REPEAT:MNI ANALYSIS: RBA May Temper Optimism Due Uncertainties

Repeats Story Initially Transmitted at 08:45 GMT Sep 4/04:45 EST Sep 4

By Sophia Rodrigues

     SYDNEY (MNI) - The Reserve Bank of Australia's confidence in its growth

forecasts for the economy may have increased in the past month but greater

political uncertainty on both the local and global fronts may mean the central

bank's policy statement on Tuesday doesn't reflect that optimism.

     Both economists and the market expect the RBA to leave its cash rate

unchanged its 1.5% for the 12th month in a row.

     The RBA's cash rate decision is expected at 1430 hours local time Tuesday

(0430 hours GMT).

     The RBA is expected to once again conclude its statement with the line that

"holding the stance of monetary policy unchanged at this meeting would be

consistent with sustainable growth in the economy and achieving the inflation

target over time."

     The commentary on the exchange rate is also expected to be a repeat of the

August statement: "An appreciating exchange rate would be expected to result in

a slower pick-up in economic activity and inflation than currently forecast."

     There is unlikely to be any change in the comments on the housing market,

labor market or inflation.

     Data releases since the RBA's August meeting have been mostly positive,

with retail sales growing 0.3% m/m in June, and in volume terms rising 1.5% q/q

in Q2, matching a pace last seen in the March quarter of 2013.

     The monthly labor force survey showed jobs growth for the 10th month in a

row in July, the longest streak of gains since the period ending January 2011. 

     In the seven months to July this year, jobs increased 202,400, a monthly

average of 28,900. A big proportion of the gain was due to full-time jobs, which

rose at monthly average of 21,900 while part-time jobs rose at an average of

around 7,000.

     The National Australia Bank's monthly business survey for July showed both

confidence and conditions remained at elevated levels, while the Australia

Industry Group's manufacturing, service and construction indexes all continued

their latest streak of expansion, with the construction index at a record high

in July.

     Best among recent data was the latest survey of companies' investment

intentions, which showed the capex plans rose more than expected.  This suggests

the economy's non-mining recovery is gaining traction.

     The data, published last week, showed the third estimate of expected capex

for 2017-18 was A$101.7 billion, higher than MNI median forecast of A$95 billion

and 17.6% higher than second estimate. Significantly, the upgrade was largely

driven by a 19.4% jump in services capex.

     When the RBA updated its forecasts for the economy in early August, it

assumed a gradual pick-up in business investment outside the resources sector.

It is likely the strong upgrade seen in capex estimate number three was higher

than the central bank's expectation.

     The RBA also assumed that a continued rise in employment would boost

household incomes, which would then lead to more household demand and would, in

turn, induce an increase in business investment.

     In Parliamentary testimony on August 11, RBA Assistant Governor for

economics Luci Ellis said, "we don't expect non-mining investment to pick up

particularly strongly or any time soon; that's later in the forecasts. The big

stories that are informing the pick-up in GDP growth in our forecasts are less

of a drag from mining investment and gradual increase in the household sector's

capacity to consume, all in the context of stronger mining exports and

accommodative monetary policy enabling all of that."

     Evidence that businesses are planning to increase investment sooner than

expected would therefore be regarded by the RBA as a significant step in the

economy's growth prospects, and increases chances that its forecasts will be

met.

     But a big wild card in investment decisions is uncertainty that could

easily prompt businesses to delay their spending.

     In the same Parliamentary testimony, Governor Philip Lowe said there is

uncertainty about the global political situation and uncertainty about some

policy settings in Australia. "This uncertainty leads firms to delay investment

because investment spending on capital can be difficult to reverse, so they just

wait until some of these uncertainties resolve," he said.

     Such uncertainties could also affect household spending decisions.

     In recent days, the global political situation has worsened further after

North Korea tested a more advanced nuclear weapon on Sunday, prompting the U.S.

Defense Secretary James Mattis to warn that any threat to the U.S. will be met

with a massive military response. U.S. President Donald Trump also warned

overnight that he could consider imposing trade sanctions on China if it did not

do more to rein in Pyongyang; such trade sanctions could have a major impact on

global trade and growth. 

     Locally, too, political uncertainty has increased as Australia's ruling

Liberal-National Coalition government could turn into a minority if some of its

members are regarded unfit to serve in Parliament because they are in breach of

citizenship requirements. The High Court hearing on this matter is due October

10-12. 

     The latest Newspoll showed public opinion remains in favor of the Labor

Party with 53% backing compared with 47% for the Coalition, according to

news.com.au.

     The uncertainties on the domestic and global fronts mean the RBA is

unlikely to sound upbeat. Continued worry on household consumption also means it

may be premature for the RBA to express more optimism.

     On the other hand, the RBA is likely to remain alert to renewed risks in

the housing sector despite recent data showing a slowing in housing prices and

credit. That risk means there is little likelihood the RBA will show any dovish

tilt even though the economy faces the risk from an elevated exchange rate.

--MNI Sydney Bureau; tel: +61 2-9716-5467; email: sophia.rodrigues@marketnews.com