David Plank, Head of Australian Economics at ANZ, suggests that the Minutes from the March RBA Board meeting highlighted the continued improvement in the global environment, the stronger-than-expected rise in Q4 GDP in Australia and the prospect the terms of trade could be stronger than expected.
“Housing conditions differed across the country, strengthening in Sydney and remaining strong in Melbourne while prices were declining in Perth. The primary downside influence was weak wages.”
“We highlight the following from the Minutes:
- “Forecasts by private sector analysts for growth in the major economies…had been revised upwards since mid-2016”. In the US, “above-average growth in unit labour costs, higher oil prices and more expansionary fiscal policy were all expected to contribute to a further rise in core inflation”.
- Critically for Australia, “the recent improvement in global demand suggested that higher commodity prices could be more persistent than previously anticipated.”
- Domestically, “GDP growth in the December quarter …had been above expectations”, However, while “total nominal income had risen strongly….growth in labour incomes had been unusually weak.”
- As noted above, “conditions in established housing markets had continued to differ significantly across the country.” The RBA’s overall conclusion was “that there had been a build-up of risks associated with the housing market” as “growth in household debt had been faster than that in household income.” As highlighted at the time of the RBA statement, the Bank now thought that “supervisory measures had [only] contributed to some strengthening of lending standards.”
“For us the main focus in the Minutes was the discussion about wages. We are a little surprised that the Bank chose to emphasise that the “wage price index had increased…in line with the staff forecasts.” That may well have been the case, but what about the average earnings per hour data in the national accounts? This matters much more for costs pressure than the WPI and, in our view, was much weaker than expected. The Bank goes some way to acknowledge this by noting that “this measure of wage growth had also been subdued in year-end terms”, implying “very little labour cost pressure in the economy.”
“The Bank continues to project that “spare capacity [in the labour market] was expected to decline slowly as momentum in the economy built”. As such the rise in the unemployment rate in February, revealed after the RBA Board met in early March, will no doubt have been a disappointment.”