Flexible RBA. Consumer confidence hits 9-week high

RBA Board meeting minutes; Consumer confidence; CBA Household spending intentions

What happened? The Reserve Bank of Australia (RBA) Board released the minutes of its September 7 meeting. At the meeting, the Board decided to taper its bond purchases from $5 billion to $4 billion per week until at least mid-February 2022, due to the “severe” interruption to the economic recovery from the Delta variant outbreak. The Board also signalled that the cash rate is unlikely to lift “before 2024” as it doesn’t expect to meet the conditions necessary to achieve a return to full employment or its 2-3 per cent inflation target until then.

The weekly ANZ-Roy Morgan consumer confidence rating rose by 0.2 per cent to a 9-week high of 103.3 (long-run average 112.5). Sentiment surged 7.3 per cent in Queensland and lifted by 6.7 per cent in South Australia last week. But confidence fell by 4.9 per cent in NSW and 1.1 per cent in Victoria due to prolonged lockdowns.

Commonwealth Bank (CBA) Group economists reported that household home buying, travel, entertainment and education spending intentions were all down in August due to lockdowns in NSW, Victoria and the ACT.

Implications: Recent research from the Australian Retailers Association and Roy Morgan showed that Aussie consumers are expected to spend a massive $11 billion on Christmas presents this year with 48 per cent purchased online. But this may not be good news for Australian shopping mall REITs, such as Scentre Group and Vicinity Centres, who are both primed for an eventual re-opening of both the NSW and Victorian economies.

The consumer confidence and household spending data have implications for retailers, and other consumer-focussed businesses. The Reserve Bank Board minutes are important in gauging policy settings.

What does it mean?

• The Reserve Bank of Australia (RBA) Board today released the minutes of its September 7 meeting. At the meeting, the Board decided to slow or taper its bond purchases from $5 billion to $4 billion per week until at least mid-February 2022, due to the “severe” interruption to the economic recovery from the Delta variant outbreak.

• The Board also signalled that the cash rate is unlikely to lift “before 2024,” as it doesn’t expect to meet the conditions necessary to achieve a return to full employment or its 2-3 per cent inflation target until then.

• Of course, extended lockdowns in Sydney, Melbourne and Canberra have delayed the RBA’s policy efforts to reduce the unemployment rate towards 4 per cent, which could spur wage gains of around 3 per cent, and sustainably propel inflation into its target range.

• In a downbeat assessment of the economic outlook, the RBA Board acknowledged that the economic recovery is more likely to be ‘W’-shaped than the ‘V’-shaped snap-back that we saw last year as Aussies adapt to living with the highly infectious Delta variant. In fact, policymakers said, “As restrictions were likely to be lifted gradually, the recovery could be slower than experienced earlier in the pandemic, when the end of community transmission of Covid-19 allowed for a more rapid lifting of restrictions.”

• The RBA’s updated assessment is now more in-line with the view of Commonwealth Bank (CBA) Group economists, who do not expect a return to the robust pre‑Delta economic growth path until the second half of 2022.

• And while the RBA will continue to be flexible with its bond purchases, as the health situation and economic conditions evolve, we expect the Board to eventually slow its purchases in February 2022 to a pace of $3 billion per week through to May 2022.

• Consumer confidence, as measured by ANZ and Roy Morgan, edged higher by 0.2 per cent last week to a 9-week high. Sentiment jumped in ‘Covid-free’ states of Queensland (up 7.3 per cent) and South Australia (up 6.7 per cent). But these gains were largely offset by declines in confidence in NSW (down 4.9 per cent) and Victoria (down 1.1 per cent) due to prolonged lockdowns.

• While a tentative peak in new Covid-19 cases in Greater Sydney and a lift in vaccination rates are both supportive of a potential easing of government restrictions in October, rising unemployment is weighing on consumer morale. Last week, the Bureau of Statistics (ABS) reported that 210,000 jobs in NSW had been lost in the past two months, with hours worked plunging 6.5 per cent in August due to government Covid-19 ‘stay-at-home’ orders. Of course, a big fall in jobs will likely show up in the September labour force survey, unnerving lockdown-weary Victorians.

• Consumer concerns about the rising cost of living spiked last week as petrol prices hit record highs in both Brisbane and Melbourne. The ANZ/Roy Morgan measure of consumer inflation expectations over the next two years rose from 4.5 per cent to equal 33-month highs of 4.7 per cent last week.

