The RBA really must be wondering WTF is going on.
What happened to the Aussie economy? How did it get all floppy?
That’s what the RBA must be wondering.
In February, Phil Lowe went uber-hawk on us. Markets were stunned. Suddenly we were pricing in two more rate hikes… at least!
The Aussie economy was too strong. Too resilient. We needed more rate hikes to bring things off the boil.
But that was how things looked to Phil in the rear-view mirror. We now know the ground was shifting underneath his feet… quickly.
Since the RBA’s hawkish turn in February, pretty much all the data have come in weaker than expected. And not just a touch – it’s probably just statistical noise – weaker. Much weaker.
Kicking off was unemployment. Month to month this one can be choppy, but there we created fewer jobs than expected, and when combined with the job ads data, which has clearly turned over, it paints a picture of a labour market that’s cooling quickly.
Then came the wages data, which as I’ve noted was an embarrassing miss. The Wage Price Index grew at just 3.3%, decisively putting to bed any fears that we might be looking at some sort of wage-price spiral.
That’s just not happening.
And then last week we got GDP and the monthly CPI numbers. Both were soft. Floppy even.
GDP came in at just 0.5% in the December quarter, well short of the expected 0.8%.
The big hole that’s quickly opening up in the economy is with the consumer. Household consumption cratered to just 0.3%, even with the household savings rate tanking to the lowest rate since September 2017.
That is, households are eating into their savings, but consumption is still tanking.
And that’s because disposable income fell by a whopping 0.7%, on the back of a 23% surge in mortgage expenses.
So the Aussie consumer is in trouble. Households are bunkering, and with more rate hikes already baked in for the March quarter, Q1 GDP looks like it will be sickly as well.
But wait, there’s more.
After GDP came the monthly CPI numbers.
After inflation came in at 8.4% in December, the latest figures had inflation dropping off a cliff to 7.4%, again a long way short of the 8.1% expected.
It’s starting to look, very clearly, that inflation has already peaked.
Especially when you consider the latest figures in light of the partial indicators of inflation, which all seem to have rolled over.
My bet is that this is putting Phil Lowe in a panic.
Because this is the now how the economy looks in the rear view mirror.
And given we’ve had more rate hikes in the mean time, the current situation is almost certainly weaker.
It’s worth remembering that Aussie households are the most sensitive to rate hikes in the world. In part that’s about levels of household debt, but it’s also because so much of the mortgage market is on variable rates, which give the RBA direct access to household budgets.
(In some countries, variable rates don’t even exist.)
And so households weathered the rate hike storm for a while. Things held up. Rate hikes didn’t seem to be working.
Until they did. The consumer has now rolled over, and the whole economy has gone to floppy town.
The only sensible thing to do is to stop hiking rates, just to make sure that the Aussie consumer is still breathing.
But the RBA doesn’t have a reputation for sensible.
JG.
Gabru Tarekegn says
Thanks