More call for cuts
'Westpac’s forecast for RBA rate cuts in 2019 has gained significant support over the last week' noted Matthew Hassan, Senior Economist at Westpac.
Indeed it has.
Business and consumer confidence readings both weakened, confirming that the slowdown in the economy in the second half of 2018 is beginning to impact on decisions in 2019, including the willingness of businesses to hire and invest.
Weakening household financial confidence is likely to be detrimental to decisions, and the survey detail for retail looks to be rather woeful.
The Reserve Bank will also have to revise down its optimistic growth forecasts in the next SOMP.
Jobs figures are key
The coming week's labour force figures therefore take on additional importance.
The pace of hiring has been very strong lately, with annual employment growth of 2.2 per cent over the year to January.
But if hiring begins to falter - with inflation already well below target and possibly decelerating - then there'll be no credible reason for interest rates not to be cut.
The market's median forecast is for a reasonable enough +15,000 for total employment in February 2019, with the unemployment rate flat at a level 5 per cent.
And leading indicators seem to suggest that the slowdown in hiring may be gradual.
And leading indicators seem to suggest that the slowdown in hiring may be gradual.
But two or three months of dodgy jobs results might be enough to tip the balance.
Markets are pricing an each-way bet of a cut by the middle of the calendar year, while Westpac itself expects rate to be cut twice by November .
Source: ASX
Path of least regret
If the jobs figures do start to wane over the next few months then rates should absolutely be cut instead of allowing the economy to flounder below its capacity for longer, since the output gap has already seen elevated levels of underemployment for some time.
That's the path of least regret, because a rate cut can always be reversed if necessary...but if a downturn in the economy takes hold due to inaction then the fallout could be punishing.
There's no question that the Reserve Bank's Governor Lowe has a financial stability...what the's word? Fixation? Fondness? Fetish? I'm not sure. At any rate, it's a healthy level of interest which would clearly make any such move a reluctant one.
In other words the hurdle for further cuts to the cash rate is high.
Lowe produced some innovative literature on asset prices and the credit-to-GDP gap with Claudio Borio of the Bank for International Settlements (BIS) all the way back in 2002, so it's by no means a new fad for him.
But the RBA's very own releases have noted time and again that mortgage and household financial stress is low, debt is held in the hands of households that can afford it, and that there have been unprecedented balances in mortgage prepayments, offset accounts, and cash.
And in any case the RBA has noted itself that it has no clear evidence of what the 'right' level of household debt should be (other economies have sustained far higher debt serviceability ratios without blinking, for example).
Lending much tighter
For the record, high-LVR lending for housing is tracking at the lowest level it's ever been, while low-doc lending is also now almost non-existent.
The stock of interest-only loans as a share of residential term loans by value is at its lowest level across the full data series.
In the next fortnight or so we'll see that this proportion of ADI mortgage debt has likely dropped to about 25 per cent and falling fast.
This will help to reduce household debt ratios.
This will help to reduce household debt ratios.
Housing credit growth is as low as we've seen, and slowing, while investment loans are at by far the weakest ever level of growth.
And although it wasn't reported anywhere, Australia's household debt to income ratio has actually been falling since June 2018 (it arguably never increased that much in the first place net of offset accounts, and certainly not net of deposits).
Stay tuned...
I discussed on a London banking conference live panel some of the reasons why comparing debt ratios across countries may not be all that useful with a prominent figure from the BIS here.
Drehmann is a champion fellow, and has written several highly influential papers on the early-warning indicators of banking crises and other related topics.
But global economists necessarily must take a headline level approach rather than granular analysis, and much can be missed in a headline ratio, not least the role of offset accounts in Australia.
And the fact is a strong economy is by far the best buffer against financial stability risks, while quicker household income growth would also help to reduce debt ratios further.
The Coalition's planned staged tax cuts could further assist household cashflows, although Labor and Bill Shorten have other ideas in this regard (which is to say, higher taxes).
The labour force figures will be released alongside the latest demographic estimates on Thursday.
If there's one data release you want to follow this year, it's the forthcoming jobs figures.
