Cliff Notes: labour demand and investment under pressure
Key insights from the week that was.
In Australia, the latest NAB business survey delivered another sombre update on the state of the domestic economy at the turn of the year – the “December” survey was in the field January 3-15. In an environment characterised by high inflation, elevated interest rates and weak consumer spending, business conditions declined a further 2pts to +7 as trading conditions slipped below average. Forward orders point to persistent weakness having contracted in seven of the past eight months. Business confidence meanwhile continues to oscillate at well below-average levels, currently –1.
As discussed in our analysis of the NAB survey, last week’s December labour force survey reported that businesses reduced hours worked by 1.3% in the second half of 2023, on par with Australia’s GFC experience. Conditions as measured by the NAB survey are likely to result in a further decline in hours and a throttling back of business investment. These outcomes are consistent with Westpac’s expectation that Australian GDP growth will remain below trend throughout 2024.
On a more positive note, the NAB survey reported a continued easing in cost and price pressures through the final months of the year. Final product price inflation is now tracking at a 0.9%qtr pace according to the survey, the softest pace since February 2021. In line with these developments and a benign read for Q4 inflation in New Zealand, Westpac confirmed its forecast for next week's Australian Q4 CPI at 0.8%qtr/4.3%yr for headline inflation and 0.9%qtr/4.4%yr for the trimmed mean.
Continued progress with inflation in 2024 and soft economic momentum should allow the RBA to commence rate cuts in Q3 2024, with 125bps of rate cuts from Q3 2024 to Q3 2025 to leave the cash rate at 3.10% by end-2025. A return to trend GDP growth in 2025 remains our baseline expectation.
Offshore, central banks remained cautious on near-term risks, but showed increasing confidence in achieving their medium-term objectives.
The Bank of Japan maintained its policy stance in January. Updates to GDP growth for fiscal 2023 and 2024 were minimal, FY2023’s slight downward revision offset by a modest upgrade to FY2024. Forecasts for core inflation (less fresh food and energy) were broadly the same as October, the BoJ still anticipating this measure of inflation will moderate to 1.9%yr by 2025. The BoJ also continue to expect inflation expectations to drift up and prompt stronger growth in wages and consequently consumption into the medium term. Risks to this view are most prominent near term. Results from the spring wage negotiations will be available through March/April and the BoJ’s take presented in the March statement.
The Bank of Canada kept rates steady at its January meeting despite December’s upside inflation surprise. Shelter inflation remains high and is expected to show further persistence, keeping CPI above the 3%yr top of the target range during H1 2024. In the accompanying press statement, Governor Tiff Macklem did not ‘rule out’ further policy rate increases, with inflation expectations and persistence in wage growth risks to their sanguine baseline view. However, in the absence of an unexpected resurgence in inflation, in coming months discussion will focus on how much longer rates need to remain on hold. The revised forecasts were supportive of moderate policy easing from mid-to-late 2024. GDP is expected to remain weak in 2024 then return near trend in 2025. Inflation meanwhile is seen back at 2.0%yr in 2025.
In Europe, the ECB’s Bank Lending Survey showed that demand for loans continued to decline across both households and firms in Q4 2023, the consequence of high inflation and interest rates as well as a decline in fixed asset investment. Expectations for Q1 2024 were constructive, with net demand expected to increase in Q1 2024 for the first time since 2022. However, banks remain very cautious on the outlook, risk perceptions seeing credit conditions become more restrictive in the quarter, and a further tightening anticipated in Q1 2024. 2023’s rate hikes and their consequences are clearly still transmitting through the economy.
Coming back to China. Overnight, the PBoC announced a 50bp cut to banks’ Reserve Requirement Ratio, freeing up lending capacity. This follows reports of support for the equity market via buying by large government-linked entities. The intent behind these measures is principally to buoy, or at least hold up, sentiment across the economy while the benefits of rapid growth in high-tech manufacturing permeate and the cost of structural reform in the property sector is worked through. Authorities are likely to continue their targeted approach to supporting the economy through 2024, assuming 2023’s gains in manufacturing, infrastructure and trade continue.
Still to come offshore are the European Central Bank’s January meeting and, in the US, Q4 GDP and December PCE data, with the inflation print the market’s primary focus.
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