes: The minutes from the August 1 Board meeting shows the Reserve Bank weighing up a raft of factors including the strength in the labour market, likelihood of higher wages, the level of household debt, and concerns about the stronger Australian dollar.

Consumer confidence eases: The weekly ANZ/Roy Morgan consumer confidence rating eased from 113.7 to 111.7 in the week to August 13. Confidence is down 5 per cent over the year.

New vehicle sales: The Bureau of Statistics (ABS) reported that new vehicle sales fell by 2 per cent in July – the first fall in five months. Annual sales of SUVs and “other vehicles”, like utes, are at record highs.

Tourist arrivals/departures: Tourist arrivals fell by 0.9 per cent in June. And departures fell by 2.2 per cent. Arrivals are up 4 per cent on the year with departures up 0.2 per cent. The Reserve Bank Board minutes provides guidance on interest rate settings. Consumer confidence data is important for retailers. The residential property price data is important for housing-dependent businesses. The car sales data provide perspectives on consumer spending as well as the auto sector of the sharemarket.

What does it all mean?

The Reserve Bank Board remains optimistic about the medium term prospects for the Australian economy. And aside from the obvious concern about the recent strength in the Australian dollar, there were a number of key issues occupying their thoughts – the high levels of household debt and subdued wage growth.

The commentary from the Central Bank, on the Australian dollar was telling. In effect the stronger Australian dollar (if sustained) would act as a quasi-rate hike on the economy, weighing on growth while also keeping imported prices pressures low.

Overall policymakers are firmly on the interest sidelines. Inflation remains low and the focus will be on how the business investment case evolves over the next 12 months.

Chinese tourists are still flocking down under. Tourists from Greater China (China and Hong Kong) comfortably exceed those from New Zealand, but tourists from mainland China should pass NZ in their own right in the next few months. 

Interestingly tourists from the US have surged by 16 per cent in the past year. More tourists means more spending at retail and services outlets, cafes & restaurants and on transport services. And these extra dollars are, in turn, spent elsewhere in the economy, providing important momentum to the economy.

What do the figures show?

Reserve Bank Board minutes:

Last paragraph: “Taking account of the available information and the need to balance the risks associated with high household debt in a low-inflation environment, the Board judged that holding the stance of monetary policy unchanged would be consistent with sustainable growth in the economy and achieving the inflation target over time”

“Members regarded conditions in the housing market and household balance sheets as continuing to warrant careful monitoring. Conditions in the housing market varied considerably around the country.”

“They noted that the forecasts were conditioned on the assumption of no change in the Australian dollar exchange rate during the forecast period, which extends to the end of 2019, and that this assumption was one source of uncertainty.”

“Members observed that recent data had suggested further improvement in the labour market. Employment had increased in every state since the start of 2017, including solid growth in the mining-exposed states. This provided further evidence that the drag on economic activity from earlier declines in the terms of trade and falling mining investment were running their course. Over this period, around 165,000 full-time jobs had been created, labour force participation had risen and average hours worked had increased.”

“Members observed that recent strong employment growth would be likely to contribute to an increase in household disposable income, and therefore consumption growth, over the forecast period. However, ongoing low wage growth and the high level of debt on household balance sheets raised the possibility that consumption growth could be lower than forecast.”

“Information from liaison indicated that some employers were finding it harder to attract workers with particular skills. If this were to broaden, wage growth could increase more quickly than forecast, which would see inflationary pressures also emerge more quickly.”

“Growth in China was expected to ease in 2018 and 2019 because of structural factors such as a declining working-age population, as well as policies to address financial risks. Members noted that the outlook for the Chinese economy remained a significant source of uncertainty. In particular, it was unclear how the authorities would negotiate the difficult trade-off between growth and the build-up of leverage in the Chinese economy.”

Consumer sentiment

The weekly ANZ/Roy Morgan consumer confidence rating eased from 113.7 to 111.7 in the week to August 13. Confidence is down 5 per cent over the year and below the average of 113.2 since 2014.

Three of the five components of the index fell in the latest week:

• The estimate of family finances compared with a year ago was down from +7 to +5;
• The estimate of family finances over the next year was up from +21 to +23;
• Economic conditions over the next 12 months was down from +1 to -5;
• Economic conditions over the next 5 years was unchanged at +5;
• The measure of whether it was a good time to buy a major household item was down from +35 to +31. 

New vehicle sales

According to the Australian Bureau of Statistics (ABS), new vehicle sales fell by 2 per cent in July – the first fall in five months. Passenger car sales fell by 2.2 per cent, sales of sports utility vehicles fell by 1.7 per cent and sales of “other” vehicles (includes utilities, panel vans, cab chassis, goods carrying vans, rigid trucks, prime movers, non-freight carrying trucks, and buses) fell by 2.2 per cent.

New vehicle sales are up by 1.8 per cent over the year. Passenger car sales are down by 5.2 per cent, while SUVs sales are up 8.4 per cent and “other vehicles” are up by 3.9 per cent.

In rolling annual terms, 1,180,968 new vehicles were sold over the year to July. Sales of SUVs (455,284) hit fresh record highs in annual terms, while annual sales of “other” vehicles also stood at record highs of 258,450. Sales of passenger vehicles fell to a 23-year low to 467,134 in the year to July.

Overseas arrivals & departures

Tourist arrivals fell by 0.9 per cent in June. And departures fell by 2.2 per cent. Arrivals are up 4 per cent on the year with departures up 0.2 per cent.

In June, tourists from Greater China (China and Hong Kong) totalled 137,100 (mainland China 114,300, Hong Kong, 22,800), ahead of New Zealand (110,900). Greater China passed NZ for the first time in September 2015.

Over the past year a record 1,268,700 tourists came to Australia from China, up 11.5 per cent over the year. Tourists from China and Hong Kong rose to a record 1,532,200 over the past year, up 10.4 per cent over the year. Tourists from New Zealand totalled 1,350,900 visitors over the past year, but were up just 2.2 per cent.

Tourists from the US continue to soar, up 15.7 per cent over the past year to a 758,300 annual rate.

Net permanent and long-term arrivals to Australia totalled 290,450 in the year to June – the highest level in 22 months. Permanent & long-term arrivals stood at 37-month high of 742,810 people.

What is the importance of the economic data?

The Reserve Bank releases minutes of its monthly Board meeting a fortnight after the event. The minutes give a guide to Reserve Bank thinking on interest rate settings.

The Australian Bureau of Statistics (ABS) provides quarterly data on residential prices. The figures provide further perspectives on the state of the housing purchase sector.

The ANZ/Roy Morgan weekly survey of consumer confidence closely tracks the monthly Westpac/Melbourne Institute consumer sentiment index but the former measure is a timelier assessment of consumer attitudes and is now closely tracked by the Reserve Bank.

The Australian Bureau of Statistics releases data on overseas arrivals and departures is produced monthly and is an indicator of the health of the tourism sector. The figures are also useful in understanding spending trends and tracking migrant numbers – an indicator with widespread implications for employment, housing and spending.

What are the implications for interest rates and investors?

CommSec expects the Reserve Bank to remain on the interest rate sidelines for an extended period.

Originally published by Savanth Sebastian, Senior Economist, CommSec
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