The Australian economic releases and surveys released in October continue to show that the economy has been growing below potential (3.1% average annual GDP growth), but the releases that provide more of a clue about likely future economic activity mostly continue to improve pointing to stronger growth ahead. The month started with the RBA reflecting this mix of a soft past, but a better future, leaving the cash rate unchanged at 2.50%, as it did in September too, and in an accompanying statement implying the cash rate could stay on hold for several more months.

Turning to the economic releases during the month, first cab off the rank was August retail sales up by 0.4%, the strongest reading in six months, and beating slightly consensus expectations of +0.3%. Department store sales showed a rare and strong improvement of 6.4% in the month while sales of clothing and footwear rose for a fifth consecutive month. There is a flicker of hope in this reading of improving trading conditions for traditional bricks and mortar retail traders, but confirmation is needed with follow-up stronger readings.

Set against the improvement in retail sales, August readings of home building approvals (-4.7% m-o-m) and owner-occupier housing finance commitments (-3.9%) were both weaker than the market expected. Heightened uncertainty running towards the September Federal election may have accounted for why the official indicators of housing activity in August were soft. Home sales barely missed a beat in August and have strengthened considerably in September and through October so far. At the weekend a record number of homes were offered for auction and the clearance rate around the country was an impressive 72%. Private surveys also point to strongly rising house prices, likely to be confirmed in the ABS Q3 house price data due next week. All told, the soft August approvals and finance commitment data look like anomalies in an otherwise improving trend in housing activity.

Looking at the labour force, the September reading was quirky showing a 9,100 lift in employment, weaker than expected given that temporary election workers alone should have been worth a 15,000 lift employment, but the unemployment rate fell unexpectedly to 5.6% from 5.8% in August. The fall in the unemployment rate was down to less people actively seeking work implying a “discouraged worker effect” and a marker that the labour market is still relatively soft.

The Q3 CPI released last week provided a further surprise rising by 1.2% q-o-q, well above 0.8% market expectations. The upside surprise was mostly the result of higher petrol prices and higher government charges. Underlying inflation (the trimmed mean and weighted median measures) averaged a 0.65% q-o-q increase, only marginally above 0.6% market expectations. The higher than expected CPI reading is unlikely to concern the RBA unduly, but it cannot be as confident that inflation is well-contained until the next Q4 CPI is released in late January which should confirm the high Q3 reading was a one-off. The wait for the Q4 CPI also means it is highly unlikely that the RBA will move the cash rate lower between now and its early February policy meeting.

Our view remains that there will be no further cash rate cuts in the current cycle. Forward looking local surveys support our view. So too does one very important development in the making in China. Taking the local surveys first, business confidence according to the NAB survey has started to rise very strongly up to 12 in the latest September report from 4 in August. Consumer sentiment, according to the Westpac-Melbourne Institute survey, while falling 2.0% in October is still above 108 on the index and well above the 100 long-term average reading for the survey. It seems that businesses and consumers may be close to spending more freely.

The development in China is that senior members of the administration are heralding that the approaching Plenum meeting in November will announce a series of unprecedented economic reforms with a view to making China a high income country by 2030. China, although now the second biggest economy in the world, is still a low-income country with average earnings per head below $US5,000 per year. Taking that to nearer say $US20,000 per head implies that the Chinese economy could more than quadruple in size over the next 16 years. There is a lot of good news in that development for Australian resource exporters to carry through the next decade and more.

Our next economic roundup article will be on Monday 25th November.