Australia’s March quarter GDP report will be released on Wednesday, kicking off what will be an extremely busy period for markets in terms of economic data.
Although investors will likely focus on the headline figure — something that is expected to show growth of 0.6% leaving the year-on-year rate at 2.7% — ANZ’s economics team believe that markets should look beyond the headline result, suggesting there are other features of the report that will be more influential in terms of the outlook for Australian interest rates.
Here’s what the bank will be looking for, beyond the headline GDP figure.
The National Accounts are more than just a stock-take on activity; it also includes readings on average non-farm weekly earnings (a broad measure of wages) and unit labour costs. These measures of wages are particularly important given the current focus on the inflation profile. Unit labour costs are highly correlated with domestic market services inflation.
The RBA’s weaker inflation profile in part reflected a downward revision to wages. The RBA now expects wages to “remain around current low levels for longer than previously forecast and pick up only very gradually over the forecast period”. The Wage Price Index undershot expectations – decelerating to 0.4% q/q – and any disappointment in the national accounts measures of wages this Wednesday will heighten fears that inflation will remain lower for longer.
In a report that is notoriously dated, capturing data from as far back as five months ago, measures on wage costs are something of a lead indicator, as ANZ suggests, filtering into household spending and domestic inflationary pressures in the quarters ahead.
When the Reserve Bank of Australia (RBA) cut rates to a record-low level of 1.75% on May 3, it was the inflation outlook, rather than the strength of the domestic economy, that prompted the bank to act.
That means that any indicator on the outlook for inflation has now taken on increased importance when it comes to domestic interest rates.
Non-farm weekly earnings and unit labour costs — given the relationship that exists between them and movements in non-tradable, or domestic, inflation — are no exception.
Given recent wage and employment data, further softness in these indicators has the potential to be more influential on the outlook for monetary policy than the headline GDP figure itself.
It’s something to keep an eye out for when the ABS report hits at 11.30am AEST tomorrow.