Are you struggling to understand what’s going on in the Australian economy?
Don’t worry, you’re in the same boat as some the nation’s most qualified, highly-educated economists holed up in the Reserve Bank’s Martin Place HQ.
While not exactly throwing his hands up in despair at the futility of trying to make uncooperative Australian data fit into neat economic models, deputy governor Guy Debelle remains deeply perplexed by the core conundrum: strong jobs growth and weak economic growth.
“The strength of the labour market is at odds with the slow pace of GDP growth,” Dr Debelle observed in a speech titled, The State of Economy, last week.
It’s a tussle that’s been going on for years and it’s the primary reason the RBA has been stuck at its record low cash rate of 1.5 per cent for a record period on hold. Something has to give, but clearly it hasn’t been the RBA.
The next round in the battle will be played out this week with the release of March labour force data.
February delivered much weaker than expected jobs growth, yet the unemployment rate fell below 5 per cent to an eight-year low.
While largely solid, there were some soggy patches. The fall in unemployment was driven by fewer people looking for work and the surge of full-time jobs in January was largely reversed.
This time around the market is forecasting unemployment nudging back up and around 15,000 new jobs being created in March.
Still, the GDP/jobs enigma has Dr Debelle stumped; things are getting tense, both literally and figuratively speaking.
“The two lenses on economic growth provided by the labour market and the GDP data are in stark contrast. A third lens, in the form of business surveys [conditions], sits in between the two,” Dr Debelle said.
“The tension highlighted by these different lenses on economic growth is of crucial importance. Hopefully we will get some resolution of this tension in the coming months with the incoming flow of data.”
All very frustrating for a data-dependent central bank.
Dr Debelle and RBA’s hunch was the labour market’s strength would overpower a listless GDP number.
“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?,” Dr Debelle asked rhetorically.
Wages will pick up, consumption will pick up and all the economic pieces will fit together like a beautiful mosaic.
In that scenario interest rates are heading up, not down as the market is currently betting.
JP Morgan’s Sally Auld said, in general, the “tension” could be resolved in two ways.
“One, by GDP growth rebounding back toward trend and reversing the weakness of the second half of 2018 or two, by the unemployment rate ticking higher and realigning with soft underlying domestic activity,” Ms Auld said.
“We view the second scenario as more likely given our expectation that low wage growth and negative wealth effects stemming from the housing market will continue to constrain household spending.”
JP Morgan’s house view is pretty much in line with the consensus view for March, but with a gradual rise in unemployment continuing in months ahead.
“This is consistent with our view that the RBA is likely to ease in July and August, by which time the unemployment rate is likely to be tracking in the low/mid 5 per cent with GDP growth stuck below trend,” Ms Auld said.
That’s not how the RBA sees it.
During the question and answer session after his speech, Dr Debelle conceded that the RBA could cut rates if necessary, but he still saw decent growth in the economy and declining unemployment ahead.
The three key dates to the RBA resolving the economic versus employment growth “tension” will be next week’s and next month’s jobs data and first-quarter reads on inflation (April 24), wages (May 15) and GDP (June 6).
In other words, don’t expect any action on interest rates before July’s board meeting.
Wall Street back near a record high
Investors were back buying risk by the end of the week, with a solid rise on Wall Street pushing the S&P 500 within 1 per cent of a new record high.
Positive results at the start of another reporting season – particularly from investment bank J.P. Morgan – and rebound in exporting vigour in China saw equities suck money out of the bond market.
US treasury yields rose to three-week highs, which in effect was a bet that the threat of recession was easing.
Over the week the US was up 0.5 per cent, while the ASX rose more than 1 per cent. Futures markets point to a flat start to an Easter-shortened week locally.