Macro (Re)view (20/12) | Uncertainty to endure in 2020

Domestic events this week continued to indicate that further easing in the Reserve Bank of Australia's (RBA) monetary policy stance is likely to be forthcoming in 2020 as spare capacity persists and inflation pressures remain soft. Highlighting developments this week, the labour market rebounded from weakness in October as employment increased by 39.9k in November advancing well clear of the consensus estimate of 15.0k. With participation holding at 66.0% the unemployment rate reversed its rise from the month prior falling from 5.3% to 5.2% but still remains well above the RBA's estimate of the natural rate of unemployment of around 4.5% (see our review here). 

Most notably, however, following outturns of 13.3k in September and -24.8k in October, employment growth has shifted down a gear as the annual pace was unchanged at around 2.0% in November compared to a pace of a little above 2.2% through Q1 and Q2 and then 2.5% in Q3 (see chart of the week, below). While employment growth at 2.0% is still robust relative to growth in the workforce of around 1.6% in annual terms, this dynamic has become less constructive for an RBA Board that is intent on lowering spare capacity, particularly so given the Bank anticipates GDP growth to remain below trend through the first half of 2020.

Chart of the week

The minutes from the RBA's policy meeting held earlier this month, released this week, reiterated that the Board is in wait-and-see mode, continuing to assess the impact from its 3 earlier rate cuts in 2019, but noted it "had the ability to provide further stimulus to the economy, if required". The Board remains constructive on the stimulatory impulse that will flow from an improving established housing market and this week's housing finance update for October was consistent with that theme as commitments increased by 2.0% in the month to continue the recent uptrend (more details here).  

Throughout 2019, the Bank has been public in calling on fiscal authorities to contribute to a more balanced policy response to counter soft domestic demand conditions, which made this week's Mid-Year Economic and Fiscal Outlook (MYEFO) from the Federal government of key interest. Federal Treasurer Josh Frydenberg presented a downgraded update to April's Budget, with the forecast surplus for 2019/20 lowered from $7.1bn to $5.0bn. As a result of weaker-than-anticipated economic conditions and the expectation for commodity prices to retrace from elevated levels, the budget position was downgraded by a total of $21.5bn over the 4 years out to 2022/23, lowering the projected aggregate surplus from $45.0bn to $23.5bn (more analysis here). Fiscal stimulus was modest, with a net $8.1bn in new spending to come through over the next 4 years, headlined by the previously announced accelerated roll-out of infrastructure projects, drought assistance measures, and aged care services. Overall, the downgraded outlook together with the government's approach of returning the budget to surplus indicates that stimulus will remain weighted towards responses from the monetary side, with further RBA rate cuts likely in 2020.

— — —

Turning to the developments offshore, while the impeachment of US President Trump by Congress gained headlines worldwide and is a historically rare event occurring only twice previously, it had no impact on markets given it is highly unlikely to gain enough support in the Senate where the Republicans hold a comfortable majority. However, US political developments shape as key to market sentiment in 2020 in the lead up to November's presidential election (see our outlook section). Data out late in the week confirmed the US economy expanded at a 2.1% annualised pace in the September quarter, with the household sector continuing to drive activity supported by a strong labour market and positive sentiment. However, the US economy has slowed noticeably over the past year with trade tensions and weakness offshore combining to weigh on net exports, business investment and inventories. The slowdown appears to have further to run, with Markit's 'flash' reading of its composite Purchasing Managers' Index (PMI) coming in at a reading of 52.2 in December, indicating that the growth pulse had softened to an annualised pace of around 1.5% in the current quarter. Activity in the services sector firmed to a 5-month high at a reading of 52.2 boosted by a stronger order book and employment but remains moderate overall. Meanwhile, conditions in the manufacturing sector remained broadly unchanged at 52.5 (prior: 52.6), though this is in contrast to the more closely followed ISM survey conveying a sector in contraction driven by weakness in new orders and external demand. 

Over in Europe, Markit's PMI readings continued to paint a bleak assessment of conditions in the bloc. The composite index was steady in December at 50.6, indicating that the euro area economy had essentially stalled in Q4 and was around its weakest in 6 years. While activity in the services sector firmed in the month, this was offset by renewed weakness in a manufacturing sector that is currently in its deepest downturn in 7 years, buffeted by headwinds from trade and geopolitical uncertainty and weakness in the global economy. Also of interest in Europe this week, Sweden's central bank, the Riksbank, announced an increase to its benchmark interest rate from -0.25% to 0.0%, exiting from a 5-year period of negative rates.  In the UK, despite the result in last week's general election, it became clear a hard Brexit scenario can not be completely ruled out, with PM Johnson to pursue legislation to prevent any extension to withdrawal from the EU past December 2020. With Brexit-related uncertainty set to persist, the Bank of England's (BoE) Monetary Policy Committee voted on Thursday to maintain its existing settings in a 7-2 decision, with members Haskel and Saunders again the dissenting voices. The BoE also announced Andrew Bailey, the current chief executive of the UK's Financial Conduct Authority, as its new governor taking over from incumbent Mark Carney at the completion of his term in mid-March next year.

