Statement on Monetary Policy - MAY 2019 - Reserve Bank of Australia
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Statement on
Monetary
Policy
M AY 2 0 1 9Statement on Monetary Policy
MAY 2019
Contents
Overview 1
1. The International Environment 5
Box A: China's Local Government Bond Market 23
Box B: Why Are Long-term Bond Yields So Low 27
2. Domestic Economic Conditions 33
3. Domestic Financial Conditions 45
4. Inflation 57
Box C: Housing In The Consumer Price Index 65
Box D: Trends In Wages Growth By Pay Setting Method 67
5. Economic Outlook 69The material in this Statement on Monetary Policy was finalised on 9 May 2019. The next Statement is due for release on 9 August 2019. The Statement is published quarterly in February, May, August and November each year. All the Statements are available at www.rba.gov.au when released. Expected release dates are advised ahead of time on the website. For copyright and disclaimer notices relating to data in the Statement, see the Bank's website. The graphs in this publication were generated using Mathematica. Statement on Monetary Policy enquiries: Secretary's Department Tel: +61 2 9551 8111 Email: rbainfo@rba.gov.au ISSN 1448–5133 (Print) ISSN 1448–5141 (Online)
Overview
Growth in the Australian economy has slowed trade-oriented economies in parts of Asia and
and inflation remains low. Subdued growth in the euro area. Investment and investment
household income and the adjustment in the intentions have also weakened in some of these
housing market are affecting consumer economies. Trade tensions remain a downside
spending and residential construction. Despite risk to the global outlook.
this, the labour market is performing reasonably In China, the authorities have continued their
well, with the unemployment rate steady at efforts to support growth through targeted
around 5 per cent. Underlying inflation has been policy easing. GDP growth eased in China in the
lower than expected, at 1½ per cent over the March quarter, but there are some signs in the
year to the March quarter, with pricing pressures most recent monthly data that momentum has
subdued across much of the economy. picked up again. The authorities have been
GDP growth is expected to be around mindful of the need to ensure that measures to
2¾ per cent over both 2019 and 2020. This is support the economy do not increase financial
lower than previously forecast, reflecting the stability risks.
revised outlook for household consumption In contrast to externally focused sectors,
spending and dwelling activity. Stronger growth consumption growth in the United States, euro
in exports and, further out, work on new mining area and Japan has been relatively resilient,
investment projects are expected to support supported by tight labour markets. Unemploy-
growth. Forecasts for inflation have also been ment rates are at very low levels in all three
revised lower. Trimmed mean inflation is economies and wages growth has increased. As
expected to be around 1¾ per cent over yet, though, this has added little to inflation.
2019 and then increase gradually to 2 per cent Core inflation is now below central banks’
in 2020 and a touch above 2 per cent by early targets in all three major advanced economies.
2021. In the near term, CPI inflation is expected
Global financial market conditions have eased
to run a little above the rate for trimmed mean
further in recent months. Conditions have
inflation, driven by the recent increase in petrol
become more accommodative since the
prices.
beginning of the year, unwinding the sharp
Global growth moderated in the second half of tightening that occurred at the end of 2018.
2018 and looks to have continued at a similar Major central banks have been signalling that
pace into 2019. The moderation was partly they are likely to maintain more accommodative
driven by a sharp slowing in global trade, monetary policy than had previously been
related to slower domestic demand in China expected. These revised expectations have
and a turn in the cycle in the global electronics flowed through to market pricing, taking
industry. The resulting shift in economic sovereign bond yields to low levels. Credit
momentum has been most evident in the
S TAT E M E N T O N M O N E TA R Y P O L I C Y – M AY 2 0 1 9 1spreads and other risk premia are also low, GDP growth was softer than expected over the
which has held down the overall cost of second half of 2018, after a strong first half of
financing for corporations. The easing in the year. Consumption growth has slowed
financial conditions has also been evident for noticeably, especially for those discretionary
most emerging market economies, including in items that tend to be correlated with housing
China. However, risks remain for some conditions. Residential construction activity has
economies, including Argentina and Turkey, that declined from its very high level over recent
have specific vulnerabilities. years. Some temporary factors also weighed on
Conditions have also eased in domestic financial growth: drought conditions constrained rural
markets, with government bond yields falling to production; supply disruptions affected resource
historically low levels and equity prices having exports; and the winding down of near-
risen strongly. In addition, pressures in short- complete LNG projects weighed on mining
term money markets have eased, reducing investment. Consumption and dwelling
banks’ funding costs. Bank bill spreads are now investment are expected to remain soft in
at their lowest levels since late 2017, though this coming quarters, but non-rural exports and,
has not flowed through to most advertised further out, a moderate pick-up in mining
mortgage rates. Although lending practices investment are expected to support growth.
remain considerably tighter than they were a Recent data suggest that retail spending was
few years ago, banks continue to compete weak in the March quarter, with retail sales
strongly for lower-risk borrowers among both volumes declining in most states. The near-term
households and large businesses. Demand for outlook for consumption growth has been
housing credit remains soft. revised lower because weaker housing market
The Australian dollar is currently around the low conditions and income growth are likely to
end of the narrow range it has been in for some continue to drag on spending. Further out,
years. Sovereign bond rates in Australia have though, the anticipated pick-up in income
continued to decline relative to those in the growth should provide some support. Although
major economies. This has tended to counteract the pipeline of residential construction work
the upward pressure on the exchange rate that underway should support activity in the near
would otherwise have come from rising prices term, dwelling investment is still expected to
for Australia’s key commodity exports. decline significantly over the next couple of
years. Pre-sales activity has been weak, so
Higher prices for some commodity exports,
further downward revisions to the outlook are
particularly iron ore, have boosted the outlook
possible.
for Australia’s terms of trade. This follows the
supply disruptions arising from mine closures in Conditions in the established housing market
Brazil, as well as some disruptions in Australia. remain soft. Housing prices have continued to
Oil prices have also increased in recent months, decline in the largest cities, although the pace of
which will feed through to prices of liquefied decline has eased a bit recently. Some other
natural gas (LNG) over time. The terms of trade indicators, including auction clearance rates,
are still expected to decline over the period have improved a little since the end of last year,
ahead, as supply increases and Chinese demand but generally point to continued soft
for bulk commodities eases, but to remain conditions. Prices have also been declining in
above the levels recorded in 2016. many other cities and regional areas. Other than
2 R E S E R V E B A N K O F AU S T R A L I Ain Sydney, rental vacancy rates generally remain unchanged or increase a little this year. Public
below average levels. sector wages have been affected by policies
Growth in non-mining business investment designed to keep average wages growth
picked up in the December quarter, supported contained.
