The week that was
Yet another disappointing piece of economic news – this time GDP growth which rose just 0.4 per cent in the December quarter for an annual rise of 2.4 per cent. GDP growth has been below 3 per cent, which is assumed to be around the sustainable trend for Australia, for more than 5 years and since the onset of the global crisis in 2008, annual GDP has averaged a mediocre 2.4 per cent.
It is little wonder there has been little progress reducing the unemployment rate, and is a reason why the average hours worked per employee have fallen to a all-time low. Wages growth has been weak for several years as a result, notwithstanding the slight uptick at the end of 2017.
Not only was the December quarter GDP result soft, but the early signs for 2018 are mixed. Retail sales are flat, house prices are continuing to fall, credit growth is slowing, job advertisements have flattened and global conditions are more problematic than during 2017.
One wonders what policymakers are doing to give the economy a much needed kick along?
The week ahead
All eyes will be on the US inflation data as it will help frame expectations for interest rate hikes from the US Federal Reserve. With a further 25 basis point rate hike all but fully priced in to the next Fed meeting on 21 March, the inflation data will help form views on how many interest rate hikes will be needed in 2018 to ensure the pace of economic growth is consistent with the target.
In the current cycle, the Fed has already hiked interest rates five times (each 25 basis points) to 1.5 per cent and the market is expecting rates to reach 2.5 to 2.75 per cent during 2019. If inflation continues to accelerate, interest rates would need to rise by more than this to ensure the target is maintained.