The March release of the GDP figures showed what everyone was expecting: a slowdown in the Australian economy in the second half of 2018. Reasons include low wages growth, dampened consumer spending and a turn in the residential construction sector’s fortunes – leading to knock-on effects for manufacturing suppliers and housing goods retailers.
But beware of relying too much on one number to measure Australia’s economic health: other parts of the economy are chugging along quite nicely.
The view from the RBA – a puzzle
The Reserve Bank Deputy Governor Guy Debelle used his April ‘The State of the Economy’ speech to reflect on what he sees as a puzzle in the Australian economy: strong job creation coupled with slow GDP growth. Observers could be excused for wondering what is going on.
Debelle summed up the conundrum with a question: “Businesses continued to invest through the end of 2018 and have continued to hire into 2019. Why would they do this if growth in economic activity has slowed so much?”
He suggested that looking at business surveys might offer a different lens and provide a better understanding of the puzzle. And until the data for labour and business spending comes in, we won’t have the full picture.
As indicated above, there is good news on the jobs front. While unemployment has declined and beat RBA forecasts, jobs figures can always be a bit rubbery depending on whether full-time or part-time jobs have been created.
A better measure is to look at total number of hours worked. This gives us a view on underemployment – that is, employees who want to work more hours. The latest figures show a return to the long-term average after strong growth at the beginning of 2018.
Wages growth, however, remains in its trough with only a slight uptick, which the RBA explains mostly as workers coming off wage freezes.
Non-mining sector business investment is up. This is partly, but not entirely, related to the infrastructure boom in NSW and other parts of the country. Purchases of machinery, engineering equipment and computer software are all humming along.
Looking at actual business spending is an important indicator of the health of the economy rather than relying solely on confidence surveys, which can often be ratcheted about by short-term ‘noise’ such as stock market fluctuations.
The outlook for the Australian economy can also be seen in the financial markets – particularly in the bond yield curve. It works like this: long-term interest rates are typically higher than short-term interest rates, as investors demand a higher return for money invested over the long term. When long-term rates fall below short-term rates, this is known as an ‘inverse’ yield, indicating skittishness on the part of investors.
In March, the US bond markets made big news in business pages as the 10-year bond fell below short-term rates for the first time in 12 years. In response, Australian government bonds fell to their lowest level on record. But this may be nothing to worry about as the Australian bond market is particularly sensitive to what happens in the US.
What it does indicate is that another interest rate cut is imminent.
The big picture
So, where to from here? The economy is probably in better shape than the GDP numbers indicate, but government, business and the RBA will need to switch gears to get wages growth and inflation up. Most economists agree that that may have to happen in the form of a few more interest rate cuts. It is not a matter of if, but when.