by spending on equipment and construction of Despite strong employment growth and some
private infrastructure. In the near term, non- recovery in growth of average hourly earnings,
residential construction is likely to be supported growth in household income was very low over
by the elevated level of work underway. Mining 2018. Non-labour sources of income have been
investment is likely to start increasing once the subdued and are likely to remain so for a while,
final LNG projects are completed and as new given the effects of the drought on farm
investment projects commence. incomes and of soft housing market conditions
Public demand growth has been robust in on the earnings of many other unincorporated
recent quarters, with spending on investment businesses. Strong growth in tax payments has
and a range of services provided to households also subtracted from disposable income growth
both increasing significantly. Taxation revenue over recent years.
has also grown strongly. While this has helped Weak growth in household income poses a key
improve the government sector’s financial risk to the outlook for household consumption,
position, it has tended to offset the support that especially in the context of falling housing
public demand has given to overall growth. prices and the need for many households to
In contrast to the signal coming from the service high levels of debt. Some recovery in
national accounts, a number of labour market income growth is likely, because employment
indicators remain positive. Employment growth growth is expected to remain solid, wages are
was strong in the March quarter, following expected to increase and the tax offset for low-
similar outcomes over much of 2018. The and middle-income taxpayers is set to come
vacancy rate remains high and there are into effect in the second half of this year.
ongoing reports of skill shortages for selected Inflation was weaker than expected in the
occupations. March quarter. Trimmed mean inflation was
The unemployment rate has been steady since 0.3 per cent in the quarter and in year-ended
September at around 5 per cent. Consistent terms declined to 1.6 per cent; other measures
with leading indicators of labour demand, of underlying inflation were generally lower.
employment growth is expected to grow at Inflation was subdued across a broad range of
around the same rate as the working-age domestic prices, and this more than offset the
population over the next six months, and then effects of the drought on some food prices and
to pick up a little as GDP growth increases. The the pass-through of the earlier exchange rate
unemployment rate is forecast to remain around depreciation to prices of retail goods. Headline
5 per cent this year and next year, before inflation was lower than trimmed mean
reaching 4¾ per cent in 2021. inflation, at 1.3 per cent over the year, largely
because of the earlier fall in petrol prices.
Wages growth has increased gradually over the
past couple of years, most clearly in the private Housing-related inflation, including for rents and
sector. Fewer private-sector workers are subject the prices of newly built homes, has been soft
to wage freezes than in recent years. Firms and is likely to remain so in the near term. Slow
generally expect wages growth to remain growth in labour costs and other business costs
S TAT E M E N T O N M O N E TA R Y P O L I C Y – M AY 2 0 1 9 3has also contributed to low inflation in a range
of market services. Administered price inflation
has been below average because of a range of
policy decisions designed to address cost-of-
living pressures. Further initiatives in this area
could constrain inflation in utilities and other
administered prices; this represents a key
uncertainty around the inflation outlook.
Headline inflation will be boosted in the June
quarter by the recent increase in petrol prices.
Underlying inflation is meanwhile expected to
remain low in coming quarters, largely because
the weakness in housing-related items is
expected to persist for a while. Further out, the
forecast for inflation has also been reduced a
little, as the softer growth outlook feeds through
to the inflation outlook with a lag.
The Reserve Bank Board has maintained the
cash rate at 1½ per cent since August 2016. This
expansionary setting of monetary policy has
helped support growth and create the
conditions for the decline in the unemployment
rate that occurred over 2018. The lower
unemployment rate has led to a modest pick-up
in wages growth, and a further increase is
expected. Inflation remains subdued, however,
with the adjustment in the housing market
contributing to weakness in both household
spending and the overall rate of inflation.
At its recent meeting, the Board focused on the
implications of the low inflation outcomes for
the economic outlook. It concluded that the
ongoing subdued rate of inflation suggests that
a lower rate of unemployment is achievable
while also having inflation consistent with the
target. Given this assessment, the Board will be
paying close attention to developments in the
labour market at its upcoming meetings.
4 R E S E R V E B A N K O F AU S T R A L I A1. The International Environment
Growth in a number of our trading partners expected and is below central banks’ inflation
eased in the second half of 2018, and growth targets in most advanced economies. Headline
looks to have broadly continued at this more inflation has declined because of the fall in oil
moderate rate into 2019. The slowing has been prices in late 2018, although oil prices have risen
partly the result of a sharp slowing in global over 2019 to date. More generally, commodity
trade. This has been particularly evident in price outcomes have been mixed. Supply
trade-exposed sectors such as manufacturing disruptions in Brazil and, to a lesser extent,
and trade-oriented economies in Asia and the Australia have boosted iron ore prices
euro area. Export orders data suggest that trade significantly; this has resulted in the outlook for
growth could remain subdued in the near term. Australia’s terms of trade being stronger than
However, in many economies, domestically expected at the time of the February Statement
focused sectors such as services and retail trade on Monetary Policy.
have been more resilient than externally Major central banks have revised down their
focused sectors, with strong labour market forecasts for growth and inflation over recent
conditions and accommodative financial months, and have highlighted the downside
conditions providing support. risks. Moreover, central banks see little, if any,
The sharp slowing in trade is related to slowing upside risks to inflation despite increasingly
growth in China, as well as developments in tight labour markets. Accordingly, they have
trade policies and a turn in the cycle in the signalled that policy is likely to be more
electronics industry. Chinese authorities are accommodative than previously anticipated. As
continuing their efforts to support domestic a result, financial conditions have eased in
growth in a manner that does not increase recent months, largely unwinding the sharp
financial stability risks, by easing fiscal and tightening that occurred at the end of 2018.
monetary policy. Recent data in China show Sovereign bond yields have declined to very low
that growth in industrial production, fixed asset levels and the spread between long- and short-
investment and total social financing has term yields is low. At the same time, credit
increased, suggesting momentum has picked spreads and equity risk premiums have
up. Overall, growth in Australia’s major trading generally declined or remained steady, leaving
partners is expected to be around 3¾ per cent the overall cost of financing for corporations
in 2019 and 2020, which is at, or a little below, low.
potential. The accommodative outlook for policy in
Despite tight labour market conditions and a advanced economies and China has also
pick-up in wages growth in advanced contributed to a general improvement in
economies, inflationary pressures remain financial conditions for emerging market
subdued. Core inflation has been weaker than economies. In emerging Asia, a more subdued
S TAT E M E N T O N M O N E TA R Y P O L I C Y – M AY 2 0 1 9 5inflation outlook and stabilisation in capital which have significant automotive sectors. Any
flows have allowed central banks that tightened negative developments on trade policy could
policy last year to generally pause of late. harm global growth.
