The prevailing dynamics could hardly be more complex. With PM May's Brexit deal lacking the necessary parliamentary support — including more than 100 of her own Conservative MP's — media reports have provided varying accounts of willingness by European officials to amend the details of the existing proposal. Meanwhile, the Jeremy Corbyn-led Labour opposition has been unable to succeed in forcing an election and have refused to enter negotiations with PM May unless a no-deal outcome is taken off the table.
Markets appear to have taken an optimistic outlook to these events in the sense that it has, in their view, increased the likelihood of either a soft-Brexit outcome or no exit at all. Another possibility is that EU agrees to an extension to the March deadline. While appearing as least likely, a hard-Brexit scenario does still exist as a live chance given that it is the default outcome amid the current malaise. A no-deal exit scenario would be the most detrimental to the UK economy due to increased trade barriers with the EU as British-based exporters would face import tariffs, which average around 5%, while output activity could slow from delays in bringing goods across borders.
Also this week, European Central Bank President Mario Draghi in a parliamentary address again highlighted that incoming economic data had been weaker than expected due to rising uncertainties 'related to global factors' (trade and geopolitics). Industrial production data for November released during the week fell more sharply than anticipated (see here) and was the latest indicator pointing to a loss of momentum in the euro area economy. Official ECB forecasts show an expectation for economic growth to slow from 1.9% to 1.7% in 2019, impacted by weakening external trade and business investment amidst a tightening in financial conditions following the conclusion of its quantitive easing programme. The latest ECB minutes pointed to another round of cheap long-term funding to the banking sector coming under consideration.
Stimulus measures were also a key focus in China this week. With the impact of trade tensions with the US increasing the probability of a sharper slowdown in the world's second-largest economy, Chinese officials signaled stimulus measures could include tax cuts and special local government bond issues to fund infrastructure projects. This is in addition to the bank liquidity-boosting measures recently implemented by the People's Bank of China.
The US data flow was light this week, impacted by the ongoing government shutdown with a key report on retail sales from December unpublished. The dovish shift in communication from the Federal Reserve continued to support gains across global equity markets this week, while the anticipation for further stimulus in China drove a stronger rally in Asia.
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Turning to the Australian perspective, the soft data pulse continued this week highlighted by a slide in the Westpac-Melbourne Institute's Consumer Sentiment survey, shifting the headline index into pessimistic territory in January. At a reading of 99.6, consumer sentiment fell by 4.7% in January — its largest monthly decline in over three years and the first sub-100 read in 13 months — indicating a pivot from the ‘cautiously optimistic’ levels recorded throughout 2018 to a now slightly-pessimistic outlook. The factors weakening sentiment include; declining property prices, softening growth in the domestic economy and global uncertainties arising from trade and political tensions.
Each of the 5 sub-indexes in the survey declined in January. The steepest fall came from an expectation for a deterioration in the economic outlook over the next 12 months (-7.8% to 96.2), while the outlook over the next 5 years also posted a sizeable fall (-5.9% to 96.5). Interestingly, though, both measures sit above their longer-run averages indicating that sentiment towards the economic outlook is currently less pessimistic than usual.
More troubling is that perceptions towards family finances compared to a year ago have deteriorated firmly below their longer-run average, which could indicate that the impact on household wealth from declining property prices and more recent falls in equity markets are being felt as growth in wages continues to remain low. Against this, a strong labour market has been key in supporting overall sentiment, however consecutive rises in the unemployment expectations component indicate that households have noticed an easing in conditions recently.
In the housing market, price declines have improved sentiment towards purchasing a home due to an easing in affordability concerns that have prevailed over recent years, though tighter lending standards are likely to be working in the other direction. Consumers are also firmly expecting property prices to continue to decline, most notably in New South Wales and Victoria where around 75% of consumers anticipate prices to either fall or remain steady over the next 12 months.
Remaining with the property theme, the latest monthly update for housing finance showed a resumption in the downtrend in November following a momentary pause in October (for our full analysis see here). Finance approvals made to owner-occupiers fell by 0.9% in the month, a slightly better-than-expected result (-1.5%), while the total value of commitments made during November fell by 2.9% to $22.944bn — its lowest level in nearly 5 years — with a 4.5% contraction in lending to the investor segment driving the weakness.
Perhaps of most significance in this release was a slide in average home loan sizes for both non-first home buyers and first home buyers, which is shown as our chart of the week. This has been impacted by tightening bank lending standards, which has weighed on borrowers' access to credit, while property prices themselves after having fallen for more than 12 months now on a national basis are also likely to be contributing to reduced loan sizes. Compared to their recent peaks from mid-2018, average loan sizes have fallen by around 4% to $395,500 for non-first home buyers and to $336,500 for first home buyers.
Chart of the week
