A quiet week on the Australian data front

It was a quiet week for Australian data ahead of Friday’s retail sales release and next Wednesday’s monthly CPI indicator. We look at the Flash May PMI below and check in on weekly consumer confidence and the latest Bloomberg survey of market economists, but if you’re left feeling short on economic content beyond the usual linkage roundup, we talk US debt ceiling, UK economic malaise, and the trade economics of state visits in this week’s Dismal Science podcast.

I will be doing an in-person economic update in Melbourne on 8 June, details here for the face-to-face version and here for the virtual event.
 

Flash PMI indicates private sector activity still expanding, but more slowly

The Judo Bank Flash Australia Composite PMI output index was 51.2 in May 2023, down from a reading of 53 in April. Private sector activity has therefore expanded for a second consecutive month, albeit at a slower pace than in April. The readings for output and for new orders were both in expansionary territory and Judo Bank noted that the past two months had brought the best PMI readings since the middle of last year. Once again, services drove the growth in activity, with manufacturing output shrinking for the sixth month in a row. That is consistent with a global manufacturing slowdown, softer demand for consumer goods, and a lack of growth in domestic construction activity.

Reported business confidence across the private sector improved this month, with greater optimism in both the services and manufacturing sectors. Even so, the level of confidence remains below average, reflecting concerns about the business outlook, higher interest rates and inflation.

The PMI also reported that input cost inflation eased in May even as strong demand growth implied better pricing power, which in turn led to an increase in selling price inflation.

What else happened on the Australian data front this week?

The weekly ANZ-Roy Morgan Consumer Confidence Index rose by 1.4 points last week to an index reading of 77.3, driven by improvements in the ‘current financial conditions’ and ‘future financial conditions’ subindices. Even so, ANZ noted that the level of confidence was still among the worst ten results since January 2020, with seven of those results coming between March and May of this year. The index is also 13.5 points below the level reported in the same week in 2022 and has now been below an index reading of 80 for 12 consecutive weeks – the longest stretch sub-80 since the index started to be constructed on a weekly basis in October 2008. Otherwise, the last time that the index spent at least 12 weeks under 80 was during the 1990-91 recession, when the survey was conducted monthly. ANZ reckons that this consistent period of weakness highlights the significant squeeze on households from rising cost of living pressures.

The same survey’s measure of weekly inflation expectations fell 0.2 percentage points to 5.1 per cent last week.

The latest monthly Bloomberg survey of economists reported that the perceived risk of an Australian recession edged up slightly in May 2023, rising to a 38 per cent probability from 35 per cent in April. The same poll showed that respondents expect the RBA to hold the cash rate target steady at 3.85 per cent through the first quarter of next year, before starting to ease in Q2:2024. Back in April, the median forecast had the central bank starting to lower rates in Q1:2024.

Other things to note . . .

• This AFR long read asks, are we at peak pay rise in Australia?
• A PBO distributional analysis of the Stage 3 tax cuts.
• Peter Martin proposes four ways to bring down rents and build more homes.
• Michael Celli on Budget 2023-24 and inflation.
• A new RBA research discussion paper using high frequency yield changes to examine the effects of monetary policy signalling and forward guidance. Interesting findings include that while speeches, the RBA Board minutes and the Statement on Monetary Policy all affect expectations about future rates, they have a much smaller impact than policy announcements; when the RBA highlighted housing risks in the 2010s, Australians increased their expectations for future rate rises; COVID-era unconventional  monetary policy appears to have worked mainly via changes in term premia rather than expectations for future policy rates (in contrast to pre-COVID policy when changes in expected rates played the larger role); financial markets appear to systemically misunderstand how the RBA will respond to data, given that some shocks to the path of rates are predictable based on past data; and high frequency data are unable to overturn the ‘price puzzle’ – that increases in interest rates in Australia tend to be associated with increases in inflation.
• Also from the RBA, a speech on Australian fixed income markets.
• The Treasury Secretary spoke to the same forum on Australia’s economic outlook.
• From the Economist magazine, how Australia faced down China’s trade bans and emerged stronger.
• Noted, an ANU book on the intergenerational report, sustainability, and public policy in Australia.
• A new BIS Bulletin on Disinflation milestones compares the disinflation path in the US and eurozone implied by current OECD forecasts with historical episodes. It finds that the expected 2023-24 disinflation paths for domestic prices and nominal wages are within the range of past disinflations for both economies but also cautions that higher increases in either wages or markups could threaten to undermine the disinflation process.
• Why are economists still uncertain about the effects of monetary policy?
• A new IMF working paper arguing that extended periods of ultra-easy monetary policy come with the risk of the ‘zombification’ of weak firms and low economic growth.
• A Hutchins Centre conference on the US Fed and lessons learned from the past three years. Includes a new paper from Ben Bernanke (former Fed chair) and Olivier Blanchard (former IMF chief economist) on what caused US Pandemic-era inflation. For a quick take, there’s a nice discussion of the Bernanke-Blanchard paper by the WSJ’s Greg Ip in Why inflation erupted.
• Admati, Hellwig and Portes on the US banking crisis of 2023. The authors detect ‘a replay of the Savings and Loans (S&L) crisis of the 1980s’ and argue that at the heart of the current problem is a solvency crisis.
• The United States of Bed, Bath & Beyond (via FT Alphaville).
• Measuring global economic activity using air pollution. An alternative to the ‘night lights’ approach that reckons that existing rankings of GDP by country are unreliable, even across advanced economies.
• An Economist magazine special report on digital payment systems and global finance.
• Brookings Institution report making the case for an AI-powered productivity boom.
• Related, an FT Big Read on how the AI revolution is transforming education.
• An FT explainer on what to expect as US nears ‘unthinkable’ debt default.
• What if they gave an industrial revolution and nobody came?
• Econtalk podcast talks with Tyler Cowen on the risks and impact of AI.
• Odd Lots podcast on the US debt ceiling debacle.