Global trade growth has slowed A decline in Chinese domestic
Global trade growth has fallen further in early demand growth has been one
2019 and data on new export orders suggest factor behind the slowdown in
that trade growth will remain subdued in the trade …
near term (Graph 1.1). The impact of slower
In China, real GDP growth eased in the March
trade growth has been particularly evident in
quarter, in quarterly and year-ended terms
manufacturing; in some trade-oriented
(Graph 1.3). Subdued growth in investment in
economies, particularly in east Asia, conditions
the quarter was partly offset by a pick-up in
in the manufacturing sector have eased to
consumption growth and a lift in net exports.
below their post-crisis averages.
The Chinese Government lowered the
One of the factors behind the sharp slowing in 2019 GDP growth target at their annual
trade is the slowing in domestic demand congress in March to 6–6.5 per cent, down from
growth in China. US protectionist measures that a target of around 6.5 per cent in 2018. This
have already been enacted and their supply recognises the structural decline in growth that
chain effects are also likely to have contributed has been apparent for some time and the
to the broad-based slowing in trade (Graph 1.2). additional downward pressure on growth in the
The outlook for trade policy remains uncertain. past year that has arisen from regulatory
Bilateral trade negotiations between the United measures to address financial risk. The govern-
States and China are continuing. While there ment also changed the target for the urban
had been reports of progress in recent months, unemployment rate from ‘below’ 5.5 per cent to
the US administration has recently threatened ‘around’ 5.5 per cent, and emphasised the need
additional tariffs in the near term. There is also a to support employment. Authorities reiterated
risk that the US administration increases their focus on supporting growth through
automotive tariffs; this would particularly affect measures to support smaller and private firms.
US trade with the European Union and Japan
Graph 1.2
World Merchandise Import Volumes Growth
Graph 1.1 Smoothed, year-ended with contributions
% %
Global Economic Conditions
% index
Trade Purchasing Managers’ Index
Imports growth*
(LHS) 4 4
4 56
Services
(RHS)
2 2
2 53
0 0
0 50
Manufacturing
(RHS)
New export orders
(RHS) -2 -2
2013 2014 2015 2016 2017 2018 2019
-2 47
2013 2016 2019 2016 2019 Total G3 China Other Other east Asia
* Commodity-exporting emerging economies
Smoothed year-ended growth
Sources: CPB Netherlands; Markit; RBA Sources: CEIC Data; CPB Netherlands; RBA
6 R E S E R V E B A N K O F AU S T R A L I A… but monthly activity indicators up over the past year. Authorities have reiterated
suggest momentum in China has their commitment to limiting speculative
activity, but recently announced reforms to
strengthened more recently …
loosen restrictions on rural–urban and inter-city
A range of disaggregated Chinese activity migration that are likely to support prices and
indicators have picked up in recent months investment in smaller cities in the medium term.
(Graph 1.4). Growth in industrial production
Producer price inflation has declined over the
increased in March. Some of this represented a
past year, reflecting subdued conditions in the
bringing forward of activity ahead of value-
industrial sector and low fuel price inflation
added tax changes in April, but some of the
(Graph 1.6). Core consumer price inflation has
pick-up is likely to persist. The number of
been relatively stable recently. In contrast,
industrial products for which output is falling
headline consumer price inflation has increased,
has declined, manufacturing purchasing
mainly due to a sharp increase in fresh
managers indexes (PMIs) have strengthened
and growth in industrial sector profits
rebounded in March. Growth in fixed asset Graph 1.4
investment has also increased in recent months, China – Activity Indicators
Year-ended growth
driven by infrastructure investment (which has % Industrial production Manufacturing PMI** index
Diffusion index
45 55
been supported by fiscal policy) and real estate.
30 50
Growth in retail sales has increased in both Value-added
15 45
nominal and real terms in the March quarter. 0 40
Gross output*
Conditions in Chinese property markets are also % Fixed asset investment
Infrastructure***
Real retail sales**** %
60 20
improving. Growth in real estate investment has
30 15
been relatively stable, but has been supported
0 10
by a pick-up in spending on construction and
-30 5
fittings rather than land purchases by 2009 2014 2019 2009 2014 2019
* Based on weighted geometric mean of growth rates of industrial
developers (Graph 1.5). Housing prices rose in products
** Average of official and Caixin measures
most cities in the March quarter. Housing sales *** RBA estimates prior to May 2014
**** Deflated by retail price index
have increased strongly in recent months, Sources: CEIC Data; Markit; RBA
absorbing some of the inventory that has built
Graph 1.5
Graph 1.3 China – Residential Property Indicators
Year-ended growth
China – GDP Growth % New property prices Investment* ppt
% %
Land purchases
Year-ended 10 20
12 12
0 0
Other investment**
% Floor space sold Inventory %
8 8
50 25
4 4
0 0
Quarterly*
-50 -25
0 0 2010 2013 2016 2019 2010 2013 2016 2019
2007 2009 2011 2013 2015 2017 2019 * Contributions of residential and non-residential investment
* Seasonally adjusted RBA estimates prior to December quarter 2010 ** Construction, installation, equipment purchases and other
Sources: CEIC Data; RBA Sources: CEIC Data; RBA
S TAT E M E N T O N M O N E TA R Y P O L I C Y – M AY 2 0 1 9 7vegetable and pork prices; the recovery in pork significant cuts to the value added tax rate. As a
prices is partly due to supply shortages result, the general government budget deficit is
stemming from the spread of the African swine projected to widen slightly in 2019, in both
flu. headline and underlying terms.
