There is much talk that the RBA needs to cut rates again to counter the negative economic impact of Westpac’s decision to hike interest rates across its home loan mortgage portfolio by 0.2% earlier this week.
Goldman Sach’s chief economist Tim Toohey believes the move, along with the looming El Niño drought, is enough to dip the RBA into not one but two rate cuts. That will take the the cash rate to a fresh modern day low of 1.5% from the current modern day low rate of 2%.
Part of Toohey’s, and others’, argument, is that the economy is growing slowly and well below the RBA’s downwardly revised speed limit for growth. Indeed, Toohey says “declining commodity prices, weak income growth, sharp declines in investment expectations and a peaking in the contributions to economic growth from housing have long suggested that the risks to economic growth were skewed to the downside.”
So rates have to be cut, some argue.
But, there are signs that the economy has started to exit from the slow lane which saw GDP in Q2 2015 fall to 0.2%, dragging the year on year rate down to 2%.
Here’s 6 charts highlighting the economy has improved, is improving and the RBA does not need to rush to cut rates.
RBA governor Glenn Stevens has been looking for Australian businesses to show some 'animal spirits' for a number of years now. Until recently they remained quiet but the improvement in business conditions, in business confidence and in trading and profitability is a sign that increased investment could be not too far away.
NAB chief economist Alan Oster said this week:
Although capacity utilisation is still below pre-GFC levels, the trend continues to show improvement, which provides some optimism on the outlook for non-mining business investment and the labour market.
Indeed, Oster noted just how strong conditions have become recently:
Business conditions are holding on to the solid gains obtained over the past year, despite the significant headwinds generated by financial market volatility and the mining sector. The business conditions index was unchanged in September, at +9 index points, which was well above the long-run average of +5 and the post-GFC average of around +2.
From Alan Oster again:
In Australia, the ongoing high level of business conditions and trend improvement in key leading indicators such as capacity utilisation supports our view that the gradual recovery in the non-mining economy is becoming more resilient. Low interest rates and the lower AUD are providing support, with strength particularly evident across services sectors of the economy, including but not limited to tourism-related activity. Our domestic forecasts are unchanged this month, with real GDP expected to expand by 2.4% in 2015/16 and 3.1% in 2014/15.
Employment fell 5,100 in seasonally adjusted terms in September. That means that we are just 5,100 people off the all time high of Australians working which was reached in August.
Behaviourally, more Australians working means more Australians spending and more jobs makes people feel more confident about their future.
Put simply, in behavioural terms, more confidence in employment security gives Australians and households more confidence, all other things equal. It can also increase spending and consumption plans.
Here's what Bill Evans, Westpac, said about the big fall in the unemployment expectations index which is a sub-set of the consumer sentiment survey.
The unemployment rate was recently reported to have fallen to 6.2% and jobs growth has been much stronger than anticipated over the past year.
In that regard, there has been a very significant and unexpected boost to respondents’ assessment of the state of the labour market which looks to be an even more significant result than the increase in the overall Index.
The Westpac Melbourne Institute Index of Unemployment Expectations fell by 16.3% from 156.3 to 134.9. Because the Index measures respondents’ outlook for the unemployment rate, a fall indicates an improvement in expectations around the labour market. This Index is now at its lowest level since November 2011 indicating a very significant improvement in how respondents assess the labour market including job prospects for those out of work and job security for those in work. This comes after a recent business survey which also showed a significant boost in businesses’ hiring intentions.
100,000 cars in one month. That's how many new motor vehicles ABS told us Australians bought during the month of September. It's the first time total new purchases have ever topped 100,000 units and was up more than 5% on the month before.
As the second most significant purchase after a home, such a volume of purchases suggests underlying economic conditions at a household level are stronger than many appreciate.
RBA research shows that a sustained 10% fall will add 1% or more to growth over the following 2 years. A lower Aussie dollar also puts downward pressure on monetary conditions in the economy and can have a similar stimulatory impacts to an RBA rate cut.
That stimulus comes because a lower Aussie makes Australian exports of goods and services cheaper in global trade. It also makes foreign imports more expensive which means that local competiton is more competitive.
The effects of the lower Aussie dollar can be clearly seen in the performance of Australian manufacturing and services indexes, according to Australian Industry Group CEO Innes Willox.