Australian Economy
The RBA Board decided to raise official interest rates by 25 basis point to 4.35 per cent at its meeting on 7 November. The RBA’s statement noted that the CPI remains elevated even though inflation has passed its peak. The RBA now sees inflation moderating to the top of the target range by the end of 2025. This has moved to timing of a return to the target range out by around 6 months. The Board expects the economy to remain at below trend growth rates with the unemployment rate rising to 4.25 per cent, slightly lower than the 4.5 per cent that it had previously forecast. Much of the language in the RBAs statement is consistent with previous statements noting uncertainty about the time lags in monetary policy and the need to assess incoming data and the potential risks to the economy.
Attention will now focus on the possibility of further interest rate rises. The monthly CPI for October will be released on 29 November which will be a key piece of data in the lead up to the next Board meeting on 5 December.
The RBAs Statement on Monetary Policy noted that the household sector is being squeezed by the higher cost of living, rising tax take and, the effect of higher interest rates. It has revised down the forecast for consumption forecasts for 2024 to –0.3 per centage points.
The Westpac-Melbourne Institute Consumer Sentiment index fell by 6 per cent following the RBA’s decision to increase interest rates. There has been a notable uptick in expectations for further interest rate rises with 73 per cent of those surveyed expecting further rate rises over the next year. In a sign of tightening household finances, around 40 per cent of consumers are planning to spend less on Christmas than last year.
Consistent with an easing in household consumption, the ANZ-Indeed Australian Job Ads index fell 3.0 per cent month-on-month in October following a downward revision in September to -0.5 per cent. The Job Ads series has fallen 11.2 per cent from the September 2022 peak but remains 44.9 per cent higher than pre-COVID levels. ANZ commented that slack is developing in the labour market with hours worked falling with recent jobs growth has been driven by part-time employment.
The Australian Bureau of Statistics (ABS) Labour force survey showed the unemployment rate increased by 0.2 per centage points to 3.7 per cent (sa) in October. Employment increased by 55,000 people with a total of 14,173,500 people employed. The participation rate increased to 67 per cent. The ABS noted that employment growth over the past two months was around 31,000 people a month, which is slightly lower than the average growth of 35,000 people a month since October 2022.
The wage price index rose by 1.3 per cent in the September quarter and by 4.0 per cent over the year. The ABS noted this is the highest quarterly increase in the 26-year history of the index. Much of the increase was driven by the Fair Work Commissions annual wage review and the one-off wage increase for aged care worker. As a result, market economists do not see evidence of a wage price spiral and expect future wage rises to moderate as the labour market cools. The 4.0 per cent growth in wages lags the increase in inflation of 5.4 per cent meaning real wages are still declining.
The Australian economy is a little difficult to read. We have households being squeezed with higher cost-of-living and interest rate rises, falling real wages, consumer sentiment deeply pessimistic while at the same time the labour market remains tight with unemployment remaining near record lows. How long these conditions will persist remains to be seen.
The Australian Financial Review (AFR) has done some interesting work looking at household incomes compared with the OECD. The AFR found that inflation-adjusted disposable incomes have hit their lowest level since June 2019 as high inflation, a rapid increase in mortgage repayments and rising income taxes ravage household budgets. In the 12 months to June, Australian household incomes slumped 5.1 per cent, the sharpest fall recorded across the OECD.
International Economy
Last week we saw policy decisions from the Federal Reserve, Bank of Japan and Bank of England all of which held interest rates steady. Markets remain of the view that the peak of the interest rates tightening cycle has been reached for many economies with rates to remain elevated for some time to come. The US Consumer Price Index rose by 3.2 per cent over the year to October, down from 3.7 per cent in the year to September. Core inflation rose by 4.0 per cent in the 12 months to October, the smallest change since the 12-month period ending September 2021. Markets are now expecting no further interest rate rises with the possibility that US interest rates could start falling as early as May 2024.
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Wayne Calder
Director Economics
0424 852 384
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