Closer to home, key data from China this week was generally constructive as industrial production outperformed expectations rising by 6.2% through the year to November, while retail sales (8.0%Y/Y) and fixed asset investment (5.2%ytd) were in line with consensus. Meanwhile, the Bank of Japan's Policy Board left its monetary policy stance unchanged at its meeting this week but continues to note that if downside risks in the global economy were to materialise it "will not hesitate to take additional easing measures". 

— — —

The 2020 outlook: Uncertainty an enduring headwind    

As year-end approaches, the familiar theme of uncertainty appears set to remain present through 2020, and with growth in the advanced economies languishing around or below potential, central banks are likely to remain prominent. In response to a synchronised global growth slowdown driven by trade and geopolitical uncertainty and more medium-term structural factors, central banks pivoted proactively to more accommodative policy stances from mid-year. However, before this tide of easing gains traction, the growth slowdown is likely to extend into 2020 given that the interest rate sensitive manufacturing sector has only recently shown signs of stabilising at weak levels. 

Risks to an eventual stabilisation of growth in the advanced economies appear to remain tilted to the downside as uncertainty is likely to persist around US-China trade negotiations and the nature of the UK's withdrawal from the EU, while the US presidential election has the potential to weaken firms' investment plans further and slow employment growth that would, in turn, threaten currently robust consumer spending. Meanwhile, China's economy will continue to adjust to a slower and more sustainable pace of growth. Given these dynamics and in the event that fiscal responses remain limited, central banks will likely be left in the position of having to test the limits of conventional monetary policy in 2020.  

In the US, the Federal Reserve still has ample conventional policy space, but in Europe any further easing to the ECB's already ultra-easy settings would likely be seen as having only a marginal impact and would probably be resisted by the Governing Council in any case, particularly with new President Christine Lagarde overseeing a complete review of the Bank's monetary policy strategy. In Australia, the RBA has signaled that its effective lower bound is 50bps away, at which point efforts will turn to the unconventional through quantitative easing, if required.

— — —

With this, my final piece for the year, I thank everyone for reading in 2019 and wish you all the best for Christmas and in the new year. 

Australian employment +39.9k in November; unemployment rate falls to 5.2%

Australia's labour market rebounded in November from a weak month prior as employment increased by a much stronger-than-expected 39.9k, while the national unemployment rate fell from 5.3% to 5.2%. However, with spare capacity remaining elevated and the pace of employment growth slowing, further monetary easing from the Reserve Bank of Australia is on the cards in 2020.

Labour Force Survey — November | By the numbers

• Employment increased by a net 39.9k (seasonally adjusted) in November to clearly outpoint the consensus call for +15.0k. However, October's initially reported decline of -19.0k was revised to show a larger contraction of -24.8k. 

• The national unemployment declined from 5.3% to 5.2% (exp 5.3%), unwinding the 0.1ppt increase from October. 

• Underutilisation fell from 13.8% to 13.5% and underemployment declined from 8.5% to 8.3% after both measures increased in the previous month. 

• The workforce participation rate was steady at 66.0%, in line with the consensus forecast.

• Aggregate hours worked lifted by 0.2% in November (prior -0.2%) to 1.781bn hours, with growth through the year firming from 1.4% to 1.7%.

Labour Force Survey — November | The details

After two consecutive softer-than-expected outturns, employment lifted by a net 39.9k surging above the consensus forecast of 15.0k. This was driven mostly by the part-time segment (+35.7k), though full-time employment also posted a modest rise (+4.2k). In annual terms, employment growth was little changed at 2.01% through the year to November compared to a 1.98% pace in October. Employment growth appears to have peaked in Q3 at an annual pace of around 2.5%, though even at this slower pace of nearer to 2.0% it still is in front of growth in the working age population of around 1.6%Y/Y. Full-time employment growth firmed slightly from 1.57% to 1.66% in year-ended terms, while the pace of part-time employment growth moderated from 2.89% to 2.75%. 

