We can speculate. The excellent Damien Boey at Credit Suisse tabulates Q1 GDP for us:
Business capex came in below expectations, falling by 1.7% in 1Q, with downward revisions to prior quarters’ data. For the national accounts, the ABS uses the earlier release of “construction work done” to estimate structures investment, as it has wider coverage. It only uses the “equipment, plant and machinery” component of the business capex survey for the national accounts. With this in mind, we note that private business capex on equipment, plant and machinery fell by 0.5% over the quarter.
The running tally for 1Q GDP growth is poor. Accounting for retail sales, construction work done, business capex and net exports, over 50% of GDP combined, we arrive at a slightly negative growth number. There is more data to come of course on government consumption and inventories, and so this preliminary tally is likely to be revised. But nevertheless, 1Q has been underwhelming, certainly relative to RBA forecasts.
Unfortunately, weakness appears to have also spilled over into 2Q. We note that:
- NAB cashless retail sales were very weak for April, foreshadowing potentially an 0.5% drop in nominal sales for the month.
- Building approvals have resumed their downtrend, falling by 4.7% in April, taking year-ended growth to -24.2% from -25.4%.
- CANSTAR data suggests that loan approvals fell sharply heading into the election.
With the election stall in Q2 there is a some chance of two negative quarters of growth.
More certain and more important is that the per capita recession continued in Q1 and likely Q2 as population growth continued full throttle while growth will remain poor.
But, says Boey, the future is brighter:
The good news however, is that the post-election outlook is looking better. Within the business capex release are forward-looking estimates of spending activity. These have been upgraded for the next fiscal year. Estimate 2 for 2019-20 is 12.8% higher than Estimate 2 for 2018-19 and 7.6% higher than Estimate 1 for 2019-20. We also note that business confidence tends to bounce after elections, and if the stock market’s reaction is anything to go by, history has probably repeated itself.
Overall, we see little new information in recent data releases. Growth has been diabolical – and the RBA will react shortly in kind. Yet duration is extremely overbought according to our risk appetite and neutral rate models. So the risk is that either bonds sell, or the curve steepens (in our recent articles, we have favoured the latter view because of the likelihood of multiple RBA rate cuts in the near future). Curve steepening favours value investing within the equity market.
The real action will occur next Tuesday – not because the RBA meets, and is forecast by the street to cut – but because the banks will have to decide how much to pass on. The magic number seems to be 12.5bps of a 25bps cash rate cut. This balances the margin requirements for banks, and the need for transmission to the real economy. If delivered, it will probably allay recent concerns about the significance of wider interbank credit spreads throughout 2018, and bring into focus the recent sharp narrowing. And investors become content that transmission is actually much better than previously thought, there is scope for a sell-off in long bonds. After all, neutral rate estimates in the low 1s are contingent upon the assumption that pass through has dropped below 65%.
On the other hand, if pass through really is quite limited next Tuesday, investors will worry about how low the neutral rate really is, and economists will scramble in their race to the bottom for the RBA rate cycle.
We shall see.