Clearly, much depends on the outlook and on this front the Bank made only limited changes to its growth and inflation forecasts in this quarter's update. GDP growth in 2019 was lowered from 2.5% to 2.25%, but it is still expected to pick up to 2.75% in 2020 and then 3.0% in 2021. The key risk remains around the outlook for household consumption growth, which the RBA anticipates will slow to a 1.4% annual pace in 2019 before recovering over 2020 to 1.9% by mid year then rise to 2.4% by year's end. These risks were underscored by this week's disappointing retail sales report for September, with turnover lifting by just 0.2% in the month as volumes contracted by 0.1% in the quarter despite recent stimulus (see our review here). Spare capacity in the labour market is forecast to persist, with the unemployment rate forecasts unchanged and expected to remain around its current level of 5.25% until mid-2021 when it eases to 5.0%. As such, the inflation outlook remains low and steady, with headline CPI still seen at 1.75% in 2019 and 2020 before lifting to 2.0% at end 2021, while the key trimmed mean CPI is unchanged from 1.5% in 2019 and 1.75% in 2020, however the return to the lower band of the 2-3% target was pushed out from mid to end 2021.
Also this week, housing finance approvals to owner-occupiers continued their upswing advancing by 3.6% in September, with annual growth turning positive for the first time in 18 months at 0.5% (reviewed here). The value of lending commitments firmed by 1.3% in the month and is now advancing in annual terms at 0.1% for the first time in nearly two years. As our chart of the week (below) shows, the turnaround has been rapid coming off a trough of -21.6% reached just 4 months earlier with the owner-occupier segment leading the way. Finally, the nation's trade surplus surged above expectations to $7.2bn in September as export earnings lifted by 3.5% in the month to outpace a 2.5% increase in imports (reviewed here). All in all, the trade surplus looks to have increased in the order of 8% over Q3 driven by a solid boost from export prices.
Chart of the week
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Improving sentiment continued in offshore markets this week highlighted by the US 10-year yield advancing by 23 basis points to 1.94% to its highest since late July, while the US S&P500 equity index posted its 5th straight weekly gain. Key to this week's moves was rising optimism around US-China trade developments on media reports quoting a spokesman from China's Commerce Ministry indicating that both sides had agreed to a phased rollback of tariffs. However, those reports were dismissed late in the week by US President Trump saying that no such agreement had been reached and that a complete rollback of tariffs was not on the cards. As things stand, both the US and China are still working towards finalising the 'Phase One' deal, which appears likely to be delayed until December, while the location for the signing of the agreement also needs to be determined. While work remains to be done, relations have found a more constructive tone of late and this has supported risk sentiment in markets. Also helping this week was a 2.1% month-to-month rise in the ISM non-manufacturing index in October to a reading of 54.7, indicating that the expansion in the US' services sector is picking up and is resilient to the slowdown occurring in manufacturing. Of note, firms reported solid increases in employment, activity and new orders during October, though the trade-exposed components were soft.
Over in Europe, the details from Markit's Purchasing Managers' Indexes (PMI) continued to confirm a contrast between the manufacturing and services sectors. October's PMI for the manufacturing sector was upgraded slightly from the flash reading of 45.7 to 45.9, but activity in the sector is at its weakest in 7 years. Meanwhile, the services PMI showed a faster rate of expansion occurred in October at 52.2 compared to the flash reading of 51.8. Overall, the composite PMI for the month was finalised at 50.6 from a flash reading of 50.2, indicating that the euro area economy almost stalled in October. In the UK, the Bank of England left its policy stance on hold at its meeting this week, though the vote went 7-2 (members Haskel and Saunders voted for a 25bps rate cut) whereas the Monetary Policy Committee had returned unanimous 9-0 'on hold' verdicts at every meeting since September last year. In the Bank's Monetary Policy Report GDP growth was forecast to come in at 1.0% in 2019 before rising to 1.6% in 2020, 1.8% in 2021 and 2.1% in 2022, though the MPC highlighted that the risks are "skewed to the downside" given the uncertainty over the nature of the UK's withdrawal from the EU.
