Economic Insights - RBA’s silence on contributions to spending supports an August rate cut

At first glance the statement accompanying the decision by the RBA to leave the cash rate unchanged at 2.00% looks very similar to the statement provided the previous month. Even the new comment relating to developments in China and Greece is relatively neutral, “despite fluctuations in markets associated with the respective developments in China and Greece, long-term borrowing rates for most sovereign and creditworthy private borrowers remain remarkably low”. What has changed in the commentary between June and July relates to details about spending in the Australian economy. In June, the accompanying statement included comments that “household spending has improved, including a larger rise in dwelling construction, and exports are rising. But a key drag on private demand is weakness in business capital expenditure in both mining and non-mining sectors and this is likely to persist over the coming year”.
Altair Asset Management

RBA spending comments under review

None of this detail about spending in the economy appears in yesterday’s statement. Instead, the comment on the Australian economy is reduced to just a five line paragraph pointing out that growth is below its longer-term average, unemployment is elevated and little changed implying spare capacity and inflation is forecast to be consistent with target over the next one to two years even with a lower exchange rate.  Silence on spending detail this time around seems to imply that the previous comments are in the process of being reviewed. It seems to us that review cannot escape making the June comments on household demand and exports rather softer when they next appear, probably in the statement accompanying the monetary policy decision at the early August policy meeting. 

Softer household spending & sentiment… 

Retail sales still represent the lion’s share, more than 50%, of household spending. Retail sales have turned comparatively soft over recent months. May retail sales rose by 0.3% after falling in April by 0.1% and increasing by 0.2% in March. By comparison, in February, January and December 2014 retail sales lifted respectively by 0.7%, 0.6% and 0.1%. Moreover, consumer sentiment took a much softer turn in June removing the brief positive blip in the wake of the May Federal Budget and RBA rate cut. 

Even though spending on housing has stayed strong, the RBA’s comment in June that household spending has improved looks in need of taking a much softer tone (also to be reflected in the RBA’s latest growth forecasts due to be published first Friday in August).

…while recent exports data weaker 

The RBA’s June comment that exports are rising may also need some softening. In just the two most recent months of April and May 2015 Australia has recorded a combined deficit in trade in goods and services of $A6.9 billion set against a combined deficit for the previous 6 months of $A7.2 billion. The sharp deterioration in the trade deficit in April and May is largely the result of a lurch down in the value of exports. Exports, after averaging $A27.3 billion a month between January and March inclusive, fell to $A25.3 billion in April and lifted only slightly to $25.5 billion in May. The last time the value of exports was as low as it was in April and May 2015 was more than two years ago in February 2013. Even in volume terms, more relevant for contribution to growth, it seems that exports probably fell sharply in April and May. This may be a negative blip in exports, but it still makes it hard to maintain a statement that exports are improving. 

Business investment spend may still drag  

As far as business investment spending is concerned little seems to have changed since the RBA commented that it remains the main drag on spending in the economy. If anything, the concerns about softer growth in China reinforce the negative forces making Australian businesses reluctant to invest.

We expect RBA to revise down economic forecasts 

At its next policy meeting in early August the RBA will brief its board members about its latest set of economic forecasts that will be published three days later in the regular quarterly Monetary Policy Statement. As we point out above, the RBA will probably need to make at the very least a downward adjustment to its assessment of household spending growth. It is hard to see any compensating positives to the growth forecasts. The business investment spending outlook is likely to be at least as dour as in the RBA’s previous set of forecasts and bright spot of export growth has taken a markedly weaker turn of late. Inflation still looks to be very well contained too, although confirmation is still needed in the Q2 CPI report due later this month.

…and to cut cash rate in August

All told it is hard to escape the conclusion that it will be clearer in early August than it was in June and July that demand needs more assistance. We expect the RBA will respond by cutting the cash rate another 25bps to 1.75% in early August. While silence about contributions to spending in yesterday’s RBA statement was not golden, implying concern about a softer tone in the economy, it may at least mean a market friendly response in a few weeks time with another rate cut more likely than is perhaps recognised by many.



About the Author

Stephen Roberts is Altair’s Chief Economist and provides Altair’s team with a comprehensive review and outlook of macro-economic factors likely to influence financial markets.

Stephen is an economist and investment strategist who has worked for over 40 years in the finance industry with extensive experience in banking, broking and funds management.  

During his career Stephen has been Australian Chief Economist for SBC, Fay Richwhite, Equitilink, UBS, Grange Securities, Lehman Brothers and Nomura. He has also worked as a portfolio manager specialising in strategic asset allocation overlays for Westpac Investment Management, Sagitta and BT.  In addition, Stephen was a contributing author to the Campbell Committee Report relating to the conduct of monetary policy, foreign exchange controls and floating the Australian dollar.


[Altair Economic Insights 8 July 2015_weekly.pdf]

Altair Asset Management
Altair Asset Management

Altair Asset Management (Altair) is a high conviction, active Australian equities manager whose investment philosophy is based on understanding the drivers and impact of change. Altair applies macro thematic research to uncover trends which are...


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