As reported in last month’s Company Update, inflation still remains front of mind for investors, advisers and Reserve Bank of Australia (RBA) decision-makers.
The Australian monthly consumer price index (CPI) has dominated headlines, rising 2.7% in the year to August 2024, below the 2.8% market forecasts and far lower than the 3.5% increase in the year to July. The August figures were the lowest since August 2021, entering the RBA’s target range for the first time in three years.
The low inflation figure is largely attributable to the ongoing impact of the Energy Bill Relief Fund rebate, which saw electricity prices fall by 17.9%, the biggest drop on record.
At the 24 September board meeting, the RBA again decided to leave the cash rate unchanged at 4.35%. In what was largely a reiteration of the August announcement, the RBA pointed to persistent inflation and a highly uncertain outlook for this decision.
The RBA’s position differentiates it from other central banks across the globe, which have been lowering rates, albeit from higher peaks. In mid-September, the United States Federal Reserve lowered interest rates by 50 basis points from a two-decade high of 5.3% to 4.8%. This followed the earlier-than-expected cash rate drop by the Reserve Bank of New Zealand in August, lowering by 25 basis points from 5.5% to 5.25%.
Forecasts suggest CPI growth to September 2024 will come in at around 2.9% to 3.1% – potentially bouncing outside the RBA’s target range of 2%-3%. Given its prudent stance, the RBA appears well-aware of these forecasts.
Since our last update, two of the big four banks revised their forecasts for when we’ll see the cash rate start to lower.
While CBA remains steadfast in the belief that we’ll see an easing of monetary policy in 2024 it has revised its forecast from November to December.
Westpac, who was revising its forecasts at the time of our last update, pushed its prediction from November 2024 to February 2025.
NAB sees no reason to move away from its May 2025 forecast, but acknowledge that February is beginning to look compelling.
ANZ, on the other hand, has remained firm in its February 2025 forecast.
The Australian economy has slowed, with real GDP growth of 0.2% for the quarter. The annual growth rate of 1% is the lowest recorded since the pandemic and the recession of the early 1990’s prior to that.
When aggregate GDP falls in two consecutive quarters, this constitutes a traditional recession, which the Australian economy continues to avoid. However, Australia is in a per capita recession, with June 2024 marking the sixth consecutive quarter of negative GDP per capita growth (-0.4%) – the longest stretch on record.
GDP per capita is typically used to indicate the improvement, or decline, of living standards.
While Australia went from June 1991 to June 2020 without a traditional recession, there have been three per capita recessions across this time (2000, 2006 and 2018).
The mere mention of the word ‘recession’ can put pundits on edge, but there are silver linings.
Economists, such as those at KPMG, believe we are reaching the bottom of the current economic cycle and we should see a gradual uplift in economic activity over the coming quarters.
Green shoots have begun to emerge across some key fundamentals, particularly as employment remains extremely strong, inflation continues to track in the right direction and consumer spending has begun to lift.
View the key macro-economic indicators from September 2024:
Key economic data
◦ Official cash rate: 4.35%
◦ Monthly CPI indicator: 2.7% p.a. (3.5% p.a. in month prior)
Consumer sentiment
◦ Housing credit MoM: 0.4% (0.5% in prior month)
◦ Private sector credit MoM: 0.5% (0.5% in prior month)
◦ Retail sales MoM: 0.7% (0.1% in prior month)
Housing and construction
◦ Home loans MoM: 0.7% (2.5% in prior month)
◦ Investment lending for homes: 1.4% (5.1% in prior month)
◦ Building permits MoM prel: -6.1% (11.0% in prior month)
◦ CoreLogic dwelling prices MoM: 0.4% (0.5% in prior month)
◦ Private house approvals MoM prel: 0.5% (0.9% in prior month)
Labour market
◦ Unemployment rate: 4.2% (4.2% in prior month)
◦ Participation rate: 67.1% (67.1% in prior month)
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