- The global economy is stuck running below trend in 2013 but prospects for a return to trend growth or higher in 2014 look encouraging. Some growth momentum is evident in the US and China (see The Key Chart). And Europe has inched out of recession.
- Against that global backdrop, some of the concerns about Australian economic prospects look overdone. Nevertheless, CBA’s Economic Momentum Indicator (EMI) remains consistent with softish private sector activity. The issue is not so much that economic headwinds are strengthening but rather the transition towards the non‑mining economy is not proceeding fast enough.
- The RBA has elevated the importance of the AUD in the economic and policy debate. The shift in CBA’s measure of overall monetary conditions (the MCI) points to an acceleration in economic activity.
- The impact of current policy settings is blunted by a range of concerns across the household and business sectors. CBA surveys show that households still worry about job security. And a variety of politically‑themed issues are weighing on business sentiment.
- CBA household spending indicators, after what looks like a brief political-election-related pause, has lifted again.
- The lift in CBA’s Tax Flow Indicator (TFI) over the past few months is consistent with faster growth in wages & salaries. So household ability to spend may be improving. But the perception among households is that personal finances remain under pressure. So household willingness to spend may remain restrained. Higher petrol prices are another potential negative. Petrol prices on our estimates are now above the critical level associated with below‑trend growth in consumer spending.
- CBA’s residential construction indicators, including for alterations & additions, continue to grow at a solid rate. The absence of first‑home buyers remains a downside risk to this part of the growth transition.
- Non‑mining capex is also part of the transition. CBA’s investment indicator has edged into positive territory. But this part of the transition is not yet assured. A lift in business confidence would help.
- CBA's jobs indicator for August puts the "underlying" job pulse at 12k per month, a little lower than on recent months. The gap with the 17k per month required to prevent unemployments from rising has widened. Unemployment is lokely to slow trend higher for a while yet. We have lifted our peak unemployment rate forcast slightly to 5.9% and see that peak holding for a little longer.
- CBA price indicators confirm near-term inflation restraint.
- The August rate cut finally moved policy settings to the same stimulatory level reached at the height of the financial crisis in 2009. While we see the current 2 1/2% cash as the low point for the cycle, the RBA has been at pains to indicate that it retains an easing bias. We suspect that they are reluctant rate cutters from here given trends in housing activity and that they would prefer any further easing in financial conditions to come through a lower AUD. The data must now make the case for further RBA action.