The participation rate held steady at 66.0% in November and has been little changed over the second half of 2019, which is in contrast to the first half where it was on the rise in line with the stronger pace of employment growth. In the month, the workforce expanded by 23.1k and as this was exceeded by the rise in employment of 39.9k, the total of unemployed fell by 16.8k to 708.1k. As such, the national unemployment rate fell from 5.3% to 5.2% at a headline level, though if taken at two decimal places it declined from 5.31% to 5.18%; returning to its level from two months earlier. The broader measures of spare capacity also improved in November, with underemployment (including workers who want and are available to work more hours) down from 8.5% to 8.3% and underutilisation (combining the unemployed and underemployed) declining from 13.8% to 13.5%. However, this only reversed gains in the previous month and this has been the pattern over recent times. Overall, both remain at historically elevated levels. 

Aggregate hours worked reversed a decline in the previous month, rising by 0.2% to 1.781bn hours to be up by 1.7% over the year. Adjusting for the rise in employment, average hours worked per employee in the month softened a touch from 137.7 hours to 137.5 hours, which is 0.3% lower than a year ago (137.9 hours). 

Turning to the states, unemployment declined in New South Wales (from 4.8% to 4.7%), Victoria (from 4.8% to 4.6%) and Queensland (from 6.4% to 6.3%), while it was unchanged in Tasmania (6.0%) and increased in South Australia (from 6.2% to 6.3%) and Western Australia (from 5.7% to 5.8%). 

Employment growth in the month was led by Queensland (+17.3k) followed by Victoria (+13.7k). Outcomes were modest in South Australia (+2.6k), Tasmania (+2.4k) and Western Australia (+0.3k). Employment in New South Wales contracted for the third consecutive month, falling by 2.8k in what has been a noticeably weak finish to 2019, likely influenced by the downturn in the residential construction cycle. Over the past year, Victoria and New South Wales have driven national employment growth. 

Labour Force Survey — November | Insights

Today's employment outturn at +39.9k was much stronger than expected, but it comes after two consecutive misses on the consensus forecast in September and October. Also, the decline in employment in October was revised to show a larger fall of -24.8k. Accordingly, employment growth has shifted down to a softer pace of around 2.0% in annual terms, though it still outpaces growth in the workforce of around 1.6%pa. That is still a broadly positive dynamic for an RBA Board looking to lower spare capacity in the labour market, but it is less constructive than it was through Q2 and Q3 of this year. As such, the RBA Board will likely conclude in the new year that with the unemployment rate still well above its estimate of full employment of around 4.5% and with employment growth slowing, additional monetary policy easing will be required.     

Preview: Labour Force Survey — November

The final key Australian economic data update for 2019 comes across the screens at 11:30am (AEDT) today, with the ABS due to publish its Labour Force Survey for November. A moderate employment outturn is expected in today's report, while the unemployment rate is anticipated to remain at an elevated 5.3%.  

As it stands | Labour Force Survey 

Weakness hit the Australian labour market in October as employment contracted by a net 19.0k — its first monthly fall since May 2018 — against expectations for a 16.0k increase. As a result, employment growth in annual terms slowed from 2.5% to 2.0% to be at its softest pace in 2½ years. Even though the participation rate eased from 66.1% to 66.0%, the unemployment rate increased from 5.2% to 5.3% reversing the decline recorded in the previous month. Similarly, underutilsation (13.5% to 13.8%) and underemployment (8.3% to 8.5%) also returned to their levels from August. In line with this weakness, aggregate hours worked fell by 0.2% in the month and annual growth slowed from 1.9% to 1.4%. 

For our full review of October's report see here 

Market expectations | Labour Force Survey

According to Bloomberg's survey, the consensus call is for employment to rise by a moderate 15.0k in November, with individual estimates ranging between -10.0k and +40.0k. Predicated on the participation rate holding at 66.0% (range: 66.0% to 66.1%), the unemployment rate is expected to remain at 5.3%, with the range of forecasts spread between 5.3% and 5.6%.

What to watch | Labour Force Survey

The RBA's current forecasts have the unemployment rate tracking sideways around its existing level over the next couple of years, remaining well above its estimate of full employment of around 4.5%. After the weak outturn for employment in October (-19.0k) and the associated sharp slowdown in employment growth (from 2.5% to 2.0%), another softer-than-expected report would strengthen the case for the RBA Board to ease the cash rate further at its next meeting in February. The minutes from December's Board meeting published earlier this week reitereated that tighter labour market conditions are required to generate a faster pace of wages growth that is consistent with inflation lifting sustainably within the target band and in supporting growth in household consumption — the largest component of the domestic economy — returning to trend pace.   

Australian housing finance commitments rise 2.0% in October

Australian housing finance approvals and lending commitments lifted in October to be consistent with improving conditions in the established housing market. Commitments to owner-occupiers expanded by 2.2% to lead an overall increase of 2.0%, as the investor segment rebounded from a soft September to post a 1.4% rise.   

