The RBA is pinning its hopes on the “strong” labour market. It improved its jobless rate forecast to 4.75 per cent over the next couple of years, down from the current 5 per cent rate it earlier tipped.
The RBA admitted some downside risks in Australia and globally had increased and that a weaker-than-expected consumer spending had dented September quarter growth since its previous economic growth forecasts.
“Growth in household income has been low over recent years, but is expected to pick up and support household spending. The main domestic uncertainty remains around the outlook for household spending and the effect of falling housing prices in some cities,” RBA said.
JPMorgan economist Sally Auld said the RBA “made some concessions to recent developments, but at present does not see these as threatening the economy’s ability”.
“Data for the first quarter of 2019 have been scant, but the January numbers we have seen have been weak,” she said.
The central bank scotched an earlier reference that the domestic economy is “performing well” and omitted the December remark that business conditions were “positive”.
It added a more cautious tone on the “weakened” conditions in the Sydney and Melbourne housing markets, and reiterated that credit conditions for some borrowers were tighter.
“The housing markets in Sydney and Melbourne are going through a period of adjustment, after an earlier large run-up in prices,” the RBA said.
Morgan Stanley chief economist Daniel Blake noted: “The crucial first board meeting of 2019 acknowledged weaker growth and downside risks (in housing/consumption), but did not explicitly shift policy bias.”
Governor Lowe’s speech on Wednesday will be closely watched for the retention of the bank’s “next move is up” rhetoric, Mr Blake said.
Retailers’ dismal Christmas trading period was laid bare by official figures on Tuesday showing retail sales fell 0.4 per cent in December. Spending on discretionary items such as clothing, footwear and household goods fell more heavily.
Asked about the weak retail sales, Prime Minister Scott Morrison said it was a “difficult period coming into the back end of the year” and was a “reminder of the tough headwinds we’re facing”.
The poor result backed up anecdotal evidence of retailers experiencing weak summer holiday trading.
Though the retail figures are seasonally adjusted, economists said they were partly lowered by consumers bringing forward purchases to take advantage of heavy discounting and Black Friday sales in November, when retail sales jumped 0.5 per cent.
Commonwealth Bank of Australia economist Gareth Aird said the recent data flow relating to the consumer was concerning.
“Spending has slowed significantly and the latest read on consumer confidence suggests that concerns around the economic outlook for households have risen,” he noted.
New vehicle sales fell a hefty 7.4 per cent to 81,994 in January, compared to the same month last year, with the car industry blaming the pull back on lower consumer confidence.
“The current economic environment is a challenging one, with an imminent federal election, a declining real estate market and tighter lending practices,” said Federal Chamber of Automotive Industries chief executive Tony Weber.
Separately, the services sector suffered its worst activity monthly reading since October 2014, falling 7.8 points to 44.3 points in January, according to the Australian Industry Group (AiG) Performance of Services Index. Sharp drops in retail and wholesale trade dragged down overall services activity to post its first contraction since February 2017.
“The services sector slumped sharply in January following a period of slowing activity over the second half of last year,” Ai group chief executive Innes Willox said.
“Sales fell away in January and new orders were also down despite widespread price discounting.
“The retail sub-sector recorded its weakest monthly result for over six years.”
The international trade balance offered a mixed picture, with the trade surplus surging to $3.7 billion in December, up $1.4 billion on November.
However, in another sign consumers and business pulled back on spending, imports of total goods and services fell 6 per cent. Business imports of capital goods plunged 15 per cent.
The sharp fall in import values more than offset a small decline in export values.
“The details of the report were unequivocally weak, particularly imports which sank 6 per cent month-on-month,” JPMorgan economist Tom Kennedy said.
More positively, the $22.2 billion trade surplus for 2018 was the highest calendar year surplus ever and the first time since 1972 when every month was in surplus, Trade Minister Simon Birmingham said.
Signs of a softening economy were evident on Monday when data showed building approvals slumped 8.4 per cent in December, taking the slide down in new residential approvals by 22.5 per cent for 2018.
One consistent bright spot for the economy has been strong employment growth and a low jobless rate of 5 per cent.
However, ANZ job ads on Monday recorded their first annual fall in almost four years, falling 3.7 per cent below the January 2018 level.
More positively, weekly consumer confidence measured by ANZ-Roy Morgan rose to a two-month high of 118.1 points, above the long-term average of 113.1, CommSec noted.
Asked about the weak retail sales, Prime Minister Scott Morrison said it was a “difficult period coming into the back end of the year” and was a “reminder of the tough headwinds we’re facing”. DAVE ACREE
Autralia economy news