What does it all mean?

The Reserve Bank Board undertook its annual review of forecasts and concluded that forecast errors had been lower than ‘average’ or normal. Members of the Board also ran different scenarios to assess the impact on interest rates and also ran scenarios to judge the impact on Australia of higher US wage and price growth. Overall, it seems clear from the text that the Reserve Bank Board is comfortable with how things have played out over 2018 and is comfortable with current interest rate settings.

While the Reserve Bank continues to watch the US-China trade dispute, it remains upbeat, believing that growth of Australia’s trading partners will “remain above potential in 2019.” However the Board did note “the latest forecasts had incorporated a small negative effect from recent tariff changes on growth in a number of economies, including the United States and some east-Asian economies.”

There are definitely no signs of angst expressed by Reserve Bank Board members.

Consumer confidence fluctuates from week-to-week. Over the year to November 18, the ANZ-Roy Morgan sentiment gauge has averaged 118.5 points, broadly in-line with current levels of confidence. 

The sharpest falls in weekly sentiment have occurred around political events this year – the Liberal Party leadership crisis (“Libspill”) and Wentworth by-election, respectively in August and October. Of course, households will be navigating three elections in the coming months with Victoria, New South Wales and Federal polls ahead. Business and consumer confidence will likely be choppy in this environment. 

That said, sentiment is holding-up remarkably well, given that home prices have been falling in Sydney, Melbourne and Perth for over a year. And the Aussie sharemarket touched 20-month lows today, down by almost 7 per cent (ASX200 index) so far this year. Importantly, consumer views about the state of their finances and economic conditions are still all above their long-run average levels.

What do the figures show? 

Consumer Sentiment

The ANZ-Roy Morgan consumer confidence rating fell by 1.7 per cent to 117.8 in the past week. The index is well above the average of 114.2 held since 2014, and above the longer-term average of 113.0 held since 1990. 

Three of the five components of the index decreased last week:

The estimate of family finances compared with a year ago was down from +15.2 to +6.7; 

The estimate of family finances over the next year was down from +27.5 to +25.2;

Economic conditions over the next 12 months was down from +11.7 to +9.9; 

Economic conditions over the next 5 years was up from +15.1 to +16.6;

The measure of whether it was a good time to buy a major household item was up from +29.5 +30.7.

The measure of inflation expectations fell from 4.3 per cent to 4.2 per cent.

Reserve Bank November Board minutes:

On the economy: “Members noted that the recent run of economic data suggested that growth in the Australian economy had been higher over the year to the June quarter than earlier forecast, and above estimates of potential growth. Labour market conditions had remained strong and other available indicators pointed to further solid GDP growth in the September quarter. At the same time, inflation in the September quarter had slowed as expected, partly as a result of a large policy-induced decline in childcare prices.”

On the job market: “Conditions in the labour market had also been stronger than expected and forward-looking indicators of labour demand continued to point to ongoing strength in the near term. As a result, the forecast for the unemployment rate had been revised lower and the forecast for wages growth had been revised slightly higher.”

Good economic forecasts: “As part of a regular annual review process, members considered how the domestic economy had evolved over the preceding year relative to the Bank's forecasts of a year earlier. Members noted that the magnitude of forecast errors for key variables, including GDP growth, the unemployment rate and inflation, had been smaller than the historical averages.”

Global risks: “Members noted that the direction of international trade policy continued to be a significant risk to the global outlook.”

Money market conditions: “Information from liaison suggested that there had been little change in domestic money market conditions in recent months. The modest increase in funding costs earlier in the year had been passed on by most lenders to existing borrowers with variable-rate business and housing loans.”

Residential developments: …”there had been reports that bank financing of large development projects had become more difficult, particularly in areas where there had already been substantial development.”

What is the importance of the economic data?

The ANZ/Roy Morgan weekly survey of consumer confidence closely tracks the monthly Westpac/Melbourne Institute consumer sentiment index but the former measure is a timelier assessment of consumer attitudes and is now closely tracked by the Reserve Bank.

The Reserve Bank releases minutes of its monthly Board meeting a fortnight after the event. The minutes give a guide to Reserve Bank thinking on interest rate settings.

What are the implications for interest rates and investors?

Consumers remain positive. But the real test will come over the next month for Aussie retailers in the lead up to Christmas. And department stores will again be under pressure this week with the Black Friday and Cyber Monday mega online sales kicking-off. Finder.com.au estimates that Aussie consumers will splurge around $320 million on goods.

The Reserve Bank reiterated in its Board meeting minutes today that the outlook for consumption remained uncertain given slow income growth, high mortgage debt levels and cooling housing markets. But wages growth appears to have bottomed, interest rates remain at very supportive record-low levels and utilities bills and petrol prices have fallen from their most recent peaks. And of course 180,200 full time jobs (out of a total of 308,100 job gains) have been created over the past ten months. 

With elections ahead, the IMF has weighed in with its views on its wish-list for Aussie policy reforms. The Fund suggested that “broad tax reform to support productivity and inclusive growth would be desirable…. These reforms should be combined with reforms to raise the GST revenue, lower the company tax rate more broadly, and reduce tax concessions.” On research and development reforms, the IMF said that “The recommendations of the science agenda laid out in Australia 2030: Prosperity through Innovation are constructive and should be implemented.” And on housing, “Housing supply reforms will be critical to restoring housing affordability.”

CommSec expects no change in the official cash rate until later in 2019. However, just like Reserve Bank Board members, we are closely watching trends in the job market and wages. The Reserve Bank is uncertain about the extent of spare capacity in the job market and therefore this has implications for wage growth.

Ryan Felsman is a senior economist at CommSec.