Interest rate increase in July an each-way bet, economist says
The Reserve Bank’s fight with inflation has a few rounds to go, according to CreditorWatch.
Anneke Thompson (pictured above), chief economist at CreditorWatch, said while incoming data in June was mixed, with business and consumer sentiment falling, but retail trade and labour force not easing to the extent RBA would like them to, anecdotal evidence still suggested that “monetary policy impacts are definitely working their way through the economy.”
Inflation showing some positive movements
Monthly CPI data has shown some positive signs, with all groups’ CPI falling a considerable 0.8 percentage points, to 5.6%. However, CPI excluding volatile items only slipped 0.1pp, to 6.4%, which according to Thompson, “will reinforce RBA’s fear that underlying inflation is proving harder to shift.”
Falls in both consumer sentiment and spending are starting to impact pricing. Clothing and footwear prices slumped 0.4% over the year, while holiday travel and accommodation price rises eased substantially from 11.9% in April, to 7.3%. Pricing in the food and beverage sector, meanwhile, has continued to prove sticky, with price rises for “meals out and takeaway food” speeding up to 7.7% in May, from 7.3% the previous month.
“This is consistent with our data that the food and beverage (F&B) sector is by far the biggest risk of insolvency in the country, at 0.91%, as consistently high input prices, wages and rents increasing with CPI are still proving a major issue for café and restaurant operators,” Thompson said.
Unexpected labour force result
In May, the unemployment rate unexpectedly dropped by 0.1 percentage point to 3.6%, while employment growth was at a very solid 75,900, with most gains in full-time employment.
“While this growth is good news for employees, it does create headaches for the RBA, as low unemployment fuels higher wage expectations, and makes the task of getting inflation back to within the target band that much harder,” Thompson said.
She added that Deputy RBA Governor Michelle Bullock also said last month that in order to tame inflation, unemployment will have to rise.
Forward indicators, such as SEEK’s monthly employment dashboard, revealed that job advertisements were well down on this time last year, but were still high compared to longer term averages. Job Vacancy data, as released by ABS, showed job vacancies are down 2% YoY, but much higher than pre-COVID levels.
Retail trade rise jacked up by inflation
Retail trade ticked up in May, driven by an increase in spend in food and beverage retailing, as well as a small lift in household goods spending and spending in the “other retailing” category.
“While this trade data may seem to contradict consumer sentiment, the ABS makes clear that the increase in spend in food and beverage retailing is due to rising prices, which rose 7.7% over the year to May as well as a very strong trading weekend over Mother’s Day, and by earlier-than-normal discounting by major retailers,” Thompson said.
She added that the “other retailing” category, which included pharmacies and florists, also got a significant boost over Mother’s Day.
“Overall, the retail trade data is likely to be viewed as neutral by the RBA,” Thompson said.
Business and consumer sentiment still worrying
Consumer confidence was still near recessionary levels. According to a Westpac survey after the June 6 rate rise decision, consumers were noticeably more pessimistic than those surveyed the day prior.
“Consumer sentiment has never been this low for this long, which points to difficult times ahead for the retail sector in Australia,” Thompson said. “Already, the household goods sector is being severely impacted, with trade in this sector down almost 5% in the year to April 2023, despite record inflation over that time period.”
On business sentiment, she said it is “now starting to fall the way of consumers, although the drop in sentiment, it must be said, is a far slower process.”
Business confidence is now at -4 index points, while business conditions dropped to +8 index points in May, from +15 points the month prior. More concerning, Thompson said, is that labour and input costs increased, “a further sign that inflation is too sticky.”
Interest rate hike, an each-way bet
Thompson is expecting the central bank’s industry engagement program to play a big role at next month’s RBA meeting, given that the monthly data releases over May “don’t present a strong argument either way for a cash rate rise or pause.”
“There is strong evidence directly from retailers that consumer spending, particularly on discretionary items, has slowed significantly, and the RBA may take the view that this is evidence that the 12 cash rate rises are now heavily impacting leveraged households,” she said.
“On balance, it is likely that the RBA may wait one more month to get a better feel for consumer spending trends and to also see if the labour force starts to show weakness as the new financial year starts.”
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