Housing Finance — October | By the numbers

• Housing finance approvals to the owner-occupier segment (excluding refinancing) lifted by 0.6% in October to 27,076 (prior +2.2%).  Approvals in annual terms fell by 1.0% compared to a near-flat outcome of -0.2% in September.   
• Total housing finance commitments by value (excluding refinancing) increased by 2.0% in the month to $18.214bn (prior -0.4%), with annual growth turning positive for the first time in 2 years at a 0.9% pace (prior -2.3%).   

Housing Finance — October | The details 

From this update forward, the ABS has shifted to a new methodology for this series and thus there have been significant changes from what was reported previously. Overall, total lending commitments (excluding refinancing) lifted by 2.0% in the month (seasonally adjusted) to $18.2bn (0.9%yr). The owner-occupier segment lifted for a 5th straight month, rising by 2.2% in October to $13.1bn as the annual pace reached a 20-month high at 5.7%. Commitments to the investor segment expanded by a softer 1.4% pace in the month to $5.1bn, slowing the annual pace of decline from -14.0% to -9.7%.  

The chart, below, shows the annual pace of growth in total lending commitments and for the owner-occupier and investor segments. The impulse turned from mid-year as election-related uncertainty cleared and the RBA recommenced its easing cycle.  

Loan approvals to the ower-occupier segment were up by 0.6% in October to 27,076 but remained weaker through the year (-1.0%). Approvals to purchase established homes were broadly flat in the month (-0.3%), while loans for new construction (+5.5%) and to purchase newly constructed dwellings (+1.3%) lifted in October.  

Looking across the states, the value of lending commitments to the owner-occupier segment increased in the month in New South Wales (+5.8%) and Victoria (+3.4%), though there were declines in Queensland (-2.5%), South Australia (-3.4%), Western Australia (-3.0%) and Tasmania (-4.7%). As yet, seasonally adjusted estimates for the number of loan approvals across the states are not available.  

Housing Finance — October | Insights

Sentiment in the established housing market improved from mid-year, resulting in the near two-year downturn in national house prices coming to an end in the September quarter (see here) before rising further in the current quarter. Consistent with this, housing finance approvals and commitments have been in an upswing over the second half of 2019, driven by the owner-occupier segment. 

Australian MYEFO downgraded on softer outlook

The Australian Federal government has presented a downgraded Mid-Year Economic and Fiscal Outlook (MYEFO) to Budget 2019/20. Federal Treasurer Josh Frydenberg announced the forecast surplus for 2019/20 has been lowered from $7.1bn (0.4% of GDP) to $5.0bn (0.3% of GDP), while the budget position has been downgraded by a total of $21.5bn over the 4 years out to 2022/23, impacted by softer economic conditions. The breakdown of the updated budget profile is now; 2019/20 $5.0bn (previously $7.1bn), 2020/21 $6.1bn ($11.0bn), 2021/22 $8.4bn ($17.8bn) and 2022/23 $4.0bn ($9.2bn).

Turning to the details, the $21.5bn deterioration in the budget position reflects a $13.5bn net impact from the downgraded economic outlook and a net $8.1bn in new spending. The softer economic impulse has a delayed impact hitting from 2020/21, where it has a net cost of $2.0bn, then $7.5bn in 2021/22 and $4.1bn in 2022/23. Over the period, receipts are impacted by $32.9bn driven by a lower tax in-take from individuals (-$7.4bn) and corporations (-$7.9bn), a reduced GST collection (-$9.9bn), as well as smaller excise and customs duties (-$2.1bn) and superannuation fund taxes (-$1.6bn). 

A reduction in receipts is moderated lower payments, which have been marked down by $19.7bn out to 2022/23. Within this, there is an offsetting reduction in GST distributions to the states over the 4 years (-$9.9bn), debt servicing costs are down (-$3.9bn) in line with lower rates, and there were lower-than-expected take-ups from the Defence Housing Australia (-$1.3bn), Family Tax Benefit (-$1.2bn) and Student Payments (-$0.7bn) initiatives.          

The net $8.1bn in new spending provides a boost to the economy of $2.2bn in 2019/20, $2.9bn in 2020/21, $2.0bn in 2021/22 before fading to $1.0bn in 2022/23. This spending centres on an accelerated roll-out of infrastructure projects, drought assistance measures and aged care services. The table (below) shows the revisions.     

A comparison of the key forecasts in MYEFO and Budget 2019/20 are shown in the table, below. GDP growth for 2019/20 has been lowered by 0.5ppt to 2.25% to reflect a weaker starting point and a softer outlook. However, the expectation for growth to return to trend in 2020/21 and then rise to 3.0% in 2021/22 and 2022/23 was retained. These forecasts are in line with those published by the Reserve Bank of Australia for 2019/20 (2.25%) and 2020/21 (2.75%).

