The latest US jobs data show an economy that is growing quite nicely, with 178,000 new jobs over the last month, and with unemployment falling to 4.6%, its lowest rate since the financial crisis (see chart below). However, the market had expected slightly stronger growth, and the drop in the unemployment rate from 4.9% to 4.6% was due in large part to a drop in the participation rate (see US News report and FT coverage). That said, overall the data are consistent with a healthy US economy, and thus it still appears extremely likely the US Federal Reserve will increase the Federal Funds rate this month from its current target of 0.25-0.5 percent.
Although Australia will benefit to some extent from US economic growth, particularly through its flow-on effects to China, there are nonetheless concerns about the current economic outlook in Australia. The new capital expenditure data published by the ABS last week were worse than expected, with weakness outside of mining (see chart below), and the September quarter GDP growth figure to be published this Wednesday may well be negative (see Peter Martin’s SMH article from last Friday for an excellent overview). It is disappointing that the Australian economy appears to have lost momentum in the September quarter, as it appeared set for a good 2016 in its first half.
Given low inflation and wages growth (see chart below), and the possibility of negative GDP growth, the RBA Board may end up having to cut the cash rate (currently at 1.5%) in 2017. While the market is overwhelmingly not expecting a cash rate cut when the RBA Board meets this Tuesday (see ASX RBA rate indicator), and the OECD has urged the RBA to increase interest rates to deal with the housing bubble (see Jacob Greber’s AFR article from last weekend), if the September quarter GDP figure released Wednesday is a shocker, the outlook for interest rates could turn around.
Obviously a national slowdown would not be good news for Queensland. It would be very disappointing, as we have had quite a bit of positive economic news recently, including:
- a fall in the unemployment rate (see chart below), although there is a lot of concern about the reliability of the ABS figures (see my QEW post) and Townsville remains in big trouble (see Pete Faulkner’s latest post on NQ & FNQ labour markets);
- recovery in agriculture associated with better rainfall which, among other things, has led to a bumper wheat crop (see Qld Country Life coverage);
- a strong tourism sector, with 11% growth p.a. in international visitors (now 2.5M p.a.) and expenditure (now over $5BN p.a.), driven by strong growth in visitors from China, up 30% in 2015-16, and Japan, up 21% in 2015-16 (see TEQ’s very useful International Tourism Snapshot); and
- higher coal prices which are substantially improving the budget bottom line, and may allow the State Government to boost infrastructure spending, which would be much appreciated in regions such as Townsville and outback Queensland that have been suffering at the end of the mining boom.
Recently, the Queensland economy had shown signs of pulling out of its previously lacklustre state, so let us hope we avoid a national slowdown that would hold back Queensland as well.
Queensland Economy Watch 
The effect of the USA economy on Australia’s is of less direct impact then it used to be and I suspect increasingly so. If Australia catches a cold when the USA economy slows down then it will be on the operating table if China’s economy slows down (the recent few years arguably have been “softer growth” in China rather than a “slowdown”).
I guess Queensland is lucky it’s economy wasn’t as strongly tied to the Mining sector as Western Australia’s economy was. There doesn’t seem to be much further the mining sector can deteriorate (saving a serious downturn in China). So, the outlook is at worst probably not much change and possible upturn for mining communities. That in itself is a confidence change.
Thanks for the comment, Alistair. Very good points. Yes, we would be on the operating table if the Chinese economy crashes.