The information on the financial system is beginning to get a lot gloomier. The newest retail spending data and phrases from the governor of the Reserve Bank are sounding the warning siren that the financial system is at risk of slowing as households look to have reacted to the ongoing lack of enchancment in actual incomes by closing their wallets.
After effectively over a 12 months of suggesting that the subsequent interest rate transfer will doubtless be a rise, Philip Lowe, in a speech on Wednesday to the National Press Club in Sydney, admitted that now the odds of a cut are round the similar as that of a rise.
To a big extent this was simply the RBA catching as much as the market. For a couple of months now the market has been pricing in a better likelihood of a rate cut than a rise over the subsequent 18 months. Currently the market is absolutely pricing in a rate cut to 1.25% by the center of subsequent 12 months and a 50% likelihood of it taking place by the finish of this 12 months.
Now that appears all positive and good – and not all that stunning given the state of inflation growth. After all decrease pursuits charges imply decrease mortgage funds.
But the reasoning behind why a cut might be coming is rather scary.
Lowe outlined two – in his view equally doubtless – situations. The first is the place “the labour market is strong, people’s incomes start rising, inflation will rise”. If that occurs the subsequent interest rate will be a rise and principally all will be effectively.
The second state of affairs is one the place “income growth does not pick up, the housing market weighs on spending and people don’t want to invest”. If that occurs, Lowe suggests an interest rate cut will happen and it’s going to imply extra years of weak wages progress and flat actual incomes to come back.
He suggests the chance of both case occurring “is broadly equal”. A 50-50 wager. Heads we win, tails we lose …
It’s not all that reassuring to know that the probabilities of issues going badly are as doubtless as them going effectively – particularly when the funds’s numbers are reliant on them being greater than good.
Take wages progress.
In the mid-year economic and fiscal outlook, the treasury estimates that by the center of 2020 annual wages progress would be three%, and by the center of 2021 it could be as much as three.5%. That determine mixed with employment progress helps the estimates for earnings tax income.
But rather than three% and three.5%, the governor produced a graph of the RBA’s estimates which confirmed wages progress by the finish of 2020 to be little above 2.5% and by the center of 2021 to be in the vary of two.75%.
And the lack of wages progress is very a lot being felt in the financial system as households scale back their spending.
December every year is the huge month for retail purchasing. Christmas sees us get away the bank card and spend rather more than in every other month. It’s why it appears a bit bizarre to listen to discuss of a small progress in retail spending in December.
The actuality is every year there is an enormous surge in precise spending in December in comparison with November:
But the unique information is not a lot use for us, which is why the ABS adjusts it to take account of seasonal components – similar to the reality that every 12 months we spend extra in December than every other month.
We truly now spend much less in December than we used to. Back in the 1980s December accounted for over 12% of annual spending – the equal to about six weeks’ value of spending throughout every other time of the 12 months. Now it is value simply over 5 weeks:
But that shift doesn’t negate the unhealthy information of the newest retail figures.
In December in seasonally adjusted phrases spending grew by simply zero.1% and zero.2% in development phrases. That month-to-month development progress marked 11 months of slowing progress – the longest such streak recorded going again to 1982:
To some extent this is not stunning – inflation progress is so weak that it is virtually laborious to maintain rising your spending as a result of costs are usually not going up for lots of products – or not less than they’re not going up as quick as they used to. That’s why the quarterly retail turnover figures have been extra worrying as they take a look at the quantity of gross sales rather than the cash spent. In this fashion they accord extra with family consumption that includes the GDP figures.
Our financial system is primarily a spending one. Just beneath 60% of our GDP is comprised of family consumption. Now that is much more than simply retail – insurance coverage, well being, schooling, utilities and so forth are additionally included in family consumption – however the two are comparatively carefully linked, and the information is not good for subsequent month’s GDP figures:
In development phrases, retail turnover in the December quarter final 12 months grew by simply zero.27% – the worst consequence since March 2011, and the annual progress rate exhibits a transparent slowing:
The slowing is additionally occurring throughout virtually all states – turnover truly fell in NSW for the first time since June 2011, and solely Queensland confirmed any indicators of strong enchancment:
All this provides as much as an image of households which have stopped spending even whereas employment is rising. It highlights how actual incomes have didn’t develop, and households at the moment are spending like they don’t anticipate them to develop any time quickly.
For now the probabilities of a rate cut might be 50-50, but when the information doesn’t enhance quickly, these odds are going to swing sharply. The Reserve Bank will be hoping additional report low interest charges will be the trick to encourage individuals to open their wallets.
• Greg Jericho is a Guardian Australia columnist