Economic growth may be gathering pace in the United States and Australia according to economic releases over the past week adding weight to our view that the Reserve Bank (RBA) is unlikely to cut the 3.00% cash rate any further. Another key consequence of the brightening economic outlook in both countries is that there may soon be a pronounced lift in credit growth in both countries adding to growth in domestic demand. Importantly, we see the US Federal Reserve (Fed) and the RBA maintaining their current very accommodating monetary policy stances until evidence accumulates that both economies have been growing above long-term trend for at least three or four quarters.
In the US the most recent evidence of a lift in economic activity has been in the labour market. February non-farm payrolls rose by 236,000 well above market consensus forecast of +165,000. The private sector continued to lead the improvement lifting payrolls by 246,000 and with contributions in cyclical sectors such as manufacturing, +14,000; retail, +24,000 and construction, +48,000. The unemployment rate fell to 7.7% in February from 7.9% in January, but is still well above the level implying a tight labour market that might lead the Fed to consider a less accommodating policy stance.
Rising US employment together with improving US household wealth are two key reasons why we expect US households to spend more freely, notwithstanding constraints from government budget consolidation. Even if household incomes are still under pressure, we expect households as their optimism builds to save less and borrow more to fund greater spending.
An early sign of changing household behavior showed in the Q4 2012 Fed flow of funds statement released last week showing that household debt as a percentage of GDP rose to 80.9% from 80.7% in Q3, the first increase since the beginning of 2009. Household debt as a percentage of household disposable income was also down to a decade low of 110.7%, well below the peak of 134.6% in 2007.
In Australia, the economic data releases last week pointed to soft economic conditions in Q4 2012, but a marked improvement developing in Q1 2013. Real GDP rose by 0.6% in Q4 2012, but household consumption spending was very soft, up only 0.2%. In contrast, January retail sales were surprisingly strong, up by 0.9% in the month and with some retailers indicating the improvement persisted in February.
A marked lift in housing activity also appears to be gathering pace according to weekly auction clearance data (above 70% in Sydney over the past three weekends). The first sign of this sharp improvement in housing activity in official ABS data is likely to show in housing finance figures for February due for release in mid-April. If February housing finance figures rise as sharply as we expect, that will in turn herald a much stronger run of monthly private sector credit readings starting with the March reading.