Economic releases over the past week point to upside growth surprises internationally, but local economic growth languishing. Laminar Group views this combination of better-than-expected global growth and soft local growth influencing the Reserve Bank of Australia (RBA) to keep the cash rate unchanged at 3.00%, not only at its next policy meeting on Tuesday 5th February, but also for many months beyond. We believe that the RBA already views its monetary policy setting as being very easy (recent statements after monetary policy meetings referred to borrowing interest rates being more than a percentage point below long term average) and accommodating enough to deal over time with the softness in the local economy. Moreover, despite the weakening trend in the local economy through much of 2012, inflation in Australia is not quite as low as it should be at this stage of the economic cycle. The Q4 CPI due this week will be an important input into the RBA’s own inflation forecasts which will be presented to the RBA Board on 5th February and will be made public in the quarterly Monetary Policy Statement out on Friday 8th February.
The market consensus view is that the CPI rose by 0.4% in Q4 2012 lifting the annual inflation rate to 2.4% from 2.0% in Q3. If the CPI rises close to expectation, the outcome would not seem unduly alarming. The RBA’s inflation target is 2-3% and the annual rate in Q4 would be a touch below the middle of the RBA’s target band. The problem is that so called “underlying” measures of inflation that provide a better guide to where inflation may travel over coming quarters are expected to be quite high in Q4 (the consensus forecast is 0.7% for both the trimmed mean and weighted median measures and we are a touch higher at 0.8%) implying that annual inflation is annualizing on either forecast close to 3% and at the bottom of the economic growth cycle.
Returning to overseas data releases and market information over the past week, the US continued to look like an economy in recovery. December retail sales, industrial production and housing starts all beat market expectations rising respectively by 0.5%, 0.3% and 12.1%. The lift in housing starts was particularly impressive taking total housing starts to their highest level since late 2008. The Q4 company earnings season is also underway in the US and of the 67 S&P 500 companies that have reported so far, 72% have beaten analysts’ expectations.
In Australia’s single biggest international trading partner, China, Q4 GDP growth was stronger than expected, up by 7.9% y-o-y from 7.4% in Q3. December retail sales and industrial production also both beaten expectations and rose at their fastest pace in nine months, also signaling some acceleration in Chinese growth.
It is true that the economic readings in Australia have been less promising. Employment fell nationally by 5,500 in December (although interestingly rose in both New South Wales and Victoria) and the unemployment rate edged up to 5.4% from 5.3% in November. Import data for November was also quite weak, down by 8% in seasonally adjusted terms with capital goods imports down by 19%, a sign of perhaps waning resource sector investment spending. Nevertheless, with key economies overseas showing signs of improvement, it is reasonable to expect that Australian growth will stabilize and start to recover later in 2013. Inflation would need to be very low to encourage the RBA to cut the cash rate any further and we doubt that will be the message from the CPI report out this week.