Chinese merchandise exports were little Growth in total social financing has picked up
changed in the March quarter, while imports slightly since the start of 2019 because strong
declined. Trade with the United States has growth in bank credit has offset the continued
weighed on Chinese exports and imports, as a contraction of off-balance sheet financing
result of tariff increases from late last year and (Graph 1.7). Chinese authorities have reiterated
front-loading in 2018 to avoid these tariffs. their commitment to keeping the ratio of debt-
Shipments of Australian coal have been taking to-GDP stable. Meanwhile, the authorities have
longer to clear customs in recent months. While continued to support financing conditions for
this has weighed on Chinese imports of private businesses, in particular micro- and
Australian coal, the effect on overall coal imports small-sized enterprises (MSEs); official estimates
has been largely offset by increased coal suggest that private firms account for more than
imports from other countries. 60 per cent of GDP and over 80 per cent of
urban employment. Financial regulators have
… supported by targeted instructed large state-owned banks to increase
the stock of lending to MSEs by at least
policy easing
30 per cent in 2019. The authorities have also
The Chinese authorities are continuing their announced further targeted cuts to reserve
efforts to support growth in a manner that does requirement ratios for some small and medium-
not increase financial stability risks, through a sized banks. They also stated that the resulting
targeted easing of fiscal and monetary policy. In release of funds should be directed towards
early March, the Chinese Government lending to MSEs.
announced additional measures to increase
spending on infrastructure, as well as an
increase in the quota for local government
‘special bonds’ (see Box A: China’s Local Govern-
ment Bond Market). Authorities also announced
Graph 1.7
Graph 1.6
China – Total Social Financing Growth
China – Inflation* Year-ended with contributions
Year-ended % %
% %
Consumer prices Producer prices
30 30
8 10
Headline Debt swap adjustment*
20 20
4 5
10 10
0 0
Core
0 0
-4 -5 Business loans Off-balance sheet financing
Household loans Securities financing
-10 -10
-8 -10 2009 2011 2013 2015 2017 2019
2009 2014 2019 2009 2014 2019 * Upper bound estimate after including local government bond issuance
* Seasonally adjusted by RBA to pay off debt previously included in TSF
Sources: CEIC Data; RBA Sources: CEIC Data; RBA
8 R E S E R V E B A N K O F AU S T R A L I AElsewhere in east Asia the decline follows very strong growth in this sector in 2016.
in trade has weighed The slowdown reflects a cyclical downturn in
global demand for semi-conductors, driven by
on investment
lower smartphone demand in China and a shift
In most economies in east Asia, export growth to less frequent device upgrades by consumers.
has eased sharply and survey measures of new The impact on the region has been amplified by
export orders are below average (Graph 1.8). the fall in semi-conductor prices over 2018, after
Industrial production growth has slowed and they rose strongly in 2017. Business investment
surveyed business conditions have also eased to contracted in the economies with sizable semi-
below average levels in many economies in the conductor sectors, such as South Korea, largely
region. because of the completion of earlier investment
The fall in export growth has been most to add to productive capacity in the electronics
pronounced in exports to China, consistent with sector.
slowing domestic demand in China (Graph 1.9). While the declines in export growth have been
The effects of US–China trade tensions on similar across economies, those most exposed
supply chains in the region are also apparent in to global trade, such as South Korea and
intra-regional exports. However, lower-cost Singapore, have been more adversely affected
economies in the region, such as Vietnam, the in other respects. In particular, business
Philippines and Thailand, could potentially investment growth slowed sharply in these
benefit from production shifting away from economies, while it has held up in the less
China to avoid higher US tariffs. Export growth trade-exposed economies (Graph 1.10). South
to the major advanced economies has been Korean GDP fell in the March quarter because
relatively resilient; export growth has picked up investment and exports contracted; consump-
to the United States and has moderated only a tion growth slowed but remained positive.
little to the European Union and Japan.
In Indonesia, growth has been more resilient
The slowing in trade and the recent weakness in because consumption and investment growth
industrial production in east Asia has been have eased only slightly (Graph 1.11). The
evident in capital and industrial goods exports, significant monetary policy tightening in
particularly in the semi-conductor sector. This Indonesia in 2018 has had limited effect on
Graph 1.8
East Asia – Economic Indicators
Smoothed Graph 1.9
% index
Production and trade* Manufacturing PMI**
East Asia – Merchandise Exports
US$b US$b
Value by destination Value by commodity
10 53 Capital goods
Merchandise Aggregate 40 60
exports
Other
China
5 50 30 45
Industrial goods
US
20 30
0 47 Intra-regional Transportation
Industrial
production New export orders Fuels
10 15
-5 44 Japan
2015 2019 2015 2019 EU Consumer goods
Food
* Year-ended growth 0 0
** Purchasing Managers’ Index 2009 2014 2019 2009 2014 2019
Sources: CEIC Data; IHS Markit; RBA Sources: CEIC Data; RBA
S TAT E M E N T O N M O N E TA R Y P O L I C Y – M AY 2 0 1 9 9domestic demand because the pass-through to months. Core inflation (which excludes food and
banks’ lending rates has been limited. fuel) continues to moderate. Headline inflation
picked up in February and March, but remains
In India, growth remains low, primarily due to weak food price inflation.
relatively robust
In India, which relies less on merchandise trade
Growth in the major advanced
than most economies in the region, economic economies has generally eased
growth edged higher in the December quarter, from above potential
but over the year the pace has declined Growth momentum has generally moderated
(Graph 1.12). Investment and export growth across the major advanced economies from
remained robust in the quarter, while growth in rates that were well above potential in 2017 and
private and public consumption slowed. Growth early 2018. Weaker external demand and policy
in other parts of the economy, such as industrial uncertainty have weighed on growth to varying
and steel production, have also eased in recent degrees (Graph 1.13). Manufacturing sectors
have been particularly affected while service
sectors and consumption have been relatively
Graph 1.10 resilient.
East Asia – Investment and Consumption In the United States, domestic demand
Year-ended growth
%
More trade-exposed Less trade-exposed
% continued to slow in early 2019 although a fall
economies* economies**
in imports contributed to stronger-than-
10 10
Investment
expected GDP growth in the March quarter.
