Cliff Notes: consumer incomes remain under pressure from cost of living
Key insights from the week that was.
Beginning in Australia, the July Monthly CPI Indicator provided further confirmation of the deceleration in inflation’s momentum, easing from 5.4%yr to 4.9%yr. However, the composition still speaks to lingering cost-of-living pressures, as evinced not only by the actual lift in electricity prices (6.0%mth) but also what the lift could have been were it not for the introduction of state energy rebates (19.2%mth). Additionally, the detail around housing still reflects an uncomfortable mix, with rental inflation continuing to accelerate (7.3%yr to 7.6%yr) as the moderation in new dwellings persists (6.6%yr to 5.9%yr). So, while it is constructive to see the current progress in inflation and the improving balance of risks for monetary policy, the detail is a reminder that consumption nonetheless remains under pressure in an environment where both prices and interest rates have risen rapidly.
Therefore, it was somewhat encouraging to see nominal retail sales rise 0.5% (2.1%yr) in July, largely due to a solid contribution from cafés and restaurants associated with school holidays and the 2023 FIFA Women’s World Cup. The influence of population growth and inflation remains substantial however, with retail sales continuing to track a very weak profile on a real per capita basis, in the realm of –3.0%yr to –3.5%yr, a reminder that temporary forces which stimulate aggregate discretionary spending have not significantly altered the underlying trend.
In the lead up to next week’s Q2 GDP report, the ABS also released two partial indicators for investment.
There were some unexpected results around the quarterly profile for construction work done, a modest 0.4% lift in Q2 coupled with a significant upward revision to Q1 (from 1.8% to 3.8%), resulting in construction work being up 9.3%yr. This solid uptrend reflects ongoing momentum in infrastructure investment, public infrastructure up a sizeable 16%yr and private infrastructure +15%yr. Housing experienced mixed fortunes however, with renovation activity down –7.2%yr but new dwelling construction up 5.1%yr.
The Q2 CAPEX survey subsequently delivered an upside surprise, the 2.8% lift in current activity surpassing even Westpac’s top-of-the-range forecast of 2.0%. The 1.9% gain in equipment spending was also constructive and remains consistent with our immediate view for investment. On spending intentions, the third estimate for 2023/24 CAPEX plans remained optimistic, up 7.0% compared to the third estimate a year ago. In our view, this implies a 6.3% rise in CAPEX spending over the financial year. While positive for now, we anticipate a diverging outlook for investment, with equipment spending softening as the impetus from tax incentives fade while capacity expansion via construction work holds firm.
Despite the downside surprise on construction work, our forecast for Q2 GDP remains unchanged at 0.4% (1.8%yr). A detailed breakdown of our forecast can be found on WestpacIQ.
Offshore, the US had the most data to ascertain signal from, with spending, income, and a revised GDP figure released as well as the latest JOLTS survey. Personal spending rose 0.6% in real terms in July after a 0.4% gain in June. Spending well and truly outpaced growth in personal income in the month, 0.2%, and the savings rate fell back near its historic low as a result, highlighting that savings can only be drawn down upon for so long. Given this robust July reading for spending and as Q2 GDP has been revised down from 2.3% to 2.1% annualised, Q3 GDP growth looks set to print materially above trend. That said, with available excess savings dwindling and real incomes recovering slowly, growth looks certain to drop below trend in Q4 and beyond. The latest labour market detail is also supportive of such a view, July's JOLTS job openings falling by an outsized 338k while the number of unemployed people per job opening increased to 0.7. Hiring and separation rates being little changed and the still historically-high level of job openings are not indicative of recession by any means, but they do point to less opportunity for advancement and nominal wage growth, restricting discretionary demand. In such a climate, a continuation of the current benign inflation trends seems probable. Both headline and core PCE deflators rose by ‘only’ 0.2% in July.
Across the Atlantic, Europe's flash August CPI showed disinflation only at the second decimal place -- August's print coming in at 5.26%yr versus 5.31%yr in July. 'Underlying' inflation cooled to 5.3%yr from 5.5%yr however, giving the ECB the option of extending their pause in September if they perceive the risks faced by the economy as skewed to the downside.
China's NBS manufacturing PMI meanwhile ticked up to 49.7 in August from 49.3 but remains below the 5-year pre-COVID average. Of note, there was a large upswing in main raw material purchase prices and producer prices, although producer price data suggests the starting point was entrenched deflation. The non-manufacturing PMI instead declined from 51.5 to 51.0, continuing the downtrend of recent months. While there was a slight improvement in the employment component for services overall, construction employment’s contraction accelerated.
Overall, the data should be taken as a sign of stabilisation not recovery. The latter is likely some months away, assuming the recent run of policy measures gains traction. Of note this week, the Chinese government announced changes to mortgage lending requirements, with the national minimum deposit requirement to now be 20% for first-time buyers and 30% for second-home buyers (first-time investors). However, required deposits will still vary city by city. How far tier 1 and 2 city deposit requirements for first-time investors are cut towards 30% will dictate how effective the policy is. The additional move to cut mortgage rates for all borrowers will, in time, aid consumption as well as new housing investment. Hopefully, the windfall will be greater than its immediate financial impact. Putting a floor under sentiment such that households feel free to spend down accumulated excess savings could quickly turn Chinese domestic demand. As the changes are due to take effect late-September, it will be a few months before we find out.
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