This is one of the big weeks of the year for the Australian economy. The first weeks of March, June, September and December are when the monthly meeting of the Reserve Bank board coincides with the national accounts for the preceding quarter from the Australian Bureau of Statistics (and the start of monthly economic data such as retail sales, building approvals and trade). Looming elections federally and in NSW, however, make this week especially important.
After the shock slowing in September quarter GDP growth to 0.3%, from 0.9% in the June quarter, economists are tipping a further slowing in the December quarter. Subject to revisions in the previous quarters’ data, annual growth in the December quarter could slow from 2.8% to a range of 2.4% to 2.6%, with most quarter-on-quarter estimates around 0.2% (AMP) to 0.4% (ANZ and NAB).
Those estimates might alter with today’s figures on wages, salaries, sales and business stocks and the current account (and there’s government finance and investment data tomorrow). Most forecasts are around that level after last week’s solid December quarter private investment figures were countered by a big fall in construction spending in the December quarter and large revision downwards for the three months to September.
This won’t affect the Reserve Bank — they’ll leave rates on hold tomorrow — but if the December quarter numbers are as poor as predicted, the bank will begin to focus more on the metric it has identified as the guide to the immediate future of monetary policy — the unemployment rate and the “substantial” rise that would prompt it to cut rates. Complicating that story, however, is what we used to call the “two-speed” nature of the jobs market.
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In Western Australia — where what’s left of the Morrison government is in serious trouble — unemployment is 6.8%, despite strong exports and high commodity prices. It’s a similar picture in the other battleground state, Queensland, where unemployment is 6% but significantly higher in regional areas. But in NSW, and in Sydney in particular, the economy is charging along with unemployment at a record low of 3.9% — the sort of level that should see an incumbent comfortably re-elected, but this month’s election is proving difficult indeed for Gladys Berejiklian.
The bank is also worried about weak household income growth, continuing sluggish wage growth, weak consumption spending and, to a limited extent, moderating house prices. If you believe Nine and News Corp — and their Domain and REA Group property arms — and even the ABC, house prices are the be-all and end-all of the economy. Friday’s monthly CoreLogic property price data showed more falls in Sydney and Melbourne in February: house prices in Sydney down 1.1% last month to be down 11.5% over the past 12 months (and at July 2016 levels), while in Melbourne prices fell 1.2% to also be down 11.5% (back to November 2016 levels).
That, inevitably, brought out the doom and gloom merchants in the media. But their self-interested obsession with the property market means they can’t or won’t see what the RBA really thinks about falling house prices. It is a “second order issue” according to RBA governor Phillip Lowe, who used that word a couple of times at his recent House of Representatives Economics Committee appearance, referring to
weak income growth, which is the primary story, and housing prices, which is the secondary story. Income growth over recent years has been sub 3%. It used to be 6%. When your income is not growing as fast as it used to, you have to curtail your spending. That’s the primary thing that’s going on. As income growth has been slow year after year, more and more of us have realised that the old days are not coming back anytime soon and we have to adjust our spending plans … The second-order issue is what’s going on in the housing market. There are some wealth effects from declining housing prices, but they’re relatively small. We’ve got to remember that in Sydney and Melbourne prices are still up 70 or 80% over a decade, so most people are sitting on very substantial capital gains … It’s largely the income story which doesn’t get talked about enough, because the media love talking about property prices, but year after year of weak income growth finally weighs on our spending plans.
Lowe couldn’t have been clearer about how the focus by Nine, News Corp and the ABC on property is deeply misleading when it comes to what’s really going on in the economy. And income growth has been a key constraint on GDP in recent quarters — and likely a key constraint on the political prospects of governments seeking re-election.