Australia’s June quarter (2Q18) GDP growth of 0.9% beat consensus estimates of 0.7% pushing year-on-year growth to 3.4%, from 3.1% in 1Q18. The Reserve Bank (RBA) had an inkling the June number would be OK adding, “In the first half of 2018, the economy is estimated to have grown at an above-trend rate” to the governor’s Monetary Policy Decision Statement. Few believe a 3.4% rate is sustainable, including the forward-looking market. The outcome while solid and above-trend is now history. The investor needs to be looking through the windscreen rather than the rear-vision mirror.

While the RBA left the cash rate unchanged at 1.50% for the 25th month at the 4 September meeting, more recent incoming economic data has not overwhelmed. Perhaps not individually meaningful, but collectively there is increasing evidence to suggest hope springs eternal at the top of Martin Place. The RBA holds to the view the next move in the cash rate is up, unless an exogenous factor alters its forecasts. The most likely factor on the horizon is a full-blown trade war between the US and China and it remains a distinct possibility.

In the month since the last board meeting and after the close of 2Q18, the tale of the tape of incoming data is as follows. July housing approvals were weaker than expected, as were July retail sales. Seasonally adjusted employment fell 3,900 in July. The ANZ Business Outlook Survey headline business confidence fell in August to a net 50% of respondents reporting they expect general business conditions to deteriorate in the year ahead. Employment and investment intentions and profit expectations were all subdued. Private sector capital expenditure (capex) fell 2.5% in the June quarter against forecasts of a 0.6% increase, mostly reflecting weakness in the mining sector. It poses the question whether the business investment cycle has peaked. Year-on-year (y/y) capex was up just 0.4%. Housing prices continued to fall, the decline accelerating in Sydney and Melbourne. Household disposable income, already under siege, took a further knock with Westpac’s (ASX: WBC) 14-point increase on all variable mortgage rates. Both ANZ Bank (ASX: ANZ) and Commonwealth Bank (ASX: CBA) have now followed with 16 and 15-point increases respectively, National Australia Bank (ASX: NAB) will follow.

Is the RBA tending to ignore this data, at least in its monthly commentary, with perhaps an unhealthy focus on inflation and wages growth? It is unlikely 2H18 GDP growth will match the average 3.25% y/y growth of the first half. Looking to 2019, further falls in house prices will affect consumer behaviour and without a meaningful increase in household income, the coat will need to be trimmed to match the cloth.

2Q18 GDP growth was supported by consumption—household and government, both unsustainable in my opinion. The household savings rate is back to December 2007 levels and governments have no savings, just more debt. When consumption (spending) outpaces income growth the outcome is not pleasant. The RBA has faith wages growth will get back to trend, but the corporate sector is unlikely to cooperate as rising energy and imported raw materials costs are already impinging on margins and competitive pressures and disruptors make price increases difficult. Wages are a major cost item and permanently adding to it via increased rates will be resisted. The increase in hours worked and the number in employment is underpinning household consumption, not higher wage rates. July retail sales data revealed growth in necessities, while more discretionary items took a back seat.