Australian data this week shows no urgency to lift the cash rate

The Australian monthly consumer price index rose by 4.9% over the year to October, below economist and our own expectations of 5.2% year on year growth and down from 5.6% last month. This implies a 0.3% fall in the month of October. The monthly CPI reached a peak of 8.4% in December and will probably end the year at just over 4% per annum. Excluding volatile items (like fuel, fruit and vegetables and holiday travel) the annual CPI declined to 5.1% (down from 5.5% last month). The trimmed mean didn’t decline much, it was up by 5.3% year on year in October, slightly down from 5.4% in September.

• The components showed that the highest price rises occurred in housing (+6.1% year on year), food and non-alcoholic beverages (+5.3% year on year) and transport (+5.9% year on year). Within housing, rent was up by 6.6% over the year to October and rental prices actually fell by 0.4% in October because of the impact of changes to the Commonwealth Rent Assistance program which increased rental assistance from late September by more than usual (without this program, rents would have risen by 0.7% over the month). Across food, the biggest monthly contributors were in “food not elsewhere included” (+6.2% year on year), bread and cereal (+8.5% year on year) and fruit and vegetables (+1% over the year). Fuel prices are included in the transport category and were up by 8.6% over the year to October, down from 19.7% in September which were impacted by the usual changes in oil prices but also from the impact of the reinstatement of the full fuel excise tax.
• The RBA has become increasingly concerned about “homegrown” services inflation driven by consumer demand. In October, goods prices rose by 4.6% over the year and services were 5% higher. Goods prices have slowed significantly since a peak in late 2022 while services prices have been relatively flat between 5-6% per annum over most of 2023 (see the chart below). However, the monthly CPI data is not a full picture of inflation compared to the quarterly data, as the series is relatively new and not all components are surveyed every month. In October, under 65% of components were surveyed which doesn’t include many services. The only major “service” surveyed in October is domestic and international holiday travel and accommodation which rose by just 1.3% over the year to October (well down from a peak of 29.3% year on year in December 2022).

• Much has been said around higher Australian inflation data relative to our global peers (see the chart below). However, Australian inflation peaked ~6 months after our major peers, so it’s only natural that the decline in inflation is also occurring later than our peers. We expect that inflation will fall faster than the RBA is forecasting over the next 6 months.

• The September quarter construction work done data was also released today and showed a 1.3% increase (above economist estimates of a 0.3% lift and below our own estimate of +3.4%). This data is a component that goes into the GDP figures (September quarter inflation data is released next Wednesday). New residential building rose by 0.7%, alterations and additions lifted by 5.2%, non-residential building fell by 1.6% while engineering work rose by a solid 2.6% (driven by government spending). Our September quarter GDP estimate is currently at +0.4% over the quarter or 1.8% over the year.

• Australian capital expenditure (or business investment) across private firms rose by 0.6% in the September quarter (in volume terms), slightly below economist expectations of a 1% lift (we were expecting stronger growth around 2.7%). Mining was up strongly by 5.6% over the quarter (because of higher spending on iron-ore projects and battery-related mining development), manufacturing was 3.1% higher while other (non-mining) industries fell by 1.8%. Buildings and structures were up by 0.7% and plant and equipment capital spending rose by 0.5% (which was driven by higher spending from the construction industry as supply-chain disruptions eased and allowed businesses to lift delivery of new vehicles and heavy machinery). This means that business investment will contribute positively to September quarter GDP growth (which is released next Wednesday and we expect quarterly growth of 0.4% or 1.8% over the year). Annual capital expenditure is up by a solid 10.7% over the year, but the pace of quarterly growth slowed into the December quarter. Since the start of 2021, business investment growth has averaged 7.2% per annum, which has improved substantially since its 2011-200 annual average of 1.1% (but the soft growth in 2011-2020 also reflected a post-mining boom slowing in investment).

• The capital expenditure release also contains a forward-looking projection for business investment, with firms surveyed about their outlook for spending in the current and/or next financial year. In this release, firms gave a fourth estimate for 2023-24 capital spending in nominal terms (therefore also accounts for the impacts of inflation), which was stronger than we expected at $171.3bn. This estimate is 10.3% higher than the same estimate made a year ago for 2022-23 and this tends to be a good guide to actual spending outcomes for the financial year (see the chart below). However, this pace of growth is lower compared to 2022-23. Non-mining industries (excluding manufacturing) and mining capital expenditure had a slight upgrade to spending expectations. The information media and telecommunications industry is expecting a large rise in capital expenditure from new data centres. Business investment growth is expected to be positive in the next 6 months until the end of the financial year, but the pace of growth will be slower compared to 2022-23.

• Building approvals rose by 7.5% in October, well above estimates of a 1.4% rise (we had a higher forecast of 5%) which follows a fall of 4% last month. House approvals rose by 1.2% and multi-unit (mostly apartments) surged by 19% in October. Total approvals are still down by 6.1% over the year but have been trending a little higher over recent months – especially for houses (see the chart below).

• It is too soon to say that building approvals have bottomed. High interest rates weigh on construction demand because of the higher borrowing costs involved and from lower household demand for new dwellings. Building approvals are running around 165K/year on a 3?month average which is way below the approximate level of new housing demand which is currently around 225K/year.
• The long delays in construction in the current cycle means that there is a high level of dwelling construction in the pipeline which will support residential construction and therefore economic growth. The chart below shows that total dwellings completed usually move in line with approvals and dwelling commencements but have lagged behind in this cycle.

• The RBA private sector credit data showed a 0.3% rise in credit, or 4.8% over the year. Housing credit rose by 0.4% or 4.2% over the year, business credit lifted by 0.3% or 6.4% over the year and other personal credit continues to grow and was up by 0.2% or 2.4% over the year. The rise in personal credit growth could be a sign of consumers drawing on sources of credit to assist with cost-of-living pressures from rising interest rates and elevated (but slowing) inflation.

• This weeks data doesn’t provide much new information that would sway the RBA to do a follow-up rate hike at next week’s Board meeting. While the RBA has sounded more hawkish in the past few months under the new Governor Michelle Bullock, the RBA’s commentary also hasn’t indicated a sense of urgency to raise the cash rate imminently. Since the last rate hike, retail sales were softer for October (although this may be a one-off if there is a boost in November from the increasingly popular Black Friday/Cyber Monday sales), the daily home price data has started falling for Sydney and Melbourne over the past week (in line with the slowing in auction clearance rates) and the monthly inflation data shows there could be some downside to the RBA’s CPI forecast of 4.5% year on year growth by December. However at the same time, the lack of services surveyed in the October CPI and the stickiness of the trimmed mean in the monthly figures mean the RBA is still likely to maintain its tightening bias at next week’s meeting. Our base case is for the cash rate to remain unchanged at 4.35% until the start of rate cuts from mid-2024, but recognise the high risk (~45% chance) of another 0.25% rate hike which could come at the February Board meeting (the RBA doesn’t meet in January and the December quarterly inflation data is released in late January). Financial markets are only pricing in around a 26% of another rate hike by May of next year which looks too low.