Economics wrap: At a rate of knots

Company News

by Glenn Dyer

Australian interest rates will rise for a fourth month in a row when the Reserve Bank again lifts the cash rate at its August meeting tomorrow.

The RBA is widely expected to lift the cash rate by a half a per cent – the second in a row – which would take the cash rate up to 1.85% – the highest since mid-2016.

That would see cumulative hikes from May reach 175 basis points – the fastest pace on record.

Banks will again follow with increases in their mortgage rates, business rates and small and slower rises in rates on savings products as they look to slowly fatten their margins.

The RBA meeting will come the same week as the June data on building approvals, finance, the trade data for June and 2020-21 and house prices (today), car sales (late in the week) for June and the first half of the year, the final retail sales for June and volumes and a few early June 30 results.

AMP Chief Economist Shane Oliver wrote in his weekend note: “Fortunately, the slightly slower than expected inflation rate for the June quarter of 6.1% likely removed the need for a further step up in the size of rate hikes to 0.75%.”

“However, with the RBA still seeing the economy as resilient, the labour market coming in stronger than expected, inflation on its way to over 7% and the RBA viewing the cash rate as still well below its assessment of the neutral rate the RBA is expected to remain hawkish warning of further rate hikes ahead.

“The RBA’s Statement on Monetary Policy (Friday) is expected to lower its unemployment rate forecast for this year to 3.25% but revise down the growth outlook for the next year and revise up the inflation outlook to over 7%yoy for this year.

Moody’s economists wrote last Friday: “We expect more hikes in the second half will take the cash rate to 2.6% by the end of 2022.”

“The RBA is moving aggressively to tame inflation that has broadened well beyond the supply side. Demand-pull inflation is running high. “

The labour market is extremely tight, with the unemployment rate at a five-decade low of 3.9%.

Job vacancies are also elevated and will put further downward pressure on unemployment in coming months

June retail sales growth slowed to 0.2%, which would be negative after inflation.

Dr Oliver says “It looks like the pace of gains may be starting to slow reflecting the drag from cost-of-living pressures and rising mortgage rates.”

Thursday showed that thanks to higher LNG and thermal and metallurgical coal prices Australia saw another terms-of-trade surge in the June quarter.

Export prices rose another 10% due to surging coal prices (+271%yoy) and gas prices (+105%yoy) whereas import prices rose only 4%qoq (largely due to higher petrol prices).

Dr Oliver says “The continuing surge in the terms of trade is good for national income and tax revenue – but can’t be assumed to last. (Fortunately, Treasury is not assuming that it will in its budget projections.)”


Not the most convincing news reports for the Chinese economy at the start of a new month, or for Australia for that matter.

China’s huge manufacturing sector unexpectedly slipped back into contraction in July, according to the official activity survey from the country’s National Bureau of Statistics (NBS).

The reading of 49.0 in July was a sharp fall from the 50.2 reading in June as manufacturing in and around Shanghai and the east coast, as well as around Beijing re-opened after a series of Covid lockdowns.

The survey missed market forecasts for a slightly faster pace of expansion than in July of 50.4.

China is of course Australia’s major export market and although iron ore prices rose strongly in the final weeks of July, the mood across the economy was less than convincing.

“The level of economic prosperity in China has fallen, the foundation for recovery still needs consolidation,” NBS senior statistician Zhao Qinghe said in a statement on the bureau website.

Continued contraction in the oil, coal and metal smelting industries was one of the main factors pulling down the July manufacturing PMI, he said.

For all the bravado about boosting coal production and cutting imports – and ignoring Australian coal – news of production concerns for the coal mining industry chimes with blackouts reported in parts of China in late July because of strains on the power state due to very hot weather.

The reading was the lowest in three months, with sub-indexes for output, new orders and employment all contracting.

The NBS survey also reported that service sector activity also slowed in July but remained in an expansion phase.

The Non-Manufacturing survey for July declined to 53.8 from a 13-month high of 54.7 in June – the brief bounce back from those lockdowns clearly fading as China tackled more Covid outbreaks, cuts to production in thousands of factories, more limited restrictions and a run on banks in Henan province as well as a growing mortgage boycott across more and more parts of the country.

The two surveys saw the combined reading for July also dip but remain in positive territory.

The NBS Composite PMI Output Index in China dropped to 52.5 in July from that 13-month high of 54.1 in June.

China’s economy grew just 0.4% (annual) in the second quarter thanks to widespread lockdowns, and the Communist Party’s Politburo last week made it clear that the party’s strict zero-COVID policy would remain a top priority.

That means the chances of more lockdowns and disruptions to economic activity remain a very real possibility.

So it’s no wonder that Bruce Pang, chief economist and head of research at Jones Lang Lasalle pointed out in a research note on Sunday (reported by Reuters). “Q3 growth may face greater challenges than expected, as recovery is slow and fragile.”

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