Chief economist update: Hard target

With business conditions and confidence like it is, the Reserve Bank of Australia (RBA)'s full employment target just got a little harder to meet.

Recall that in his speech at the RBA board dinner with the business community on June 4 - the night after the afternoon when the central bank announced its first rate cut since August 2016 - governor Philip Lowe declared 4.5% is the unemployment rate at which wages start to lift and feed into inflation.

Latest data show Australia's unemployment rate at 5.2% in May; headline CPI inflation at 1.3% in the March quarter and; the core inflation rate - average of trimmed mean and weighted median measures - at 1.4%. The annual growth in wages remained stuck at 2.3% over the past three quarters to March 2019.

The latest NAB Business Survey - conducted from June 18 - 28 (two weeks after the RBA first took down rates from 1.5% to 1.25%) - provides no reason for optimism and justifies the central bank's follow-up rate 25 bps rate cut in July, that took the official cash rate to a new all-time low of 1.0%.

NAB's 'Key Messages from the Survey' says it all: "Overall, the survey results for June continue to suggest that the business sector has lost significant momentum over the past year or so. Business confidence largely unwound the bounce in May and while business conditions rose in the month, they remain below average."

"The recent run of results also suggests that the economy is unlikely to record a significant pickup in growth in Q2. Further, forward orders also remain below average (and are negative), suggesting a near-term turn around in business activity is unlikely. Capacity utilisation on the other hand saw a sharp rise in the month, though this comes after a notable weakening earlier in the year. Survey measures of inflationary pressure remain very weak, with output price growth remaining low and the retail prices showing an outright decline in the month.

"The weakening in momentum has been broad-based across the business sector over the past year, with all industries having weakened. Retail also continues to show ongoing malaise, with reported business conditions at a level last seen in the GFC - while manufacturing has also shown steep declines."

Business conditions rose to a reading of +3 in June from +1 in the previous month, but remained below its long-run average (+5) for the third straight month. Business confidence dropped back below its long-run average of +6 to a reading of +2 - which had been observed since October 2018 - after surging to +7 in May.

The RBA's target full employment rate target would be harder to achieve while business confidence and conditions remain weak.

Read more: NABReserve Bank of AustraliaPhilip Lowe
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