In nominal terms, GDP growth is still forecast to expand by a 3.25% pace in 2019/20, however; a sharp downgrade from 3.75% to 2.25% occurs in 2020/21 to reflect a sizeable 8.75% contraction in the terms of trade as commodity prices are expected to decline from elevated levels. On this front, as in Budget 2019/20, the iron ore price is forecast to retrace from its current level of around US$90/t to US$55/t, though the timing for this to occur was delayed by 3 months to the end of the June quarter in 2020. Meanwhile, the metallurgical coal price forecast was cut from US$150/t to US$134/t and thermal coal reduced from US$91/t to US$64/t. Nominal GDP growth then lifts by 4.75% in 2021/22 and 2022/23; an upgrade of 0.25ppt in each case.   

Employment growth forecasts were left unchanged across the 4 years, though there was a notable downgrade in the profile for wages growth. The starting point for wages growth has been lowered from 2.75% to 2.5% and is then expected to remain at that pace in 2020/21 (previously forecast at 3.25%). It then firms to 2.75% in 2021/22 (previously 3.5%) and finally lifts to 3.0% in 2022/23 (previously 3.5%).

In summary, MYEFO conveys a softer domestic economic outlook that begins to impact the budget position from 2020/21 as the tax in-take moderates and commodity prices retrace. Accordingly, the budget is now in surplus by $23.5bn over the 4 years out to 2022/23, which is greatly reduced on the forecast for a total surplus of $45.0bn in Budget 2019/20. Given the government's pre-election commitment to return the budget to surplus, the softer economic outlook conveyed by MYEFO implies reduced scope for additional fiscal stimulus to be implemented. With the Australian economy tracking at a subdued below-trend pace of 1.7% over the year to Q3 (see here), monetary policy is likely to have more work to do in 2020.   

Link to MYEFO 2019/20 here 

Analysis of Budget 2019/20 here 

Macro (Re)view (13/12) | Global risks ease (for now)

In a key week for offshore risk events, markets gained a rare moment of clarity as some of the uncertainty that has persisted throughout 2019 appeared to be clearing, at least for the time being. Some 9 weeks after the US and China agreed to the outline of the phase one trade agreement, delegates from both sides formalised the text details, though it is yet to be signed by Presidents Trump and Xi. Of most immediate impact, this week's progress ensured that a planned US-levied tariff of 15% on a $160bn tranche of consumer-related imports from China set to come into effect on Sunday (15/12) will be averted, while China has cancelled retaliatory tariffs, which included a 25% import tax on US autos, due to start on the same day. 

In addition, the US has agreed to a partial rollback of the 15% tariff on a separate $120bn tranche of Chinese goods that commenced on September 1, which falls to 7.5% when the agreement is signed, though the 25% tariff on a larger $250bn list of mainly industrial imports is set to remain unchanged. Meanwhile, according to the USTR, China has agreed to undertake "substantial additional purchases of US goods and services in the coming years". A fact sheet compiled by the USTR (see here) outlined that this commitment is due to see China boost its import of US goods (including agricultural products) over the next 2 years so that the total value exceeds the level from 2017 by at least $200 billion, thus narrowing the US's trade deficit with China. Additionally, concessions have been granted by China relating to intellectual property commitments, forced technology transfers, financial services and foreign exchange devaluations. The final aspect of the phase one agreement is a dispute resolution mechanism, which opens the door for future tariffs or other measures to be implemented in the event of non-compliance. 

Over in the UK, PM Boris Johnson secured a resounding victory in Thursday's general election that resulted in the Conservatives gaining an 80-seat majority in the Commons, the largest for the Tories since 1987. With the path now clear for an orderly Brexit to occur on January 31, market attention now turns to the nature of the arrangement the PM will negotiate with the EU during this transitory period, particularly in regards to matters of trade and migration. For its part, EU Council President Charles Michel said that negotiations should be conducted on the basis of "maintaining close co-operation" with the UK. But, for now, after more than 3 years of deep uncertainty, the premise of a stable government should offer much-needed support to a UK economy that has essentially stalled.