Over the past year, growth in exports and
5 5
business investment has slowed. Investment
intentions have also eased but remain relatively
Consumption
0 0
high (Graph 1.14). The protracted US Govern-
ment shutdown and severe weather dampened
-5 -5 domestic activity around the turn of the year;
2014 2018 2014 2018
*
**
Hong Kong, Malaysia, Singapore, South Korea, Taiwan, Thailand
Indonesia, Philippines
consumption growth was weak while residential
Sources: CEIC Data; RBA
investment contracted further. A number of
Graph 1.11 Graph 1.12
East Asia – GDP Growth India – GDP Growth and Inflation
Year-ended Year-ended
% % % GDP growth Inflation %
Other ASEAN*
12 15
10 10
8 10
Indonesia
5 5
4 5
South Korea
0 0 Excluding food and fuel
0 0
Quarterly*
-5 -5 -4 -5
2007 2010 2013 2016 2019 2008 2013 2018 2008 2013 2018
* Includes Singapore, Thailand, Malaysia, Philippines; Vietnam from 2013 * Seasonally adjusted by RBA
Sources: CEIC Data; IMF; RBA Sources: CEIC Data; RBA
10 R E S E R V E B A N K O F AU S T R A L I Afactors are likely to support consumption further this year because of the weaker external
growth in the near term, although at a slower conditions and the ongoing uncertainty about
pace than during the past year when consump- trade policies and the United Kingdom’s exit
tion was buoyed by tax cuts. Consumer from the European Union. More positively,
sentiment is elevated, the labour market temporary factors that disrupted the
remains strong and wages growth has picked automotive industry and key transportation
up. channels in late 2018 and into early 2019,
In the euro area, growth picked up a little in the appear to have been largely resolved. Moreover,
March quarter. New export orders suggest that retail sales growth and consumer confidence
the external demand weakness that has been remain above average in 2019, supported by
dampening recent growth is likely to persist into strong employment growth.
the June quarter. Investment growth slowed in Japanese GDP growth appears to have slowed
2018 and investment intentions have eased abruptly in early 2019, driven by external
demand. Exports to China and the rest of Asia
were weak, new export orders have been
Graph 1.13
subdued and surveyed conditions in the manu-
Major Advanced Economies –
Business Conditions* facturing sector have declined sharply. Business
Deviation from post-GFC average investment appears to have held up in the
std United States Euro area Japan std
dev dev
2 2 March quarter but investment intentions have
0 0 moderated. In contrast, business conditions in
-2 -2 the services sector remain buoyant, consistent
Export orders
std std
with the above-average growth in domestic
United States Euro area Japan
dev dev demand.
2 2
0 0
Services
-2
Manufacturing
-2 Tight labour markets in advanced
-4
2015 2019 2015 2019 2015 2019
-4
economies are supporting
* ISM for US, smoothed; PMIs for euro area, smoothed; PMI export
orders and Tankan business conditions for Japan consumption and wages growth
Sources: Bank of Japan; RBA; Refinitiv
has increased …
Employment growth remains high and above
Graph 1.14 working-age population growth in the major
Major Advanced Economies – advanced economies in 2019 (Graph 1.15).
Consumption and Investment Indicators
%
United States Euro area Japan
std While employment growth has slowed a little in
dev
Retail sales* some of these economies since mid 2018, it has
(LHS)
5 2 held up well relative to the slowing in GDP
growth, which is similar to the experience in
0 0 Australia. Unemployment rates are at multi-
decade lows in many advanced economies.
-5
Investment
-2 Tight labour markets have also encouraged
intentions**
(RHS) higher participation rates. Employment
-10
2013 2018 2013 2018 2013 2018
-4 intentions have declined a little in the United
* Year-ended growth, smoothed; personal consumption expenditure
for the United States
States and the euro area but remain at a high
** Deviation from average post-2000 for US (smoothed) and euro area
and post-2004 for Japan level. Vacancy rates remain very high and firms
Sources: Bank of Japan; RBA; Refinitiv
S TAT E M E N T O N M O N E TA R Y P O L I C Y – M AY 2 0 1 9 11continue to report widespread difficulties in price decline in late 2018; oil prices have
filling jobs. This labour market strength is retraced some of this fall more recently. Higher
supporting ongoing growth in household US–China tariffs have increased costs for some
income and consumption. producers in these economies. Inflation expec-
Wages growth increased notably over 2018 in tations of professional forecasters and measures
the major advanced economies, continuing the derived from financial markets have generally
trend of recent years (Graph 1.16). US wages declined over the past six months; consumer
growth is around the highest of the current expectations have also eased, except in Japan.
expansion. Wages growth in the euro area in Core inflation also remains generally subdued in
late 2018 was around the highest since 2010, the east Asian region, while headline inflation
although it has softened a little recently. In has declined because of the fall in oil prices in
Japan, it appears that full-time wages growth late 2018 (Graph 1.18). In the Philippines,
remains positive and wages in the more inflation has returned to the central bank’s
cyclically sensitive part-time sector have
continued to grow at a very high rate relative to
the past decade. In some advanced economies Graph 1.16
such as New Zealand, Spain and South Korea Major Advanced Economies –
substantial increases to minimum wages will Labour Market and Wages
% Wages* %
Unemployment rate
Year-ended growth
also contribute to wages growth.
Euro area
11 4
Japan part-time
… but global inflation
remains subdued 8
US
2
Core inflation is low in the three major
5 0
advanced economies, despite ongoing capacity Japan full-time**
Japan
constraints. It is also now below central bank
2 -2
targets in each of these economies, given the 2009 2014 2019 2009 2014 2019
* Average hourly earnings for the US; compensation per employee for
easing in the US Federal Reserve’s preferred core the euro area; smoothed average full-time scheduled wages and
part-time hourly wages for Japan
** From 2017 series is matched to a consistent sample
inflation measure in recent months (Graph 1.17). Sources: CEIC Data; ECB; Eurostat; MHLW Japan; RBA; Refinitiv
Headline inflation has fallen because of the oil
Graph 1.17
Graph 1.15 Major Advanced Economies – Inflation
Year-ended
Major Advanced Economies – % %
United States* Euro area Japan**
Labour Market Indicators
% Employment growth ratio
Vacancies to unemployed
Year-ended
ratio
Headline
3 3
3 1.5
Euro area
0 1.0 Core
Japan 0 0
-3 0.5
United States -3 -3
2009 2019 2009 2019 2009 2019
-6 0.0 * Personal consumption expenditure inflation
2009 2014 2019 2009 2014 2019 ** Excludes effect of the consumption tax increase in April 2014
Sources: Eurostat; RBA; Refinitv Sources: RBA; Refinitiv
12 R E S E R V E B A N K O F AU S T R A L I Atarget range following substantial policy emerging signs that policy stimulus is
tightening over 2018. Inflation continues to be supporting growth in China.
