The door for rate cuts opens further

Pendal

December 2024

THE Australian economy grew by only 0.3% in the September quarter, once again falling behind population growth.

We managed only 0.8% growth for the year, yet the RBA still thinks demand outstrips supply.

The September quarter GDP numbers were always going to be more interesting than most.

Tax cuts and government subsidies were hitting consumer pockets and the big question was whether they would be spent or saved. For now, it appears consumers have been happy to pocket the extra money.

Spending by business and consumers once again flatlined and per capita consumption fell by 2% over the year.

The only growth we could find was, once again, the government - which now comprises almost 28% of GDP, up from around 23% for most of the past 50 years.

The graph below, courtesy of Westpac, highlights this extraordinary return of big government.

Source: Westpac Economics

Source: Wages grow 3.5 per cent for the year | Australian Bureau of Statistics

The national accounts also provided more information around wage pressures. As the high wage outcomes of 2022 and 2023 have faded from view, these are easing quickly.

Average earnings per hour moderated to 3.2%yr, from 6.5%yr in the June quarter. This is consistent with recent wage data at 3.5%.

We have weak growth, moderating inflation, wages under control and global easing cycles - so why the hesitation from the RBA?

The central bank remains focused on the idea that the labour market remains too tight, as it believes that 4.5% - not the current 4.1% - to be full employment.

The data is now suggesting otherwise.

Outlook

It will be an interesting few upcoming meetings for the RBA board.

February will likely be the last monetary policy board decision for three of the six independent directors. And March or April will see a split into governance and monetary policy boards.

Whether this influences thinking remains to be seen, but the current spirit of caution may yet stop a rate cut in February.

However, I think the RBA may do a short sharp pivot in the next few months, and view two cuts (in February and May) as still on the cards.

The Q4 inflation data at the end of February will be another low number, with even underlying inflation likely to print 0.6%, or annualised at the RBA midpoint.

While bond investors will be cheering for a cut, the Labour government will be desperate for one ahead of the "cost-of-living" election.

Time will tell if the RBA delivers for them.

Author: Tim Hext

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Understanding Bridging Loans: A Comprehensive Guide

Australian Secure Capital Fund

December 2024

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Hedge Clippings | 20 December 2024

As we in Australia end the year as it started - with the RBA's cash rate stuck at 4.35% - in the US the FOMC cut rates 0.25% to 4.25 to 4.50%, leaving markets unimpressed - not so much because they were hoping for more, but because Jerome Powell flagged a slow down in the rate of cuts in 2025.

As a result equity markets took the hint - not really surprising given the recent "Trump Effect" rally, and leading into the Christmas break, year end, and question marks over the effect of next year's policy changes on tariffs, deportations and foreign policy. Markets simply don't like uncertainty, and no one is quite sure of their outcome on inflation and trade.

Back in Australia, and looking forward to 2025, speculation - or expectation - is increasing that the RBA will finally start the easing process, possibly as early as the next Board meeting scheduled for 17/18th of February. Jim Chalmers will be hoping for that - or at least that it occurs before the upcoming election. Policy wise the PM and Treasurer are doing everything they can to shore up votes by softening the cost of living crisis and thereby claim credit for easing the burden on consumers' pockets, as well as take the credit for a rate cut - if it eventuates. Meanwhile, Chalmers is also claiming credit for keeping the economy out of a recession thanks to the government's increased hiring and spending, while at the same time their spending is one of the main drivers of the inflation which has been keeping rates higher for longer.

Chalmers' hopes will be bolstered by the changes both to the structure and composition of the RBA board which are due to take effect on March 1st, but depending on when the election is held, it's going to be a close run thing.

The first meeting under the new board doesn't take place until March 31st, with the result announced on April Fools' day - although the tricks are supposed to finish by midday. Meanwhile the election has to be held by May 17th, just two days before the following RBA meeting.

So a rate cut in February may be on the cards. The outgoing Board will want to show it was their decision, and not one forced on them by the new appointees as soon as their bums hit their seats. And the incoming board won't want to imply criticism of the old one by moving at the first opportunity.

So 2025 is shaping up to be interesting times both in the US and locally, particularly given the current closeness of the polls. Post the election one of the worst outcomes is likely to be a hung parliament, with the potential for a "coalition" between Labor and the Greens/Independents.

Interesting times indeed!

In the meantime, Hedge Clippings will be taking a break for a few weeks over Christmas and New Year to re-charge the batteries. We'd like to take the opportunity of wishing all our readers a safe holiday, and a healthy, prosperous and happy New Year.

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