The other main focus this week was on the latest policy meetings from the Federal Reserve (Fed) and the European Central Bank (ECB). In the US, the Fed's policy-setting Committee paused their easing cycle leaving its benchmark interest rate unchanged at 1.5-1.75%, as expected. Following a total of 75 basis points of cuts being delivered at their three previous meetings as "insurance" from a weakening global economy and trade uncertainty, Committee Chair Jerome Powell described the current rates setting as "well positioned" to support the constructive outlook conveyed in the updated summary of economic projections, in which its GDP growth forecasts were unchanged from 3 months ago at 2.2% in 2019, 2.0% in 2020, 1.9% in 2021 and 1.8% in 2022. The unemployment rate is now seen a touch lower in 2019 at 3.6% and was then trimmed by 0.2ppt in each of 2020 (3.5%), 2021 (3.6%) and 2022 (3.7%), however in the post-meeting press conference Chair Powell was reluctant to classify the labour market as "tight" given the current pace of wages growth (3.1%Y/Y) and instead described it as "strong". Consistent with that assessment, the inflation outlook remained mostly intact and is not expected to return to the target until 2021. Indicating the Committee is now in wait-and-see mode, Chair Powell outlined that the current monetary policy stance "would likely remain appropriate" unless the data flow was to cause a "material reassessment of our outlook". As such, the revised 'dot plot', which contains individual members' projections for their expected path for rates, implied the Committee would be on hold for an extended period until 2021 where the median forecast was for one rate increase.

The ECB also finds itself in wait-and-see mode after recently implementing a broad-based package of stimulus measures and thus the Governing Council held its policy stance unchanged at this week's meeting. The updated ECB staff macroeconomic projections contained only minor alterations compared with September's forecasts. GDP growth for 2019 was lifted from 1.1% to 1.2% but was trimmed from 1.2% to 1.1% for 2020 before rising to 1.4% in 2021 and 2022. The inflation forecast was left at 1.2% in 2019, then slightly upgraded to 1.1% (from 1.0%) in 2020, while in 2021 it was lowered from 1.5% to 1.4%. New ECB President Christine Lagarde in the post-meeting press conference outlined that while the risks to the growth outlook remained "tilted to the downside" some of the uncertainties that have weighed on activity in the bloc, most notably in the manufacturing sector, relating to trade and geopolitical tensions had become "somewhat less pronounced". Though the data flow was still regarded as weak overall, it was noted that there had been "some stabilisation in the slowdown of economic growth in the euro area". 

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Turning to the domestic perspective, the latest consumer and business surveys were in line with last week's subdued update on the Australian economy in Q3's National Accounts (see here). Concerns around the economic outlook and a general reticence to spend continue to be prevailing themes for households as the Westpac-Melbourne Institute's Index of Consumer Sentiment fell by 1.9% in December to a reading of 95.1, with the headline index remaining inside pessimistic territory for a 4th consecutive month (see chart of the week, below). The deterioration in sentiment over the second half of 2019 indicates a tepid response from consumers to recent stimulus from RBA rate cuts and increases to the Federal government's low and middle income tax offset.

Chart of the week

The combined impact of this stimulus was a 2.1% surge in household disposable income growth in Q3, though last week's National Accounts indicated this windfall was to a large extent saved as household consumption growth edged up by just 0.1% in the quarter and annual growth slowed to a post-GFC low of 1.2%. Westpac's Chief Economist Bill Evans reports that since the RBA recommenced its easing cycle in June, consumer sentiment has declined by 6.1% and in this latest update views around the economic outlook slipped on both a 12 -month (-1.1%) and 5-year (-2.4%) outlook to partially reverse increases in November. Through the year, consumers' forward-looking assessment of economic conditions has deteriorated sharply; 'next 12 months' -14.2% and 'next 5 years' -11.0% and as a result of this heightened caution, spending has clearly been reined in. Household debt is also weighing as evidenced by a deterioration in views towards family finances, with the 'vs a year ago' sub-index down by 3.6% in December (-9.5%yr) and the 'next 12 months' sub-index easing by 0.5% in the month (-7.0%yr). Accordingly, 64% of consumers nominated deposits, superannuation or paying down debt as the 'wisest place for savings', to be up from 62% in September. Undoubtedly, the stimulus from RBA rate cuts has helped drive a recovery in the established housing market, with capital city prices posting their first quarterly rise in nearly 2 years in Q3 (see here), while more timely data from CoreLogic has shown these price gains have extended into the current quarter. Consumers expect this trend will continue, with the Westpac-Melbourne Institute's House Price Expectations Index rising by a further 3.2% in December to be up by 40.1% over the year. As such, the 'time to buy a dwelling' index contracted by a sharp 5.6% in December and is up only modestly (1.8%) from a year earlier.  

