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Is Australia starting to enjoy the Trump bump?

David Bassanese
Wednesday, February 08, 2017

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By David Bassanese

Is Australia already starting to enjoy the “Trump bump”? A smattering of positive economic data in recent weeks and an upbeat outlook from the Reserve Bank suggests the economy could well shake off the impact of the impending slide in home building fairly well. If so, it would be a great relief to Canberra and the RBA and suggests the share market could well post another year of positive returns, thanks to a belated lift in corporate earnings.

We’ll see of course, but to my mind, the tentatively improving outlook suggests simply persistent low inflation won’t be sufficient to goad the RBA into cutting interest rates further this year – especially with the Sydney housing market still red hot. What will also be necessary are clear signs that the labour market is deteriorating, as would be evident with the unemployment rate piercing through the 6% level again.

So why all the positivity? Perhaps the single best timely indicator on the economy is the National Australia Bank’s monthly business survey. The latest survey covering the month of December revealed an encouraging rebound in economy-wide business conditions, after having been on the slide since mid-2016. 

The improvement was fairly broad-based across sectors, with gains in transport and wholesaling particularly impressive. The NAB economists – who have been calling two RBA rate cuts this year – tried to look for the weak spots, noting that conditions in the retailing sector remained poor. But even in retailing, the latest survey showed a strong lift in forward orders during the month. As an indicator of consumer spending, moreover, the NAB survey could be given as a misleading read or at least reflect lags, as we know retail sales volumes rebounded by a solid 0.9% in the December quarter, after close to flat reading in the June and September quarters.

What appears to be particularly hurting retailers is not sales so much (though new foreign entrants and online retailers remains an intensifying threat), but the sheer lack of pricing power. According to the official retail sales survey, retail prices rose a meagre 0.3% in the December quarter, and only 1.3% over 2016. It’s little wonder underlying consumer price inflation remains so low.

It’s just a hunch, but perhaps one of the reasons for the relative strength in transport and wholesaling as reported by the NAB is the rapid growth in online retailing – we’re buying online and having stuff delivered to our homes or offices rather than venturing into shops. The solid gain in resource export volumes is another factor supporting transport.

Otherwise, the strongest sectors in the NAB survey are in finance, property and business services, along with recreation and personal services. Again, another reason for the ailing traditional retailing sector is that we are buying more “experiences”, through services such as massages, travel and eating out, rather than clothing, take-home food or household goods.

The other clear positive percolating through the economy is the amazingly persistent strength in coal and iron ore prices. While they’ve come off their boil in recent weeks, they remain at high levels – and the outlook has improved from the despair of early 2016, thanks to signs that China has no choice but to continue pump-priming housing and infrastructure activity to keep the economy ticking over, while also cutting back on excess capacity in its own high cost and highly polluting coal and iron ore industries. 

Judging by the RBA’s post-meeting Statement on Tuesday, the Bank still seems to see more blue skies than rain clouds ahead. For starters, it downplayed the negative September quarter GDP result suggesting it “largely reflected temporary factors” – which we know were factor like poor weather which hampered some construction projects and export shipments. The Bank then confidently expressed the view that its “central scenario remains for economic growth to be around 3 per cent over the next couple of years.”  As gleaned from various surveys, that’s still toward the top-end of the range of market-economist expectations (including my own), and suggest the RBA won’t revise down its growth outlook by much at all in this Friday’s Statement on Monetary Policy.

Given the RBA talks to an extensive range of business contacts on a regular basis, the fact it remains relatively upbeat on the economic outlook is encouraging. That said, while the RBA is not the worst economic forecaster in the country, even it is not infallible.

More generally, however, my sense is that the RBA may be getting a little more comfortable with below-target inflation, especially if it coincides with above trend growth (as it expects) and associated downward pressure on the unemployment rate. Indeed, provided low inflation does not reflect deficient demand – but rather “positive supply shocks” such as new entrants and productivity-enhancing technology shocks – it could actually be construed as an economic positive that enhancing real incomes.

All this suggest that a rate cut as early as May will also be a stretch – even if annual underlying inflation stays close to 1.5% in the March quarter report in late April – unless we also start to see the unemployment rate defying the RBA’s optimism and push back above 6%.

Published: Wednesday, February 08, 2017

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