Economic Wrap

16 February 2024

Australian economy

The Secretary to the Treasury, Dr Steven Kennedy PSM, provided an opening statement to the Senate Estimates Economic Committee on 14 February. The key messages from the statement are:

  • Global inflation peaked in mid-to-late 2022 and is easing although the speed at which global inflation is moderating has slowed. The easing of inflation comes as supply side shocks have reduced and goods price inflation has eased. Services price inflation is lagging this trend and is now the largest contributor to headline inflation. Despite the easing of supply side shocks, the attacks on shipping in the Red Sea is impacting some supply chains.
  • The prospects for a soft landing have improved. The reduction in inflationary pressures has increased market expectations for cuts to official interest rates. Markets expect that US official interest rates will fall in the June quarter with further 1 percentage point rate reduction by the end of 2024. Central banks still need to see a sustainable fall in inflation before reducing interest official rates.

Comment: The path will be somewhat volatile with the US CPI marginally higher than expected at 0.3 per cent in January with inflation over the last 12 months increasing by 3.1 per cent, down from 3.4 per cent December. Markets reacted pushing back their expectations for the first cut in interest rates from May to June and the stock market plunged. It is likely there will be continuing volatility in inflation and uncertainty about the speed of interest rates cuts.

  • Increases in official interest rates and weakness in the Chinese economy are a drag on global economic growth. It is expected that global growth over 2023, 2024 and 2025 will be the weakest in three decades outside the GFC and pandemic.
  • In Australia inflation has peaked and will moderate over the next two years. Household consumption is weak, and the savings rate is at the lowest since December 2007 with per capita consumption now the weakest since the GFC. The demand for labour softened, employment growth is slowing, and hours worked are falling. The unemployment rate is expected to increase to 4.5 per cent by the June quarter 2025.
  • Investment spending is expected to remain elevated in the near‑term, supported by public infrastructure projects, commercial buildings, private sector electricity infrastructure, and some large LNG projects.

The unemployment rate rose to 4.1 per cent (sa) in January from 3.9 per cent in December. This is the first time since January 2022 that the unemployment rate had been above 4 per cent. The number of unemployed people rose 22,300 to 600,600. The number of hours worked fell by 2.5 per cent in January. The ABS pointed to the number of people taking leave in January and therefore reporting zero hours worked. This seems to have become more pronounced in recent years.

The Westpac Melbourne Institute consumer sentiment index rose 6.2 per cent to a twenty-month high in February. While still in pessimistic territory the bounce in the index suggests that consumers see moderating inflation, the likelihood of interest rates cuts and the proposed tax cuts as easing some of the cost-of-living pressures they are facing.

The latest NAB business survey reported that business conditions have soften further and business confidence remains at low levels. The softening trend is consistent with official data - which indicate that growth slowed in the second half of 2023. The business confidence index rose slightly remains below the long run average.

International economy

The US Consumer Price Index for All Urban Consumers increased 0.3 per cent in January on a seasonally adjusted basis, after rising 0.2 percent in December. Over the last 12 months, CPI increased 3.1 per cent down from 3.4 per cent in December. This exceeded market expectations of a rise of 0.2 per cent in the quarter and 2.9 per cent over the past 12 months. Core CPI rose by 3.9 per cent above the 3.7 per cent expected in markets. US markets reacted quickly and are not seeing any movements in official rates until June. The Fed Reserve typically favours the Personal Consumption Expenditures (PCE) inflation index as its preferred measure. The next PCE reading is late February and will provide guidance for the Fed Reserve ahead of its March meeting.

Inflation is Britain held steady at 4.0 per cent in January. Markets had expected the inflation rate to edge up 4.2 per cent. Markets are now pricing in a first reduction in interest rates by the Bank of England in June. Keeping with global trends, services price inflation remained sticky and increased to 6.5 per cent compared to 6.4 per cent in December.

The volatility in the movement of inflation underscores the cautious tone in recent central bank commentary. They are looking for a sustainable fall in inflation before reducing official interest rates. This does not mean that inflation will need to be at the target before official interest rates start falling, but central banks need to be convinced that inflation is tracking sustainably to their respective targets.

If you would like more information or have any questions please feel free to reach out to me.

Wayne Calder
Director Economics
0424 852 384
[email protected]