Economics

The 19th National Congress of the Communist Party of China is being held amid a week where there is a torrent of data on the Chinese economy. In terms of the economy, the National Congress is likely to keep a focus on economic and financial stability whilst ensuring the risks from financial pressures linked to risks in the banking and property sectors are carefully monitored and managed.

With the eyes of the Reserve Bank firmly on the housing market, the release of the housing finance data will be scrutinised for more clues on the extent of the cooling in demand for housing. Over recent months, there has been a cooling in housing finance growth as a mix of tighter regulation, a lift in mortgage rates for investors and a more general souring in mood towards housing have all impacted.

In a week heavy with data and the regular meeting of the RBA Board, there will be keen interest in the retail trade data for August. Making up close to one-quarter of GDP, trends in retail sales have an important influence on the strength of the economy.

In the United States, the ‘final’ reading for June quarter GDP will be released and it is set to confirm that annual economic growth picked up to around 2.25 per cent from levels around 1.5 per cent a year ago. It is still below the 2.75 per cent or so that is considered to be the long run potential rate of expansion for the US.

The quarterly official Australian Bureau of Statistics data on house prices will be released and as always, it will focus the discussion on the strength or otherwise of the housing market. The other private sector indicators of house prices have generally seen some moderation in price growth, which if repeated in the ABS data will see annual growth slip below 10 per cent.

The labour force release will dominate the Australian data calendar next week with the highlights being the estimates of spare capacity in the labour market. The key points will be the rate of unemployment (currently stuck around 5.5 to 5.75%), the underemployment rate (currently around 8.5 to 9 per cent) and, linked to those, the momentum in jobs growth in both full-time and part-time work.

A huge week for data and events looms, with the RBA Board meeting all but certain to leave official interest rates unchanged.

The world’s central bankers and a plethora of economists will gather at Jackson Hole, Wyoming, USA, for an annual get together with the topic this year, “Fostering a Dynamic Global Economy”. While that is an important topic as the world continues to lurch unevenly from the global crisis which started 10 years ago, the market will be looking at the speeches and discussion for clues on monetary policy settings.

The wages data will be vital for an assessment of both inflation pressures (or lack thereof), household income growth and the extent to which consumer spending can pick up from its current sluggishness. Wages growth has been tracking at record lows driven by global competitive pressures and a slack local labour market which is due to ongoing economic underperformance.

The extent of the cooling in the housing market will get a further update with the release of the housing finance data for June. Since the peak in the number of new loans in June 2016, housing finance has dipped 4.4 per cent with falls in new lending in three of the past four months. The value of loans has also started to trend lower.

While the event highlight next week will undoubtedly be the monthly RBA Board meeting (is it setting the scene for interest rate hikes or not?), the data highlight will be the retail sales data for June – and therefore the June quarter.

The June quarter inflation data will set a framework for the next few months for analysis of inflation pressures and which biases on monetary policy the Reserve Bank of Australia should have.

The all important labour force data for June will help verify the robustness of recent data on employment, hours worked and the unemployment rate.

The Bank of Canada (akin to our Reserve Bank of Australia) shocked just about everyone with a decision to hike official interest rates for the first time in 7 years. The 25 basis point rate hike took the rate to 0.75 per cent, with the market consensus suggesting the move was based on a more upbeat pace of economic expansion rather than inflation, which continues to track below the BoC target.

With all eyes on housing, as always it seems, the housing finance data next week will provide the update on demand for borrowing for both investors and owner-occupiers, the average loan size and the extent first home buyers are participating in the housing market.

Tuesday sees the monthly meeting of the RBA Board and there is close to zero chance that official interest rates will be adjusted from the current 1.5 per cent. This will mean official interest rates will have been left unchanged for close to a year.

After the recent run of favourable jobs data and the inevitable debate on the reliability of the monthly labour force data, some cross-testing of those results will come next week with the release of the ABS job vacancies series.

House prices!

The US Federal Open Markets Committee will meet next week to determine whether or not to hike interest rates for a fourth time in this cycle. The market is pricing it in as a near certainty, which would take the Fed Funds rate (equivalent to the cash rate) to 1.25 per cent.

Next week is a busy one with the RBA meeting one highlight – the other is the release of the much-anticipated March quarter GDP result. Just how strong, or weak, was the economy at the start of 2017?

Next week is a busy one for fresh news on the economy. The private new capital expenditure data will be a particular highlight as the slide in Capex over the past four years gets closer to a trough. Or so the RBA, Treasury and all economists hope.

A quiet week for local data, so the focus will be overseas.

One reason for the low inflation and moderate growth trends in the economy has been the sharp downturn in wages growth. Overall, annual wages growth has dropped from around 4 per cent just under a decade ago to a record low 1.9 per cent. Private sector wages growth has registered a more severe weakening than public sector wages, in part due to the rapid casualisation of work in the private sector.

The monthly meeting of the RBA Board on Tuesday is almost certain to leave official interest rates on hold at 1.5 per cent, a rate first reached in August 2016.

It will all be about inflation. The March quarter consumer price index on Wednesday will be a dominant guiding force for the markets and the Reserve Bank of Australia.

Speaking of a muddling economy, next week sees the release of the all-important monthly labour force data. While the monthly numbers on employment are notoriously volatile, they will be a vital update on the lay of the economic land. With the economy yet to get sustained traction towards stronger growth, the readings for full time and part time jobs plus unemployment will be vital to judgments of just how strong (weak) the economy really is.

House prices – it’s the topic on everyone’s lips and it’s a topic where everyone has a view. Next week sees a factual update on house prices trends with the release of the Australian Bureau of Statistics house price series for the December quarter. There seems little doubt that prices rebounded strongly, especially in Melbourne and Sydney.

Amid the discussion about how strong or weak the Australian economy is, this week sees the release of the labour force data for February. The labour market encapsulates most critical undercurrents in the economy with information of total employment, the unemployment rate, the mix of full and part time employment and the level of underemployment throughout the whole economy.

The retail trade data for January are they key data next week. They will reveal a fulsome update on the sales period around Christmas/New Year. Recall that in December, retail sales recorded a shock 0.1 per cent decline which continued the broad trends of weaker retail sales growth.

All will be revealed next Wednesday with the release of the December quarter GDP result. In the September quarter, GDP fell 0.5 per cent which opened the door for the notion of a recession, which is often defined as two consecutive quarters of negative GDP growth.

The big news next week is the release of private sector business investment data. Since the peak in 2011, business investment has been in free-fall, driven by the end of the mining investment boom. That said, even non-mining investment has been disappointing with zero growth in recent years. As a share of GDP, business investment has fallen from a peak of 19 per cent to 13 per cent and is likely to fall further before finding a floor.

How strong is the labour market? Next week sees a further update on the data for full-time and part-time employment, unemployment, underemployment and workforce participation. Each of these sub-sets of the labour force data provides arguably the most important news on just how strong the economy really is. The RBA never adjusts interest rates without some reference to the health of labour market conditions.