low in Malaysia because of changes in In China, near-term growth is expected to be
consumption taxes. supported by targeted policy-easing measures,
but continue to moderate further out because
Trading partner growth has of longer-term structural factors such as the
moderated and is expected to declining working-age population. In the United
continue at a similar rate in States, GDP growth is expected to moderate
from its very strong rate in 2018 to be around
2019 and 2020
estimates of potential by 2020. Some of this
Growth in Australia’s major trading partners is moderation can be explained by the waning
expected to be around 3¾ per cent in 2019 and effects of the recent fiscal stimulus, although
2020 (Graph 1.19). This is noticeably slower than markets expect monetary policy to be more
the relatively fast pace of growth in 2017 and in accommodative than previously.
the first half of 2018, but remains at, or a little
In 2019, the moderate growth expected in most
below, potential. Recent data have led to some
other regions reflects a mix of subdued external
small downward revisions to the global growth
demand being counterbalanced by resilient
outlook, mainly because of lower growth in
domestic demand. In parts of east Asia, trade
parts of Asia as a result of the more pervasive
effects on manufacturing and investment have
slowing in global trade. Global inflation is
been particularly evident. In Japan, the slowing
expected to be a little lower, and monetary
in external demand and the related easing in
policy is expected to be more accommodative
manufacturing sector conditions are expected
over the forecast period than at the time of the
to be offset by the boost from consumption
February Statement, in line with financial market
being brought forward ahead of an October
expectations. Risks around trade and other
2019 increase in the consumption tax, leaving
policies remain and could weigh on growth
growth around potential. In the euro area, GDP
more than currently expected. In contrast, the
growth is expected to be below potential in
risks around the global impetus from Chinese
2019 because of weaker external demand and
demand are more balanced, in light of
its effects on investment; the investment
Graph 1.19
Graph 1.18
Australia’s Trading Partner Growth*
East Asia – Inflation Year-average
Year-ended % %
Forecast
% %
Headline Core
6 6
8 8
Philippines
6 6 4 4
Indonesia
4 4
2 2
2 2
0 0
0 0
Malaysia
South Korea -2 -2
-2 -2 2000 2004 2008 2012 2016 2020
2015 2019 2015 2019 * Aggregated using total export shares
Sources: CEIC Data; RBA Sources: ABS; CEIC Data; RBA; Refinitiv
S TAT E M E N T O N M O N E TA R Y P O L I C Y – M AY 2 0 1 9 13weakness is expected to be compounded by economies are expected to remain at, or below,
the effects of continuing political uncertainty current levels through to mid 2020.
about the United Kingdom’s exit from the In the United States, the Federal Reserve (Fed)
European Union. Consumption is expected to has lowered its projections for the path of its
remain supported by tight labour markets. policy rate and continued to state that it will
Fiscal policy will provide support in 2019 in a take a patient and flexible approach to setting
number of countries, with the exception of policy. In its most recent forecast update, the
Japan (Graph 1.20); structural deficits are set to Fed revised its central projections for growth
increase in 2019 in the United States, and in the down modestly, while indicating the upside
euro area led by Germany. Monetary policy in risks to inflation are limited despite ongoing
trading partner economies is also expected to tightness in the labour market. The Federal
be more accommodative over the forecast Open Market Committee (FOMC) now projects
period than at the time of the February its policy rate is most likely to remain
Statement. unchanged in 2019, followed by one increase in
2020 (in December, officials projected two
Central banks have signalled that increases in 2019 and one in 2020) (Graph 1.22).
By contrast, market pricing suggests that the
accommodative policy is likely to
FOMC is expected to lower its policy rate by the
persist for longer end of this year, in part reflecting a perception
A number of major central banks have signalled that risks to growth and inflation are skewed to
that policy settings are likely to remain more the downside.
accommodative than earlier expected. This shift
The Fed has also announced that the decline in
has reflected lower projections for growth and
its asset holdings will slow from May and cease
inflation, and policymakers have highlighted
from the end of September, sooner than market
increased downside risks. Market participants
participants had expected (Graph 1.23). Based
have further revised their expectations for policy
on this guidance, the Fed’s securities portfolio
rates lower since the previous Statement
will settle higher than market participants had
(Graph 1.21). Market pricing implies that
expected a few months ago.
monetary policy rates in most advanced
The European Central Bank (ECB) expects to
leave its policy rate unchanged until at least the
Graph 1.20
Major Advanced Economies –
Structural Fiscal Deficits Graph 1.21
Share of potential GDP, annual
%
US Euro area* Japan
% Policy Rate Expectations
% US %
3 3
8 8 Feb SMP
2 2
1 1
6 6 Current Euro area
IMF forecast 0 0
Japan
4 4 % %
3 3
Canada NZ
2 2
2 2
1 1
Australia
UK
0 0
0 0
2014 2024 2014 2024 2014 2024 -1 -1
* RBA estimate from 2021 2017 2019 2021 2017 2019 2021
Sources: IMF; RBA Sources: Bloomberg; Refinitiv; Tullet Prebon Pty Ltd
14 R E S E R V E B A N K O F AU S T R A L I Aend of 2019, three months later than previously A number of other central banks have signalled
signalled. This reflects noticeable downward a more accommodative outlook for policy
revisions by the ECB to its near-term economic settings, citing the weaker outlook for growth
growth and inflation forecasts, and its view that and downside risks. The Bank of Canada stated
risks are tilted to the downside. Market pricing is that their monetary policy settings are expected
broadly consistent with this policy guidance. to remain more accommodative than previously
The ECB also announced a third series of anticipated, though officials have stated that the
lending operations to euro area banks on next move is more likely to be up than down.
