Australian Economic Developments

This week the Reserve Bank of Australia (RBA) left the cash rate on hold at 2.75%, at its monthly Board meeting, after cutting the cash rate by 0.25 basis points in May. In the accompanying Statement by RBA Governor Glenn Stevens, the RBA left the door open for further rate cuts this year if needed, stating that “the inflation outlook, as currently assessed, may provide some scope for further easing, should that be required to support demand” (inflation is currently 2.5% p.a., right in the middle of the RBA’s target band of 2 to 3%). On current conditions, the RBA notes that: Australian growth is “a bit below trend”; the “unemployment rate has edged higher”; the “pace of borrowing has thus far remained subdued” and that even after the depreciation in May, the Australian dollar “remains high considering the decline in export prices that has taken place”.

Reflecting our low inflation environment (and possibly a lower growth environment also), Fair Work Australia approved a 2.6% increase in the minimum wage from 1 July 2013 in its annual minimum wage decision. This decision will deliver a rise of $15.80 per week to those on the minimum wage. It directly affects 1.5 million workers and will take their weekly wage to $622.20.

The data released this week confirmed the RBA’s verdict of ‘below trend’ economic conditions. In particular, the National Accounts showed that headline GDP growth slowed to 2.5% p.a. in the March quarter (Q1) 2013 (see details below). This means national GDP growth has slowed to well below Australia’s long-run average (3.0%) and has already slowed to the full extent that had been expected by the RBA over the course of 2013 (the RBA forecast 2.5% for calendar year 2013).

Australian Construction Activity

Australian Industry Group’s Australian PCI® improved by just 0.1 point to 35.3 points in May. This is slightly below (2.7 points) the average level of the past three years and marks the third full year that the PCI has been below the critical 50 points level that separates expansion from contraction. The very recent (and as yet mild) pick-up in building approvals and housing finance has yet to translate into an improvement in overall levels of activity.