Job Vacancies’ August Data Out; Discussing the Current Scenario in Australian Economy

Although the job vacancies data provided a gloomy picture of the Australian economy, the improvement in household wealth during the June quarter 2019 gave a sigh of relief.

Key highlights of the latest ABS announcements

In this backdrop, let us discuss the current scenario of the Australian economy, considering the below factors:

• Economic Growth
• Housing Market
• Consumption Growth
• Drought
• Labour Market
• Inflation

Economic Growth

Although Australia has been witnessing an economic expansion for the last 28 years, the GDP growth of the country over the year to June 2019 quarter was weaker than expected. The country experienced a year-on-year growth of 1.4 per cent in the June quarter, that was the worst economic growth in almost two decades.

The growth figures raised speculations of an interest rate cut by the Reserve Bank of Australia (RBA) in October 2019.

Recently, while addressing to the Armidale Business Chamber, the RBA?s Governor, Mr Philip Lowe, has also given the strongest indication of an interest rate cut next month. According to him, Australia?s GDP growth over the year to June quarter was the slowest year-ended growth observed by the country for some years and was a bit of a surprise. However, he expects a modest pick-up in the GDP growth in the subsequent quarters.

Housing Market

The Australian property market is making headlines for quite a long time now. The Australian Property Bubble has become a hot topic for analysts that have been expressing their own anticipations.

Some analysts are speculating a revival in the housing market in the near term, while others believe that residential recovery will unfold over the years.

As per the recently released ABS estimates, the residential property prices have continued their declining trend in the June 2019 quarter, falling by 0.7 per cent.

According to RBA?s Governor, the weaker economic growth observed by the country over the year to the June 2019 quarter was partially stimulated by housing market adjustments. The fall in housing prices led to a marked decline in housing turnover with fewer people moving from their homes or spending on new furniture and household appliances. This, in turn, led to a weak growth in household spending, resulting in lower GDP growth.

On the other hand, August?s performance of the Australian property market was quite promising. According to CoreLogic?s monthly home value index, the property prices improved by 0.8 per cent in August, with a significant rise of 1.6 per cent observed in Sydney. RBA has also provided a positive outlook for the property market in line with the stabilization of the housing markets noted in some cities.

Consumption Growth

Over the past year, Australia has been facing a flag growth in consumption per person, owing to a sluggish increase in household disposable income for an extended period due to solid growth in taxes paid and subdued increase in wages.

In its recent speech, RBA?s Governor has underlined the low household consumption as a key factor harming Australia?s economic growth.

However, the recently released household wealth data have raised hopes of a recovery in the Australian economy. As per ABS, the household wealth touched its record high figure of $10,455.3 billion in the June 2019 quarter, inching up by 1.6 per cent. Through the year, the household wealth jumped 0.5 per cent, driven by a 1.7 per cent increase in population growth.

Australia?s national investment also increased by $13.7 billion to $114.4 billion during the quarter. Also, for the first time in 39 years, Australia became the lender to the rest of the world, reporting net lending of $3.9 billion in June quarter 2019.

Drought

Australian farmers have been facing some extremely dry conditions across the Murray-Darling Basin. The country?s farm output has also declined for the past two years, along with a severe fall in the farm income. The farmers have been tackling with the heightened costs for obtaining feed and water.

The challenging conditions in the agriculture sector have put upward pressure on food prices and have led to weaker growth in overall household consumption and incomes.

Labour Market

Australia?s labour market has been witnessing a mixed trend that can be explained through the following factors:

Employment Growth

As per the latest ABS estimates, the number of employed persons has increased by 2.5 per cent with no percentage change in the unemployment rate, over the year to August 2019. Despite the robust employment growth, the unemployment rate has edged up to 5.25 per cent since the start of 2019, lifting speculations of a further rate cut by the RBA.

Increase in Labour Supply

Over recent times, there has been an increase in the labour supply, along with a substantial increase in the labour force participation by older Australians and women. The participation rate has improved by 0.1 per cent in August to 66.2 per cent (ABS estimate). However, the increase in labour supply has surpassed the rise in labour demand, leading to a high unemployment rate.

Subdued Wage Increases

As per the RBA, there has been a modest increase of just 2.3 per cent in the wage price index over the past year. The lift in wage growth seems to have stalled recently despite a pick-up from the rates of recent years.

Decline in Job Vacancies

According to the ABS, the job vacancies fell by 1.3 per cent over the August 2019 quarter in trend terms and 1.9 per cent in seasonally adjusted terms. Tasmania and Victoria saw the largest percentage increase and decrease in vacancies, respectively, during the period in original series terms.

Inflation

As per the central bank, inflation has been below the medium-term target range of 2?3 per cent for some time now, because of the following factors:

• Low growth in wages
• Slow increase in rents
• Decline in the price of building a new home
• Government initiatives to address cost-of-living pressures

RBA expects a pick-up in inflation in future; however, anticipates it to stay under the target range for some time to come.

To attain more assured progress in the direction of the inflation target, Mr Lowe expects the country to witness an extended period of low interest rates amidst the current economic scenario.

According to Mr Lowe, the interest rates around the globe are low and are moving down, and Australia cannot entirely insulate itself from long-term shifts in global interest rates. He believes that in case the RBA ignores the structural shifts in global interest rates, the exchange rate would appreciate, which would turn out to be unhelpful in terms of attaining full employment and the inflation target.

Probability of an interest rate cut in October has significantly spiked after the Governor signaled that the RBA can cut interest rate again. However, whether the central bank?s monetary policy decision would be in line with market speculations or not, would be an interesting watch.

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