In the NAB's Business Survey for November, confidence slid from a reading of +2 to 0 and conditions held steady at +4, with both indexes remaining at below-average levels. The sub-components within the conditions index were mixed, with trading down from +7 to +6 and profitability up from 0 to +3 (both are at below-average levels), while an unchanged reading for employment at +4 saw it remaining above average to be indicative of jobs growth averaging around 18k per month over the next 6 months according to NAB Economics. However, the leading indicators pointed to ongoing caution around the outlook for business investment, with forward orders falling from +3 to -2 and capacity utilisation a touch softer at an around-average 81.8% reading.

Q3 signals a turnaround for Australian house prices

The near two-year-long downturn in Australian house prices came to an end in the September quarter according to the ABS's Residential Property Price Indexes data, as the combined impacts of RBA rate cuts, an easing in macroprudential policy and the passage of May's federal election played through the established housing market. The weighted-average of capital city prices lifted by 2.4% in the September quarter — its first quarterly rise since Q4 2017 — as the decline in through the year terms moderated to its slowest pace in 12 months at -3.7%. From peak to trough, on average, capital city house prices on a national basis fell by 8.0% between mid-2017 and mid-2019. 

The Sydney and Melbourne markets have led the recovery, each rising by 3.6% in Q3 supported by both the house and unit segments. Hobart prices added a further 1.3% in the quarter, while the Brisbane market saw prices lift (0.7%) for the first time in a year. Elsewhere, prices continued to fall and as a result the annual declines in Adelaide (-1.0%), Perth (-4.6%), Darwin (-5.4%) and Canberra (-1.4%) steepened a little.
    

The granular breakdown of price changes across capital cities and segments for Q3 and over the past year is shown in the table, below.

With prices rising in the quarter, the total value of Australia's residential dwelling stock increased by 2.8% in Q3 to $6.869tn, as annual growth (0.1%) turned positive for the first time in a year. 

  

The ABS's series lags the more timely monthly updates on Australian property prices compiled by CoreLogic. Last week, CoreLogic reported that capital city prices increased by 2.0% in November, which followed a 1.4% rise in October, to be up by 0.4% over the year.  

Macro (Re)view (6/12) | Australian Q3 GDP subdued despite stimulus

The Australian economy remains subdued with this week's National Accounts for the September quarter reporting that GDP growth lifted by a softer-than-expected 0.4% in Q3 as the annual pace ticked up from 1.6% to 1.7%. At this pace, activity continues to be around 1ppt lower than than the nation's trend rate of growth of around 2.75%. Weakness in the private sector continued to weigh on domestic demand as households were disappointingly absent despite receiving a sizeable income boost from recent RBA rate cuts and fiscal stimulus through tax relief for low-and middle-income earners, though ongoing strength in public demand and a robust export sector were key supports (see our full review here).

Household consumption growth lifted by just 0.1% in Q3 — its softest quarterly outcome since Q4 2008 — while in annual terms, the momentum slowed from 1.4% to 1.2% to be at its weakest pace in the post-GFC period. In context, household consumption growth was running at a 2.6% annual pace a year ago. Factors that have driven this slowdown include subdued confidence due to concerns over the economic outlook, uncertainty in the lead-up to May's federal election and from developments offshore as global growth has slowed, a correction in house prices and low wages growth. In the quarter, the benefits from the RBA's rate cuts in June and July and the Federal government's tax cuts began to flow. As a result, in nominal terms, tax payments fell by 6.8% and interest payments were down by 2.5%. Adjusting for inflation, real household disposable incomes accelerated by 2.1% in Q3 to an annual pace of 3.1%, which is a 5-year high. However, this income boost was largely saved by consumers as the household saving ratio surged up by 2.1ppts to 4.8% to a 2½-year high and helps to explain the soft outcome for household consumption in Q3 (see chart of the week, below) 

Chart of the week 

At this week's RBA policy meeting, the Board held the cash rate steady at 0.75% but remains prepared to ease further should its constructive outlook deteriorate (see here). The Bank's forecast is for GDP growth to lift to 2.3% by year's end and then rise to around a 3% annual pace in 2021. The decision statement from Governor Philip Lowe outlined that the transmission from its rate cuts to the real economy will work with "long and variable lags", with the Bank expecting that, in time, households will lift spending in response to the income boost and also due to a wealth effect accruing from an improving established housing market. Data this week from CoreLogic showed national property prices have now lifted for 5 consecutive months after a 1.7% rise in November as annual growth (0.1%) turned positive for the first time since April 2018. However, the early indications are that households' reticence to spend was evident at the start of Q4 as retail sales stalled in October and annual growth slowed to a 2-year low of 2.1% (see here). It is possible that households decided to wait for Black Friday sales promotions and the Christmas period to come around before making use of the windfall from the recent stimulus measures, so the retail sales data in the months ahead will be of importance.