• Some angst about rising consumer prices and joblessness may have fed into household caution about the purchase of ‘big ticket’ items. In fact, the closely followed question of whether it is a good ‘time to buy a major household item’ fell by 1.6 per cent last week.

• Encouragingly, Commonwealth (CBA) Group economists today reported that, “[household] retail spending intentions showed some signs of stabilisation in August 2021 relative to last year. Retail spending in August 2021 was, however, stronger than August 2019.” The ABS reports the retail trade figures for August on September 28. Delta-virus induced lockdowns in Australia’s big cities will likely dampen consumer spending in August after retail sales dropped 2.7 per cent in July and 1.8 per cent in June.

• The post-lockdown rebound in retail spending in late 2021 is likely to be more gradual when compared to the sharp snap-back in the earlier stages of the pandemic last year. That said, the Australian Retailers Association (ARA) remains optimistic about Christmas trading. ARA research released in conjunction with Roy Morgan showed that Aussie consumers are expected to spend a massive $11 billion on presents this year with 48 per cent purchased online.

• Of course, this may not be good news for Australian shopping mall REITs, such as Scentre Group and Vicinity Centres, who are both primed for a reopening with the NSW and Victorian governments expected to loosen lockdown measures in the coming months.

What do you need to know?

Minutes of the Reserve Bank Board meeting held on September 7

Key quotes:

• Final paragraph: “The Board remains committed to maintaining highly supportive monetary conditions to achieve a return to full employment in Australia and inflation consistent with the target. It will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range. The central scenario for the economy is that this condition will not be met before 2024. Meeting this condition will require the labour market to be tight enough to generate wages growth that is materially higher than it was at the time of the meeting.”

• Near-term economic outlook: “The outbreak of the Delta variant had delayed, but not derailed, the recovery. GDP was expected to decline materially in the September quarter; the near-term outlook resembled the downside scenario presented in the most recent forecasts.”

• Medium-term economic outlook: “Beyond the September quarter, members agreed that the timing and pace of the rebound in economic activity would depend largely on the lifting of restrictions in response to health outcomes. As vaccination coverage increased, this would allow restrictions to be eased and recovery from the recent setback to begin in the December quarter. As restrictions were likely to be lifted gradually, the recovery could be slower than experienced earlier in the pandemic, when the end of community transmission of Covid-19 allowed for a more rapid lifting of restrictions.”

• Job market outlook: “Consistent with the effect of the lockdowns on activity, members assessed that further improvement in the labour market would be delayed.”

• Decision to taper bond purchases: “Two modifications were considered. The first was to maintain the recent rate of purchases at $5 billion a week to at least November 2021 and then review the program. The second was to taper purchases to $4 billion as had been announced, but to extend the period over which bonds would be purchased at this rate to mid-February 2022. With the economy expected to return to its pre-Delta path by mid-2022, members assessed that, on balance, tapering remained appropriate. The Board also took account of the fact that a number of other central banks are tapering their bond purchases. In addition, at $4 billion a week, the Bank’s bond purchase program is expanding faster relative to the stock of bonds outstanding than that of many other central banks. The Board also saw value in providing greater clarity regarding bond purchases after November 2021.”

• And, “The Board will continue to review the bond purchase program in light of economic conditions and the health situation, and their implications for the expected progress towards full employment and inflation reaching the target.”

Consumer sentiment – Week ended September 19

• The weekly ANZ-Roy Morgan consumer confidence rating rose by 0.2 per cent to a 9-week high of 103.3 (long-run average since 1990 is 112.5). Three out of the five major sub-components rose last week.

The Commonwealth Bank (CBA) Household Spending Intentions Series (HSI) – August

• According to CBA economists, the highlights of the August HSI include:

• “Home buying spending intentions rose in August 2021 relative to August last year, but with the pace of improvement continuing to decline from the jump in H1 21.

• Retail spending intentions were soft in August, but showed some stabilisation from recent declines.

• Travel spending intentions continued to adjust lower in August, as the impact of the lockdowns reduced the ability of Australians to travel.

• Health & fitness spending intentions were little changed in August, following the volatility seen through H1 21.

• Entertainment spending intentions were down in August, with lockdown restrictions limiting the ability to spend in the category.

• Education spending intentions continued to turn down in August.

• Motor vehicle spending intentions had been volatile through H1 21, as the economy opened and then closed again, but stabilised in August.”

Published by Ryan Felsman, Senior Economist, CommSec