favourable terms, beginning in September Market pricing suggests that the policy rate will
(labelled ‘Targeted Long-term Refinancing remain unchanged for some time. At its May
Operations’, TLTRO-III). The new program meeting, the Reserve Bank of New Zealand
addresses concerns that financial conditions (RBNZ) lowered its policy rate by 25 basis points
might otherwise have tightened unhelpfully for to 1.5 per cent, and noted that the outlook for
current monetary policy settings as loans from policy is now more balanced. The RBNZ lowered
the previous program are repaid in the year its forecasts for activity and employment
ahead. growth, and noted that inflation is expected to
The Bank of Japan (BoJ) has continued to return to the 2 per cent midpoint of its target
provide monetary stimulus by maintaining very range by mid-2021, a little later than previously
low interest rates and expanding its balance indicated. Market pricing suggests that the
sheet. At its April meeting, the BoJ stated that it policy rate is expected to be lowered again by
expects to leave its policy settings unchanged early next year. Bank of England (BoE) officials
until at least the second quarter of 2020. Market continue to point to the outcome of Brexit as a
participants expect the current policy stance to significant source of uncertainty, and note that it
be maintained for an extended period. Inflation is likely to shape the next move in the BoE’s
forecasts have been consistently revised lower policy rate, which could be up or down. Market
in the past year, with inflation now expected to participants expect that the policy rate will be
reach 1.3 per cent by 2020 compared with increased around the middle of 2021, a little
expectations of 1.8 per cent a year ago (and later than previously expected.
against a target of 2 per cent).
Graph 1.23
Central Bank Net Asset Purchases*
Graph 1.22 Three-month moving average
US$b Projections** US$b
US Policy Rate Fed ECB BoJ BoE
% %
Dec 18 FOMC projections Range of FOMC
150 150
Mar 19 FOMC projections long-run projections
3.5 3.5 Total
100 100
3.0 3.0
19 Dec 2018
2.5 2.5 50 50
2.0 2.0 0 0
Current
1.5 1.5
Actual -50 -50
2011 2013 2015 2017 2019
1.0 1.0 * Excludes minor operational transactions
2018 2019 2020 2021 ** As per guidance from central banks and market estimates. BoJ
Sources: Bloomberg; Board of Governors of the Federal Reserve forecasts based on recent months' average of ¥30 trillion per year.
System; Refinitiv Sources: Bloomberg; Central Banks; RBA; Refinitiv
S TAT E M E N T O N M O N E TA R Y P O L I C Y – M AY 2 0 1 9 15Government bond yields have low term premium, which is around 200 basis
fallen to low levels … points below its long-term average. Also, other
market indicators for future economic
In recent months, the yields of long-term
conditions are not currently pointing to an
government bonds have declined to be near
economic downturn. For example, credit
historically low levels (see ‘Box B: Why Are Long-
spreads on high-yield corporate bonds in the
term Bond Yields So Low?’). In Germany and
United States remain low. Credit spreads tend to
Japan, long-term yields are again close to the
increase when market participants perceive a
record low levels seen in 2016 (Graph 1.24). The
rise in the risk that borrowers will default on
declines in bond yields since late last year have
their debt obligations, as is commonly seen in
reflected a noticeable fall in real yields and lower
an economic downturn.
inflation compensation. This is consistent with
the downward revisions to macroeconomic
projections by central banks and market … and the cost of financing for
participants, and the lowering of policy rate corporations has declined
expectations. In addition, term premiums – the Corporate bond yields have declined since the
compensation that investors demand for the start of the year, more than reversing the
additional risk of holding long-term rather than increase experienced in late 2018. Over the year
short-term bonds – have declined to be around to date, the decline has mostly reflected lower
record low levels. credit spreads – the premium above govern-
Yield curves have also flattened in recent ment bond yields that investors demand as
months. For a short period, long-term bond compensation to invest in corporate bonds. This
yields in the United States were below those of improvement in conditions has encouraged
some short-term interest rates (Graph 1.25). This non-financial firms to increase their issuance of
so-called ‘inversion’ of the yield curve attracted bonds, particularly those firms with lower credit
attention from market participants, as persistent ratings (Graph 1.26). By contrast, issuance of
inversions have tended to precede economic leveraged loans has remained subdued. This
downturns in the United States by may reflect ongoing concerns that investors
12–18 months. However, this signal from the have about credit quality in this market or that
yield curve is likely to be distorted by the very
Graph 1.25
US Treasury Yield Curve and Credit Spreads*
Graph 1.24 bps
Yield curve**
bps
10-year Government Bonds 300 300
% Inflation %
Nominal yield Real yield
compensation* 150 150
3 3
0 0
2 2 bps bps
US 1,500 1,500
1 1 Non-investment
grade credit***
1,000 1,000
0 0
Japan 500 500
-1 -1 0 0
1989 1995 2001 2007 2013 2019
Germany
* Grey bars indicate NBER recession dates
-2 -2 ** Spread between the 3-month and 10-year Treasury yields
2015 2019 2015 2019 2015 2019 *** Spread to equivalent Treasury yield
* Difference between nominal yield and real yield Sources: Bloomberg; Federal Reserve; ICE Data is used with permission;
Sources: Bloomberg; RBA RBA
16 R E S E R V E B A N K O F AU S T R A L I Athe shift in the outlook for monetary policy has has shifted some of its issuance from short-term
reduced the demand for securities like bills toward longer-term bonds.
leveraged loans with floating interest rate
coupons. The US dollar is little changed and
Equity prices globally have risen strongly since currency volatility is low
the start of the year and are now close to, or
The US dollar remains a little below its levels of
above, their levels in September last year
late 2018 on a trade-weighted (TWI) basis
(Graph 1.27). In the United States, equity prices
(Graph 1.29). Following a sustained appreciation
are around record highs. Increases globally
over much of 2018, from mid December the
largely reflect changes in investors’ appetite for,
US dollar depreciated alongside a more
or perceptions of, risk, and expectations that
pronounced shift in the outlook for monetary
central bank policy will be more accommoda-
policy in the United States than in other major
tive than previously anticipated. This has more
economies. The euro has depreciated slightly
than offset the effect on equity prices of modest
since the start of the year on a TWI basis
downward revisions to expected corporate
alongside weaker-than-expected
earnings in 2019. Measures of equity market
macroeconomic data and expectations that the
valuations, such as the price-earnings ratio,
remain around their long-term averages after
declining notably in the final quarter of 2018. Graph 1.27
Equity Prices
Spreads in short-term money markets (over and 1 January 2015 = 100
index index
above expected policy rates) have declined
substantially this year (Graph 1.28). In US dollar US
140 140
markets, conditions have eased following the
tightness associated with the regulatory Europe
120 120
constraints on banks’ balance sheets that bind
at the end of the calendar year. Also, there have
100 100
been strong inflows to money market funds that
invest in short-term securities issued by banks Japan
80 80
and corporations. In addition, the US Treasury 2015 2016 2017 2018 2019
Source: Bloomberg
Graph 1.26 Graph 1.28
Corporate Bond Markets International Money Markets
% Investment grade Non-investment grade % Three-month unsecured rates, spread to OIS
4
Yield Yield
10 bps bps
3 8
US dollar 60 60
2 6 Canada
1 4 US
Euro Australia
40 40
US$b Investment grade* Non-investment grade* US$b
Gross issuance Gross issuance
360 180
12-month average 20 20
UK
240 120 NZ
120 60 0 0
Euro area Japan
0 0
2011 2015 2019 2011 2015 2019 -20 -20
* Non-financial corporations; June quarter-to-date 2016 2019 2016 2019
Sources: Dealogic; ICE Data is used with permission Sources: ASX; Bloomberg; Tullet Prebon (Australia) Pty Ltd
S TAT E M E N T O N M O N E TA R Y P O L I C Y – M AY 2 0 1 9 17ECB’s monetary policy settings will remain more private capital inflows and a rise in bond yields
accommodative than previously anticipated. in China relative to those in advanced
The Japanese yen has appreciated of late, to be economies. Chinese foreign currency reserves
back around its levels of late 2018. Volatility in have remained stable at a little above
the currencies of advanced economies has US$3 trillion.