The National Accounts also continued to highlight that residential construction and business investment remain areas of concern in the domestic economy. The downturn in the residential construction cycle intensified in Q3 as activity contracted by 1.7% to be down by 9.6% over the past year, which is its sharpest rate of decline in 7 years. Activity in new home building is even weaker at -11.0% through the year and is contracting at its fastest rate in 18 years. With dwelling approvals showing renewed weakness in October with an 8.1% fall (-23.6%yr), the downturn in activity is likely to persist throughout 2020 (see here). Private sector business investment fell by 2.0% in Q3 and -1.7% for the year, with the annual pace remaining in contraction for the 5th straight quarter. Mining investment took a final step lower as major projects reached completion to be down by 7.8% in the quarter and -11.2% for the year, though the outlook is for a rise of around 16% in 2019/20, based on the recent ABS Capital Expenditure Survey. Non-mining investment was up by 1.2% in Q3 and 2.2% through the year, but as covered in last week's review, plans for 2019/20 are looking less constructive, with uncertainty from offshore and weak domestic demand conditions headwinds for the investment climate. 

In contrast to weak private sector demand, robust growth in public demand remained in train over Q3 with a 1.5% rise to be up by 4.9% in annual terms. This has been supported by spending associated with public healthcare initiatives and investment in infrastructure in response to strong population growth. The other leading contributor to activity over the past year has been net exports (1.1ppts). Export volumes were up by 0.7% in Q3 to 3.3% in annual terms, driven by a ramp-up in production from the resources sector and strong demand for services associated with tourism and education. Meanwhile, weakness in exports (-0.2%q/q, -1.5%yr) reflects declining investment in capital goods and the impact of a lower Australian dollar. This profile ensured the current account remained in surplus for the second consecutive quarter in Q3 (see here), though the trade surplus subsequently pulled back by $2.3bn in October to $4.5bn as iron ore prices corrected from their mid-year peaks (see here). 

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In offshore developments this week, conflicting trade headlines saw markets swing between gains and losses. To start the week, US President Trump announced he would restore steel and aluminum import tariffs on Argentina and Brazil on the basis that these two countries had been "presiding over a massive devaluation of their currencies, which is not good for our farmers". Later on in the week, President Trump said that he was in no haste to complete the phase one trade deal with China, though the planned 15% tariff on a $160bn tranche of Chinese imports would go ahead on December 15 if the status quo remained. The latest US activity data produced contrasting results this week, with manufacturing conditions according to the ISM survey remaining in contraction after falling from 48.3 to 48.1 in November as the new orders and employment sub-indexes declined, though in the more broadly-based Markit Purchasing Managers' Index (PMI) the sector is in expansion as conditions improved over the month from 51.3 to 52.6 on gains in new orders and employment. Similarly, the ISM non-manufacturing survey indicated conditions in the services sector slowed from 54.7 to 53.9 driven by a sharp fall in business activity, while Markit's services PMI firmed from 50.6 to 51.6 on renewed strength in new business after a fall in the previous month. The overall state of conditions was perhaps best summarised by Markit's Composite PMI, which firmed from 50.9 to 52.0 to indicate private sector business activity across the US was increasing modestly at a below-average pace. 

The consumer continues to hold the key to growth in the US and that is not surprising given the strength of the labour market. On Friday, the latest employment data for November was much stronger than expected; even allowing for 48k GM workers returning from strike, as non-farm payrolls added 266k jobs in the month compared to the 180k expected. An easing in the participation rate to 63.2% enabled the unemployment rate to reverse its increase in October and return to its equal-lowest in 50 years at 3.5%. Wages growth was solid at 3.1% over the year but is relatively well contained considering how tight the labour market is. As a result, consumers are feeling more optimistic as sentiment according to the University of Michigan's index lifted by a robust 2.5% in December to a 7-month high at 99.2 driven by a more upbeat assessment of current economic conditions. 

Turning to Europe, GDP growth in the bloc in the September quarter was confirmed at 0.2% and the annual pace held steady at 1.2%. Overall, domestic demand remains supportive of activity, but weakness in the global economy and uncertainty associated with trade and geopolitical tensions has weighed heavily on net exports and inventories. So far in Q4, activity remains soft according to Markit's composite PMI, which was unchanged at 50.6 in November and indicated the economy was close to stalling. The weakness remains centred on the manufacturing sector, which is currently mired in its deepest downturn in 7 years despite an improvement in Markit's manufacturing PMI from 45.9 to 46.9 in November.  Conditions in Germany are of key concern, with industrial output contracting by its fastest pace in a decade at -5.3% over the year to October. Meanwhile, the more domestically-focused services sector remains in an expansionary phase but activity is slowing as Markit's services PMI fell from a reading of 52.2 to 51.9 in November.