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Economic update - September 2019

Written and accurate as at: Oct 22, 2019 Current Stats & Facts

Australian Economy

The Australian economy has not suffered a recession (defined as two consecutive quarters of negative economic growth) for almost 28 years, yet for many conditions will appear stagnant. Australia’s per capita GDP growth rate for the year to June was -0.2% following the slightly negative result in the previous quarter and is the worst outcome since the financial crisis. At its October meeting the RBA voted to lower the cash rate to a new record low of 0.75%, citing the risks to international trade posed by the US-China trade dispute, as well as uncertainty around consumer spending, which has seen only modest increases.

The unemployment rate rose slightly from 5.2% to 5.3% in August, as increased demand for labour is met with more supply, thanks to a rising population and workforce participation rate. With ‘full employment’ thought to be closer to 4.5%, it is difficult to see wages growth picking up much from current levels, particularly if the cyclical weakness in employment, as suggested by job ads data and business surveys, comes like to fruition. From a monetary policy perspective, the likelihood of a 0.50% official cash rate by early 2020 is quite high. The June quarter data shows that core inflation is running at 1.4% and the RBA does not see it reaching 2.0% until 2021.

Jobs data showed seasonally adjusted employment growth of 34,700, which included a full in full-time jobs of 15,500 offset by a rise in part-time jobs of 50,200. The participation rate rose 0.1 points to push to a new high of 66.2% while monthly hours worked increased by 3.9 million. The unemployment rate rose by less than 0.1 points to 5.3%. Growth in labour supply still seems to be outpacing demand as population growth and a rising participation rate need to be soaked up by the market.

The AIG Manufacturing Index improved 1.6 points to 54.7, indicating a faster rate of growth across the sector. New Orders (+3.8 points to 57.1) and Employment (+6.2 points to 57.6) while Production (-3.4 points to 49.8), Exports (-6.1 points to 49.6) and Sales (-4.8 points to 49.5) dropped into contraction. Some respondents noted that the downturn in residential construction is affecting the building materials sector, and others noted higher input prices for oil and Nickel due to supply disruptions.

The Westpac Melbourne Institute Index of Consumer Sentiment fell 5.5% in October from 98.2 to 92.8 points. Even with the RBA lowering rates by a further 25 basis points, consumers were still on edge, possibly viewing the cut as a sign that not all is well with the economy. Global events have certainly not helped, with a smorgasbord of risks dominating the headlines over the past month. The ‘economy, next 5 years’ sub-index plunged 9.1% while ‘finances v a year ago’ dropped 6.0%.

Australia’s balance on goods and services fell in seasonally adjusted terms from $7.25 billion to $5.93 billion. Exports of metal ores and minerals fell $1,217 million or 10.2% as the iron ore price weakened. The consensus had been for the trade balance to contract to a surplus of around $6 billion. Add to weaker commodity prices a fall in the Australian dollar, which made imports more expensive, along with softness in the domestic economy, and a pullback in the external sector was to be expected.

United States

With central banks divided on monetary policy, markets expect rates to continue to move down as global risks intensify. The US and China will re-enter trade negotiations in October, but relations between the two countries have hardly improved since talks broke down in September. Markets are not holding out hope that all issues will be resolved in one round. The Fed followed through with the largely anticipated easing on 18 September, cutting the Fed funds rate to 1.75–2.00%, the second move in this cycle. According to the so-called ‘dot-plot’, the funds rate is expected to remain at current levels until the end of 2020 before rising to 2.1% in 2021 and 2.4% in the long term. Of note was the divergence of views among members, with two voting for no move, and one, St Louis Fed President James Bullard, voting for a more significant 50 basis point cut.

The August CPI data again came in above expectations. The core CPI rose 0.3%, as it has for the past three months, taking the annual rate to 2.4%, the highest reading since early 2008. However, with the uncertainty surrounding trade, indicators of investment spending continue to tread water while business confidence has fallen for the past six quarters.

The manufacturing sector is bearing the brunt of the downturn in global trade and confidence. The ISM manufacturing index for September saw its worst reading in a decade, while the ISM services index saw its worst reading since the start of the Trump presidency. Non-farm payrolls were promising, adding 136,000 and including upward revisions to the previous two months, but not quite the blockbuster result markets were hoping for.


European data shows growth in the services economy continues to be offset by a slump in the manufacturing sector. The contraction in manufacturing is strongest in Germany, prompting the Bundesbank to warn that the country is likely in a technical recession following negative growth in the June quarter. The weakness in Germany follows a sharp drop in exports and a decline in industrial production, weighed down by a combination of turmoil in the auto industry, the escalating US-China trade war, and the prospect of a chaotic UK exit from the EU.

There is growing pressure to abandon fiscal purity in favour of stimulus measures to aid monetary policy in the struggle to stimulate growth. In Italy, the coalition between the far-right League and the anti-establishment Five Star Movement collapsed when Matteo Salvini, the League party’s leader and deputy prime minister, sensed a chance to capitalise on his rising popularity and demanded fresh elections. In the UK, prime minister Boris Johnson put MPs on notice that he was ready to legislate to hold a snap general election, which was duly defeated by the so-called ‘rebel alliance’.

Johnson has taken his proposed deal to the EU negotiators, which includes a proposal to keep Northern Ireland in the EU’s customs union to prevent a hard border.


The Chinese economy continues to slow. June quarter GDP growth declined to 6.2%, the slowest in 27 years, and there is a risk that it could drop below 6% in the September quarter. Industrial production growth for August was just 4.4%, the weakest in 17 years, while the latest official manufacturing PMI reading was below 50 for the fifth consecutive month. With the trade war escalation, the risk is that growth continues to falter, and this has prompted a series of easing measures over the past month. The Bank of China earlier introduced a new Loan Prime rate benchmark, and the rate has been cut twice in the past two months by a total of 11 basis points to 4.2%. The bank reserve requirement ratio was also reduced for the third time this year by 0.5% to 13%, which effectively frees up a further 900 billion yuan for lending. This year the government has also sought to lift spending on public infrastructure projects such as roads and bridges by expanding quotas for the value of special infrastructure bonds that local governments can issue by about 60% to 2.15 trillion yuan. However, the easing in policy is relatively minor compared to the stimulus put in place in 2009 and 2015-16. The authorities have embarked on a deleveraging drive over recent years and are loath to add to the already high levels of debt and spending on unproductive investment projects and property


Softer demand, especially from China, as well as rising supply have dampened the commodities sector over the past two months. Earnings from mining and energy exports are expected to peak by mid-2020, while the global slowdown in industrial output and manufacturing has seen prices retreat. Metals were mixed in September, with rises in Zinc (+7.9%), Lead (+5.9%) and Copper (+1.3%), and falls in Nickel (-4.8%), Tin (-2.6%) and Aluminium (-1.8%). Oil markets were rocked in mid-September by a drone attack on a Saudi Arabian facility, causing the spot WTI price to rise from $54.84 per barrel to $62.90 before easing back down to end the month at $54.07. Gold fell 3.3% over the month to US$1,470.5 per ounce


The Australian dollar succumbed to the lower interest rate outlook, rising to an intra-month high of around 69 US cents before falling back to 67 cents by the end of September. Expectations of the cash rate moving to 0.50%, potentially 75 basis points below market expectations for the Fed funds rate, combined with softer iron ore prices, have contributed to the weaker currency. Over the three months to the end of September 2019 the Australian dollar has fallen 1.5% in trade-weighted terms, depreciating against the US dollar (-3.9%), Japanese yen (-3.6%) and British pound (-0.7%) and rising against the euro (+0.3%).

Source: Lonsec Research

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