eChoice RBA Commentary for February 2018.
The official cash rate continues to stay at 1.5% as:
Inflation sits at 1.9%;
The Australian dollar hovers around .79c US;
Wage growth stagnates at 2.0%; and
National housing continues to slow.
With poor wage growth comes less household revenue and declining savings, all factors of concern for the RBA. Thus, they have their foot firmly on the rate brake this month, until they have greater economic certainty.
What’s the deal? In late 2017, Australian wage growth remained stagnate even though employment rose, along with the minimum wage. But, despite this, wage growth has been lower since the end of the mining boom. This decline coupled with a slowing property market, which is expected to fall even further, may result in a decline in household consumption. As a result, economic growth will dwindle.
With low wage growth and cooling property prices in Australia, many economists are anticipating a decrease in consumer spending during 2018. Instead of buying goods and services, many Australians will opt to pay down their debt due to interest-only loan lending restrictions and talk of rate rises.
According to the Australian Bureau of Statistics (ABS), quarterly and annual changes to key economic indicators during 2017 were mostly positive. However, increases were marginal in most sectors.
|Key Economic Indicators 2017|
|Indicators||Period||Value||Qrt Change||Annual Change|
|GDP Trend||Sep Qrt 2017||$430,571 mil||0.6%||2.4%|
|GDP Annual||2016-17||$1,693,452 mil||2.0%||na|
|Retail Turnover||Nov 2017||$26,042 mil||0.1%||1.7%|
|New Capital Expenditure||Sep Qrt 2017||$29,363 mil||1.1%||2.1%|
|Income Goods & Services||Sep Qrt 2017||$81,854 mil||0.9%||0.1%|
|Dwelling Unit Approvals||Dec 2017||$10,606.8 mil||-0.3%||17.3%|
|CPI||Dec Qrt 2017||Index 112.1||0.6||1.9|
|Wage Price||Sep Qrt 2017||Index 127.1||0.8%||2.0%|
|Unemployment Rate||Dec 2017||5.4%||0.0%||-0.3%|
|Average Weekly Earnings||May 2017||$1,543.80||1.8%|
Source: ABS 1345.0
Most economists predict the RBA will keep rates on hold throughout 2018 with them stuck between low wage growth and housing price stability. At present, Australian wage growth sits at 2% per quarter and is not likely to change short-term. Therefore, the RBA will seek to maintain economic stability.
January 2018 was a much softer month for housing. According to CoreLogic RPData Sydney, Melbourne, Adelaide, Perth, Darwin, and Canberra home values dropped. Brisbane, however, was unchanged.
Sydney property values, according to Tim Lawless head of CoreLogic research, have fallen by 3.1% since their surge by 75% in February 2012, and July peak in 2017. In comparison to these strong capital gains, the market drop witnessed thus far has been minimal states Lawless.
|Capital City Home Values as of 31st January 2018|
|All Dwellings % Change|
|City||Month||Quarter||Annual||Total Gross Returns||Median Dwelling Values|
Source: CoreLogic RP Data.
What’s the bottom line? Well, economists are suggesting that no matter how low the market goes it won’t lead to a rate cut. While annual price growth has halved since May 2017 and auction rates sit at multi-year lows, investor housing credit continues to fall with restrictions on interest-only lending.
So, are rates likely to go up then? With inflation levels almost non-existent, many economists say there is no reason to raise rates. Why? Well, rate rises typically curb higher inflation levels. Therefore, if higher inflation doesn’t exist, then there’s no need for a rise in rates.
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