Daily Commentary BY THE CURVE TEAM –

Wages and Consumer Spending Continue To Weigh In On Growth

7th of September, 2017

After a lacklustre period of growth in Q1, GDP for Q2 printed in line with market expectations yesterday. The RBA will be pleased as the result aligns with their growth forecasts however there are still areas that need to be addressed if we are to see a change in the outlook for interest rates.

On the back of a number of mixed partial readings, Q2 GDP for Australia printed at 0.8% leaving the annual rate of growth at 1.8%, an uplift from a weather affected Q1. Ongoing strength in business conditions was again apparent with another quarter of positive growth for business investment while public demand also experienced above average growth.

However, the weak wage growth story still remains and this will be continue to weigh on the RBA’s outlook. Low levels of wage growth in the Australian economy has been a key focus point for some time now and this is continuing as wage incomes undershot expectations, only growing 0.7% for Q2.

Consumer spending was the other under-performer only growing 0.7% in Q2. This trend looks like it will continue to undermine the RBA’s ability to tighten monetary policy. Whilst there are improved business conditions, until we see a lift in wages we are unlikely to see a lift in consumer spending.

As we saw in Tuesday’s RBA Statement, Governor Lowe remains optimistic about wage growth going forward however this has been the case for quite some time and we are yet to see any incremental increase. Despite ongoing strength in business conditions, the labour market will need to tighten further before we see any change in rhetoric by the RBA.

Moving offshore and the decision in the September meeting of the Bank of Canada saw rates lifted again to 1.00%. While markets were expecting the hike to come a month later, the strong Q2 GDP print prompted an earlier response.

Another busy day today with domestic retail sales and trade balance due this morning. Plus the ECB is set to meet today, while no rate decision is likely to be made, markets are looking for comments around the timing of the tapering of the balance sheet as well as around the recent strength of the currency.

Oliver Parsons

Client Relationship Officer