Some good data has helped to justify the RBA's optimism at its June meeting

You can always rely on Data. Picture: CBS

The Reserve Bank of Australia’s relatively optimistic outlook at its June meeting was backed up by subsequent data.

At its meeting on June 6, the bank alluded to potential weakness in Q1 GDP which was released the following day. Despite that, it remained optimistic that “economic growth was still expected to increase gradually over the next couple of years to a little above 3 per cent per annum”.

Here’s the extended comments from the bank on GDP:

  • “Members commenced their discussion of domestic economic conditions by noting that the March quarter national accounts, which were scheduled for release the day after the Board meeting, were likely to show that GDP growth had moderated following the strong December quarter outcome. Partial indicators had suggested that slower growth in consumption and falls in residential investment and resource exports were likely to be recorded in the accounts. However, nominal output growth was expected to have been supported by the strength in the terms of trade during the quarter.”

While GDP on Q1 was noticeably softer than the prior quarter as expected, the subsequent quarterly reading of 0.3% exceeded some analysts’ expectations and sets up the groundwork for growth to continue in line with the RBA’s forecast.

The minutes from the June meeting also show that the bank again discussed the extra amount of slack in the labour market prior, noting that underemployment remained an issue with those already in jobs looking for more work:

  • “The labour market was an important factor in the outlook for household income growth. Employment growth had picked up over 2017 and forward-looking indicators of labour demand suggested that the recent pace of employment growth was likely to continue. However, growth had continued to be disproportionate, with part-time jobs and total hours worked having fallen in prior months. Members observed that, although the unemployment rate had fallen to 5.7 per cent in April, the number of employed people who would like to work more hours had not declined.”

Despite that, in considering its interest rate decision the bank noted that “various forward-looking indicators pointed to continued growth in employment over the period ahead and a gradual erosion of the spare capacity in the labour market. Wage growth had remained low and this was likely to remain the case for some time yet. However, wage growth and inflation were expected to increase gradually as the economy strengthened.”

In view of those statements, the bank would no doubt have taken heart then from last week’s employment report, which smashed expectations and drove the unemployment rate down to 5.5%.

The strong data points in June will lend weight to the RBA’s decision to hold rates steady amid low wage growth and decreased domestic consumption.

To conclude its minutes, the bank made it clear that it was still closely monitoring developments in Australian housing.

It noted that debt was still growing in excess of incomes, while adding that it was too early to determine the effects of the latest round of lending restrictions by the bank regulator which were initiated at the start of April:

  • “Conditions in the housing market had continued to vary considerably around the country. Housing prices had been rising briskly in some markets, although there had been some signs that price pressures were starting to ease. In the eastern capital cities, a considerable additional supply of apartments is scheduled to come on stream over the next couple of years. Growth in housing debt had outpaced the slow growth in household incomes. APRA’s recent prudential supervision measures should help address the risks associated with high and rising levels of indebtedness. In response to those measures, increases in mortgage rates, particularly for investors and interest-only loans, had been announced, but were yet to have their full effect.”

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