- Upside risk to tomorrow's Q4 GDP result - Q1 data mixed to date - RBA going nowhere

By Greg Peel

Before we get to the RBA's monetary policy statement for March, let us review some of the recently released economic data.

It's at this time of the quarter that economists are furiously rejigging their Australian GDP forecasts, given the raft of quarterly data released only days before the actual GDP result (Q4 GDP due tomorrow). That which the RBA most fears, with regard to inflationary pressure, is the terms of trade. But the Q4 net exports result in the current account showed an increased deficit sufficient to render exports neutral to fourth quarter GDP growth.

Strong wage growth in the past year has nevertheless been blamed on the rising terms of trade by economists. Wages grew 1.5% in Q4 to provide an annual growth rate of 8.0%, which compares to the long-run average of 5.6%. But company profits fell by 2.8% in Q4 compared to consensus expectation of a 1.0% gain, rather offsetting inflationary concerns there.

Inventories rose a surprise 0.7% in Q4 having dropped 0.8% in Q3. This result, suggest economists, means there is upside risk to consensus GDP growth expectations of 0.7% quarter-on-quarter and 2.7% year-on-year. But the flipside to rising inventories is an implicit weakness in sales.

Moving on to monthly data, which is post-Q4, January retail sales rose 0.4% compared to 0.3% expectation. This might be seen as positive following on from a dour Christmas, but economists note the level of discounting still prevalent in stores which suggests margins are likely still paper thin, if not negative in many cases. Watch those rising inventories.

January credit data show the pace of credit demand growth to still be frustratingly slow. Demand grew 0.3% in the month – about the same as it had done in the previous two months. The housing credit growth component was up by 0.6% which is comparatively modest, and business credit demand fell 0.1% which is also consistent with previous months. Business credit demand is not crashing anymore, but it just can't seem to get going. Economists have long been expecting a bounce but it just never seems to come.

It's all about the two-speed economy.

But wait, there's good news. Today's purchasing managers' index data showed Australia's manufacturing PMI jumped to 51.1 last month compared to 46.7 in January. This is significant because it represents the first time in five months the PMI has not slipped further into contraction, and indeed a score over 50 means expansion is back. Economists warn, however, that one swallow does not a summer make.

If you take official Chinese data as a given, Beijing's careful monetary policy tightening is working quite nicely, thank you very much. Official figures show the Chinese manufacturing PMI fell to 52.2 last month compared to 52.9 in January to mark its lowest pace of growth in six months. But it's still growth, and that's exactly what Beijing wants – a steady economy rather than a runaway one.

The privately calculated equivalent PMI from HSBC also had Chinese manufacturing growth slowing, but more sharply to 51.7 from 54.5. Nevertheless, the end results are not dissimilar. Slowing Chinese growth clearly represents an impact on the Australian economy via lesser demand for raw materials, but these numbers provide little to be alarmed about.

And so on to today's RBA rate decision, which was exactly the fizzer all an sundry expected. To elaborate, try spotting the difference in these two conclusions:

February: “At today's meeting, the Board judged that the current stance of monetary policy remained appropriate in view of the general macroeconomic outlook.”

March: “At today's meeting, the Board judged that the current mildly restrictive stance of monetary policy remained appropriate in view of the general macroeconomic outlook.”

Well no prizes for spotting the addition of “mildly restrictive”, which implies that the current cash rate of 4.75% is just on the tightening side of neutral, which is deemed to be 4.5%. But other than emphasising this point, there was virtually no difference between this month's monetary policy statement and last month's, other than last month the RBA took some time to offer its thoughts on the floods.

This month the RBA simply noted that flooding had pushed up food prices, but this was deemed to be temporary. Otherwise, the central bank continues to believe core inflation will sit comfortably inside the 2-3% range for the foreseeable future, and thus for the foreseeable future rates will be on hold. So let's do it all again next month.

Read the full statement here.

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