Australian Economic Developments

This week the RBA Minutes from its February Board meeting reinforced the risks that continue to face the Australian economy. Although the Board saw reason to keep the cash rate on hold, it noted that the Australian data continues to show a “mixed” picture of growth across the economy. An easing bias appears to remain in place, with moderate inflation continuing to “afford scope to ease policy further, should that be necessary to support demand”.

In the minutes, the RBA also noted it expects resource exports to have increased strongly in the December quarter, including coal exports following the end of a significant industrial dispute. The recent Queensland floods are expected to have had a noticeable impact on the transport of coal to ports, but the effect on exports should be much less pronounced than was the case in 2011. In addition, it was noted that iron ore prices have increased significantly over the past two months, largely reflecting stronger demand from China owing to increased industrial activity there as well as some rebuilding of iron ore stocks after earlier depletion of inventories. However, iron ore prices are running well ahead of Chinese steel prices so some pullback is now expected.

In the domestic economy, this week’s wages releases point to a moderation in pricing pressures across the economy. The ABS published two separate wage-related releases this week. The Wages Price Index (WPI) is generally seen to be the more reliable indicator of wage changes in the Australian economy, while the Average Weekly Earnings data (only released twice-yearly) is useful for comparing earnings levels across states and industries.

The WPI showed that total hourly rates of pay (excluding bonuses) grew by 0.8 per cent in the December quarter, to be 3.4 per cent higher over the year (Chart 1). This was in line with market expectations and slightly above the quarterly growth rate seen in the September quarter (0.7 per cent). The annual rate of wages growth is now at its lowest level since June 2010.

Looking specifically at the private sector, total hourly rates of pay (excluding bonuses) grew by 0.8 per cent in the December quarter to be 3.4 per cent higher over the year. Ordinary hourly rates of pay (which excludes overtime rates and bonuses) also grew by 3.4 per cent in 2012, again, the lowest rate of wages growth since June 2010.

The US Conference Board’s leading economic indicator rose broadly in line with market expectations in January and has risen in four of the past five months, supporting market forecasts of a pick-up in GDP growth in the first half of 2013 after stalling in the December quarter of 2012. Economic activity is expected to be supported by growth in housing construction following the sharp rise in housing starts during 2012. The number of housing starts fell by 8.5 per cent in January, due to a fall in multi-unit construction and to an unseasonal rise  in December which had milder-than-normal winter weather. Overall, leading indicators of housing continue to point to a recovery, with housing starts 24 per cent higher over the year to January and building permits 35 per cent higher over the year.

Survey data released from Europe this week continues to point to declining activity levels. The flash estimate of the European PMI for February fell 1.3 points to 47.3 after picking up in recent months. The initial estimate of the European Commission’s consumer confidence index improved marginally in the euro area (-23.6 after -23.9 in January 2013), but remains well below the average level seen over the past decade.