Australian Economy
The Minutes from the RBA Board meeting on 19 March noted that recent economic data were largely in line with expectations. GDP growth had been below both its historical trend and growth in the population. Consumption has been persistently weak, and labour market conditions continue to ease with slower output growth leading to slowing demand for labour. Despite services inflation remaining sticky, overall inflation is continuing to moderate. While retaining the line that “it was difficult to either rule in or out future changes in the cash rate” the tone remains that reductions in the cash rate remain likely for the latter half of the year. However, The Board expects fewer reductions in Australia compared with other advanced economies as the cash rate hod not risen as much and Board had chosen to return inflation to target gradually over time in order to preserve the gains in employment. The Board also noted the expectations that many advanced economy central banks would begin reducing policy rates from around the middle of the year.
The monthly Consumer Price Index (CPI) indicator rose 3.4 per cent in the 12 months to February 2024, according to the latest data from the ABS. Annual inflation was unchanged in February and has been 3.4 per cent for three consecutive months. In monthly terms the indicator rose by 0.2 per cent. The benign outcome fits the RBAs view on inflation moderating gradually. Gas prices fell 2.4 per cent in the 12 months to February, the second consecutive month of annual deflation and down from the peak of 27.2 per cent to May 2023.
Consistent with a weaking in economic activity and easing conditions in the labour market, job vacancies fell by 6.1 per cent between November and February. Job vacancies are 23.5 per cent lower than the peak in May 2020 although remain high by pre-pandemic standards. There are currently 364,000 job vacancies.
The latest Westpac-ACCI Survey of Industrial Trends indicated that the manufacturing industry is pessimistic on the state of the economy with falling forward orders and prolonged input price pressures over 2022 and 2023. The sector is looking for cuts in official interest rates to ease cost pressures into the future.
Consumer sentiment continues to show marked weakness with the latest Westpac Consumer Sentiment index falling 1.8 per cent to 84.4. Sentiment fell significantly after the RBA decision to hold interest rates unchanged. This is being read as consumers hoping for a more positive message on inflation and the interest rate outlook. Underlying this are the cost-of-living pressures facing many households. Household consumption has been weak for some time with population growth propping up overall consumption levels. Per capita household consumption is negative.
Retail turnover rose 0.3 per cent in February following rises of 1.1 and 2.1 per cent in January and December. However, the ABS noted that once the “Swift” effect was stripped out retail turnover was up by only 0.1 per cent. Over the 12 months retail spending was up by 1.6 per cent compared with 6.5 per cent in the previous twelve months.
International Economy
In the US the manufacturing sector is showing positive signs with the manufacturing PMI increasing to 50.3 in March from 47.8 in February. A reading above 50 indicates growth in the sector. The uptick in the index ended 16 months of contraction in manufacturing. Inflation rose largely in line with expectations with the core PCE rising by 0.3 per cent In February and 2.5 per cent over the year to February, compared to estimates for 0.4 per cent and 2.5 per cent. While these can be seen as positive result, markets have reacted lowering expectations on the Fed Reserve timeline for cutting interest rates.
China's manufacturing activity expanded at the fastest pace in 13 months in March. The Caixin/S&P Global manufacturing PMI rose to 51.1 in March from 50.9 the previous month, above analysts’ forecasts and marking an expansion for the fifth consecutive month. A fall in commodity prices helped to reduce input costs for manufacturers giving more scope to lower prices and stimulate demand. Stronger manufacturing output in China may lead to a boost in commodity prices as the sector is a major demand center for commodities and energy.
The Eurozone CPI fell to 2.4 per cent in March, down from 2.6 per cent in February. The Core CPI also fell to 2.9 per cent compared with 3.1 per cent the previous month. Services inflation remains sticky coming in at 4.0 per cent. Expectations are the ECB will commence interest rate reductions in June.
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Wayne Calder
Director Economics
0424 852 384
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