The State of Australia’s Economy Still Baffling RBA

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The tension between Australia’s weak economy and strong employment is mystifying, even the nation’s most qualified economists.

So, don’t be too bothered if you are a little out of your depth when it comes to Australia’s economy. As reported by the ABC, deputy governor Guy Debelle is still trying to make sense of the uncooperative data which doesn’t seem to fit neatly into any of Australian’s economic models.

The strength of the labour market is at odds with the slow pace of GDP growth,’ Dr Debelle said last week, in his speech ‘The State of Economy’.

Granted, this isn’t groundbreaking news; the RBA has been crippling with such tensions for years and it’s why the RBA has maintained a record low cash rate of 1.5%.

It’s a bit of a head sore really, strong jobs growth and weak economic growth — it’s only a matter of time before something has to give.

The month of February saw weaker than expected jobs growth, but unemployment rates fell to an eight-year low to sit under 5%.

According to the ABC, market forecasts see unemployment edging higher, with 15,000 new jobs to be generated in March.

Aussies will have to wait for the release of March Labour force data, for the next wave to hit Australia’s economy.

GDP/ jobs complex continues to mount tensions

Economists, analysts, and investors all typically rely on data to explain why our markets are behaving the way they do. So, when thing’s such as GDP and job growth are at odds with one another, it can create a lot of uncertainty in the market. 

The two lenses on economic growth provided by the labour market and the GDP data are in stark contrast. A third lens, in the form of business surveys [conditions], sits in between the two,’ Dr Debelle said.

The tension highlighted by these different lenses on economic growth is of crucial importance. Hopefully we will get some resolution of this tension in the coming months with the incoming flow of data.’

Dr Debelle believes the labour market’s strength will override languid GDP data. Wages will lift, consumption will lift and then we will start to see the bigger picture come together, where interest rates also climb higher, not lower — which is what current markets are hedging.

Businesses continued to invest through the end of 2018 and have continued to hire into 2019. Why would they do this if growth in economic activity has slowed so much?’ Dr Debelle argued.

Can Australia’s economic tensions be resolved?

This is a tricky question, and frankly it depends on who you ask as to whether you’ll get the answer you’re looking for.

On one hand, JP Morgan’s Sally Auld says this ‘tension’ can be restored in a matter of two ways ­­— generally speaking that is.

One, by GDP growth rebounding back toward trend and reversing the weakness of the second half of 2018 or two, by the unemployment rate ticking higher and realigning with soft underlying domestic activity.

We view the second scenario as more likely given our expectation that low wage growth and negative wealth effects stemming from the housing market will continue to constrain household spending.

This view is largely reflecting March forecasts, only JP Morgan is preparing for a gradual rise in unemployment to come in future months.

On the other hand, the RBA has a very different idea.

There are three very important dates for the RBA when it comes to finding a resolution to the economic/employment growth enigma, with upcoming jobs data and first quarter delivers on:

  • Inflation, 24 April
  • Wages, 15 May
  • GDP number, 6 June

While all this likely means we probably won’t see movements to the 1.5% interest rates anytime soon, it does hint that over the next few months we might finally see a glimmer of resolve — with an inflow of much needed data.

Yet, if you listen to Capital economists, they are warning those banking on a rebound will end bitterly disappointed.


Ryan Clarkson-Ledward,
For Money Morning

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About Ryan Clarkson-Ledward

Ryan Clarkson-Ledward is an Editor at Money Morning.

Ryan holds degrees in both communication and international business. He helps bring Money Morning readers the latest market updates, both locally and abroad. Ryan tackles all the issues investors need to know about that the mainstream media neglects.

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