The latest minutes from the RBA tell us very little more than we already knew about the decision to keep the cash rate steady. They did continue to stress the benefit of rate cuts to households overall, because borrowers are more leveraged than savers (as discussed in their recent outing). We think they should be more concerned about the lack of business investment than they appear to be, net of housing.
Domestic Economic Conditions
Members commenced their discussion of domestic economic conditions by noting that the prices of Australia’s commodity exports had increased since the previous meeting and were around 30 per cent above the lows of early this year. Further reductions in production of bulk commodities by high-cost producers in China had contributed to these price increases. Reflecting the rise in commodity prices since earlier in the year, the terms of trade had increased in the June quarter.
The ABS capital expenditure survey and measures of work done on non-residential construction indicated that mining investment had continued to fall in the June quarter, in line with the forecast presented in the August Statement on Monetary Policy. The estimate of nominal investment intentions from the capital expenditure survey implied a further large decline in mining investment in 2016/17, in line with earlier expectations. However, the peak subtraction from GDP growth was still expected to have occurred in 2015/16 and members noted that there had been some signs of an improvement in sentiment in parts of the mining industry.
Members observed that developments in commodity prices and mining investment had continued to have significant effects on economic activity in resource-rich regions of the country and that the effect of the spillovers from the decline in mining investment and commodity prices would persist for some time. The regional differences had been apparent in labour market outcomes. Members noted that a decline in full-time employment since the beginning of the year had been recorded in New South Wales, Western Australia and Queensland, but that part-time employment growth had been broadly based across the country. The relative strength of part-time employment had partly reflected growth in industries that have a higher proportion of part-time jobs, such as household services, although liaison contacts had also reported that employers more generally had been taking a cautious approach to hiring. Forward-looking indicators suggested that employment growth would remain relatively subdued in Western Australia and Queensland but would be stronger elsewhere. Overall, the forward-looking indicators were consistent with little change in the unemployment rate in the coming months; the unemployment rate had fallen slightly in July to 5.7 per cent.
Growth in the aggregate wage price index (WPI) had stabilised at low levels; the private sector WPI had increased by 0.5 per cent in each of the past six quarters. Growth in the WPI had continued to be lowest in the mining-exposed industries and states, although it also looked to have stabilised in these areas.
Members noted that the June quarter national accounts, which would be released the day after the meeting, were expected to record moderate GDP growth. Net exports were expected to have made a smaller contribution to GDP growth following strong growth in resource exports in the March quarter, whereas data released during the meeting indicated that public demand had made a noticeable contribution in the June quarter. Over the first half of the year, GDP growth had been expected to have been close to estimates of potential, which was consistent with the slight change in the unemployment rate that had been observed over that period.
Growth in household consumption was expected to have remained around average in the June quarter. Household perceptions of their personal finances had continued to be above average, although growth in retail sales had declined slightly in recent months. Members discussed the effect of lower interest rates on consumption growth via the cash flow channel of monetary policy. They noted that the positive effect of lower interest rates on the disposable income of borrowing households is larger than the negative effect on the income of lender households, as the average borrower household has two-to-three times more net interest-bearing debt than the average lender household has in net interest-earning assets. In addition, on average, borrower households are likely to be significantly more responsive to changes in income that are related to changes in interest rates because they are more likely to be liquidity constrained. Members noted that, since the global financial crisis, borrower households have been likely to use more of an increase in their cash flow from any source to prepay their debt, which might imply a delay in the response of consumption spending to lower interest rates.
Private residential building approvals had increased in July, to be around the high levels observed in 2015, and there continued to be a significant amount of work in the pipeline. Members noted that this could be expected to support high levels of dwelling investment for some time.
Conditions in established housing markets had generally eased over 2016. Growth in housing prices had declined at the national level and across most capital cities over the past year, although there remained considerable variation by location. Housing prices had been declining in year-ended terms in Perth for some time. In the rental market, inflation had remained around historical lows and had also eased across most capital cities, most notably in Perth, where rents had continued to decline. The aggregate rental vacancy rate had drifted higher and was close to its long-run average.
Other indicators for the housing market had also generally pointed to weaker conditions than a year earlier. In the established housing market, the number of auctions had declined and remained lower than a year earlier, even though auction clearance rates had increased of late (particularly in Sydney). In the private treaty market – where, nationally, over 80 per cent of transactions occur – turnover had also declined since the previous year and the average number of days that a property was on the market had been on an upward trend. Members noted that sales of new properties were included in the turnover data, but that there might be measurement problems related to the long lag between purchasing and settling new properties bought off the plan, which could lead to revisions. Finally, in recent months the value of housing loan approvals had been broadly steady and housing credit growth had been lower than a year earlier, consistent with the earlier tightening in lending standards and low turnover.
Business investment had fallen further in the June quarter, driven by a decline in mining investment in line with earlier expectations. The ABS capital expenditure survey also indicated that non-mining business investment had been little changed over the past couple of years. Members noted that uncertainty about future demand growth still appeared to be weighing on non-mining business investment. The pipeline of non-residential construction work had remained low, although non-residential approvals had increased a little in recent months and survey measures of business conditions and capacity utilisation had remained above their long-run averages. Growth in business credit had eased a little, although non-mining profits looked to have increased.
