Investors might have noted some recent positives in the Australian economy. June quarter GDP growth of 3.4% was above potential and its fastest rate since 2012.
We have also seen pretty good jobs numbers, with the unemployment rate trending down and sitting at a six-year low of 5.3%.
And job ads, job vacancies and employment surveys have also been solid. (While job vacancies growth slowed to 0.6% in the three months to August, vacancies are up 16.5% for the year and remain high.) That will probably prevent a rise in the unemployment rate.
But investors must put those positives in context when assessing their impact on the Reserve Bank’s likely next move for interest rates.
Firstly, while an unemployment rate of 5.3% isn’t bad, Australia is still suffering from a very high level of underemployment. If you add underemployment (currently at 8.1%) to unemployment, our total labour market underutilisation is running at around 13.4%.
That is not only historically high for Australia, but it is very high compared with the US, which is running at around 7.4%. We still have a lot of slack in our labour market.
Falling house prices
The second point to make is that the RBA has another problem: uncertain consumer spending largely due to falling house prices in Sydney and Melbourne. In September, capital city house prices, led by Sydney and Melbourne, fell again, down 0.6%. That took the year on year fall to 3.7%, the biggest since 2012.
We believe more falls in Sydney and Melbourne are likely in the next two years because of factors such as tighter lending standards and rising supply.
House prices in those cities have been falling now for a year, and that drags on consumer spending because people feel less wealthy.
The chance of a rate cut
The labour market slack and falling house prices mean I find it hard to see the RBA raising interest rates. We do have a rate hike pencilled in some time in 2020. But there will certainly be no rate rise in the next three months to the end of the year.
Indeed, there is a small risk that at some time in 2019, the RBA may have to cut interest rates again. This is not our base case. But we can’t rule out the risk that rates might have to fall a bit further if weakness in the housing sector feeds through to the broader economy and threatens inflation on the downside.
So while we believe rates are on hold for some time yet, well out to 2020, we can’t rule out another rate cut from the RBA if the falls in house prices intensify.
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