declined since the start of the year to be around Announced increases in the weights of Chinese
its lowest level of the past several years. securities in major global financial indices have
supported strong capital inflows into China’s
In China, financial markets have onshore bond and equity markets. The Chinese
reacted to stronger-than- authorities have been seeking to expand foreign
expected economic data and an investors’ access to its capital markets in recent
increase in trade uncertainty
The pick-up in Chinese activity indicators in Graph 1.30
recent months has led to some paring back of Chinese Financial Markets
index Equities index
market participants’ expectations for the pace of 1 January 2015 = 100
140 140
further monetary easing by the People’s Bank of CSI300*
China. Accordingly, yields on Chinese govern- 100 100
ment and corporate bonds have increased,
% Low-rated Bond yields %
although for the government and high-rated corporations** Five-year
6 6
corporations, yields remain at low levels
(Graph 1.30). Equity prices have increased by a 3 3
Government High-rated
bit more than 20 per cent since the start of the corporations***
CNYb Cumulative net foreign flows to onshore markets CNYb
year although have declined a little of late Since the start of 2015
750 750
because of renewed concern regarding Bonds
US–China trade negotiations. 0 0
Equities
(Northbound Stock Connect)
The Chinese renminbi has depreciated recently -750 -750
2015 2016 2017 2018 2019
amid renewed trade uncertainty (Graph 1.31). * Based on CSI300 which measures price movements of 300 A-share
stocks listed on Shanghai or Shenzen exchanges
However, more broadly, the renminbi has ** Based on a AA- domestically rated bond
*** Based on a AAA domestically rated bond
continued to be supported by ongoing strong Sources: Bloomberg; CEIC Data; RBA; Wind Information
Graph 1.29 Graph 1.31
Nominal Trade-weighted Exchange Rates Chinese Exchange Rates
1 January 2014 = 100 yuan index
index index Yuan per US$
(LHS, inverted scale)
US dollar
120 120 6.2 110
110 110
6.6 105
Japanese yen
100 100
Euro 7.0 100
Trade-weighted index*
90 90 (RHS)
7.4 95
80 80 2014 2015 2016 2017 2018 2019
2014 2015 2016 2017 2018 2019 * Indexed to 1 January 2014=100
Sources: BIS; Bloomberg; Board of Governors of the Federal Reserve System Sources: Bloomberg; China Foreign Exchange Trade System; RBA
18 R E S E R V E B A N K O F AU S T R A L I Ayears, including by enhancing investment banks that had tightened policy last year have
channels between Mainland China and Hong generally paused of late (Graph 1.33). The shift
Kong. The authorities have stated their intention in stance has reflected downward revisions to
to further expand market access for foreign global growth forecasts, subdued domestic
investors, especially to its financial services inflationary pressures and an easing of current
sector. account and financial stability risks since last
year. The central banks of India and Malaysia
Financing conditions have have both eased policy this year.
improved in many emerging Although financial conditions in emerging
economies, but risks remain markets have been generally stable in 2019, risks
remain for some economies with specific
In many emerging market economies, asset
macrofinancial and/or political vulnerabilities. In
prices and exchange rates have been relatively
Turkey and Argentina, currencies have again
stable in recent months (Graph 1.32). There have
depreciated and central banks have further
been inflows into emerging market mutual and
tightened monetary policy in recent months
exchange traded funds, and emerging market
alongside persistently high inflation and political
governments have increased their issuance of
uncertainty associated with recent and
US dollar bonds. The more stable conditions
upcoming elections (Graph 1.34). To date, these
reflect lower policy rate expectations in the
developments have not spilled over in any
United States and elsewhere, measures adopted
noticeable way to other emerging markets,
by the authorities to support growth in China,
including in Asia.
and tighter monetary and/or fiscal policies
implemented in some emerging market
economies in response to market stresses There have been some large
during 2018. movements in commodity prices
A number of central banks in emerging market in recent months
economies have shifted their policy rate The benchmark iron ore spot price has
guidance in recent months as financial market increased since the previous Statement to be
conditions have stabilised. In Asia, the central around its highest level since early 2017
(Graph 1.35; Table 1.1). Prices rose sharply in late
Graph 1.32
Emerging Financial Markets Graph 1.33
Excluding China
% Government bond yields* % Asia – Policy Rates
9.0 9.0 % %
7.5 7.5
6.0 6.0 8 8
index Equity prices** index
125 125 Indonesia* India
6 6
100 100
75 75
Philippines
% % 4 4
Flows to funds***
30 30
Malaysia
15 15
2 2
0 0
-15 -15 Thailand
2013 2015 2017 2019 0 0
* Local currency bonds, weighted by market value 2013 2015 2017 2019
** 1 January 2012 = 100 * Break in series indicates change in official policy rate for Indonesia
*** Cumulative, includes flows to bond and equity funds (August 2016)
Sources: Bloomberg; EPFR Global; JP Morgan; RBA Source: Central banks
S TAT E M E N T O N M O N E TA R Y P O L I C Y – M AY 2 0 1 9 19You can also read
