Cliff Notes: Continued Labour Market Resilience Constructive for Outlook

Key insights from the week that was.

January’s Westpac-MI Consumer Sentiment survey suggests the Australian consumers’ mood soured over the holiday period. Following a –2.0% dip in December, the headline index fell another 0.7% to 92.1 in January. That said, most of the constituent sub-indexes did not deteriorate during the month, including the one-year outlook for family finances (+1.1%), the one-year and five-year outlook for the economy (0.0% and +0.7%), and ‘time to buy a major household item’ (+1.8%). January’s headline decline instead stemmed from a 7.8% fall in households’ assessment of their finances versus a year ago, reversing December’s gains. Overall, the partial reversal of 2024’s gains over December and January and the indexes’ current sub-par level highlights the enduring impact of cost-of-living pressures, both on current spending and confidence.

It was somewhat surprising to see consumers’ job loss fears worsen in January given the recent strength of official labour market data. December’s Labour Force Survey confirmed our labour market finished the year on a strong footing having remained tight throughout 2024 – measures of slack little changed over the period. Given these developments, the next update for wages will be keenly assessed for risks to inflation. With demand matching the supply of labour, we anticipate wages growth will continue to track lower over 2025 in a manner consistent with inflation returning to target. We view May as the most likely starting point for the 100bps of RBA rate cuts forecast by year end, though risks are tilted towards an earlier start, depending on the strength of the next quarterly inflation print due at month end.

Westpac’s Chief Economist Luci Ellis also investigated some key medium-term issues this week, including how Australia’s floating exchange helps our nation navigate global shocks and productivity.

Offshore, market participants have been kept busy between New Year’s and President Trump’s inauguration – scheduled for next week.

Last Friday, December nonfarm payrolls 256k gain beat the market’s expectation of 165k by a wide margin, even accounting for revisions to the prior two months (-8k). The unemployment rate meanwhile ticked down to 4.1% thanks to a striking 478k rebound in household employment. Note however, over 2024, the monthly gain for household employment averaged just 45k, a fraction of nonfarm payrolls 186k. There remains a significant discrepancy between the two labour market surveys which will only be partly addressed by the annual revision to nonfarm payrolls which will revise history up to March 2024. Helpfully for the FOMC, the wage pulse remains benign, annual growth of 3.9%yr at December at the top of the range historically consistent with consumer inflation at target.

December’s CPI report was also constructive for a continuation of rate cuts through 2025. Core inflation slowed from 0.3% to 0.2% in the month, and the annual rate edged down from 3.3%yr to 3.2%yr. Shelter inflation remains a multiple of the FOMC’s 2.0% target on an annual and annualsed basis; but ex-shelter, headline CPI has now been at or below 2.0% for 16 of the past 20 months – the remaining 4 prints were between 2.0%yr and 2.3%yr.

Still, like the labour market detail, retail sales suggests the FOMC has time on its side as it assesses current and potential inflation risks, headline sales rising 0.4%mth in December and the control group, which feeds into GDP, 0.7%. The control group’s Q4 gain of 1.3% is in line with Q3’s 1.4%, indicating support for aggregate activity from household demand persisted into year end.

Across the pond, the UK CPI also showed promise in December, headline inflation easing to 2.5%yr, in line with the Bank of England’s forecast. Crucially, services inflation decelerated 0.6ppts to 4.4%yr. Bear in mind that a sharp drop in airfares contributed to December’s decrease. Still, while that outcome may reverse, the overall trend in both services and goods inflation seem conducive to additional rate cuts in 2025, aiding activity growth’s recovery.

China’s Q4 GDP and partial data has just been released. As we expected, authorities’ 5.0% target was achieved for the full year, thanks to an acceleration in annual growth from 4.6% to 5.4% Q3 to Q4. Also benefitting the year-to-date result was an upward revision to quarterly growth in Q3 from 0.9% to 1.3%, compared to 1.6% in Q4.

The detail underlying the result is still to come, but December’s partial data was constructive for industrial production (growth accelerated from 5.4%yr to 6.2%yr) and retail sales (from 3.0%yr to 3.7%yr), and suggests a floor is being put in for fixed asset investment (year-to-date growth little changed at 3.2%). Although, on a year-to-date basis, industrial production and retail sales growth was also unchanged from Q3 to Q4 at 5.8%ytd and 3.5%ytd. Focusing on property, policy support is only slowly impacting conditions, home price declines incrementally abating month-on-month towards zero (-0.1% and -0.3% in December for new and existing homes), and new property sales still down 17.6%ytd in December, a slight improvement on November’s -20.0%ytd.

These outcomes point to resilience in China’s economy, but also a need for further significant policy support in coming months. The development of new industry and export markets outside the US are serving China well. But, to sustain growth near 5.0% in coming years and thereby deliver pledged welfare gains over the coming decade, the consumer and non-manufacturing investment must accelerate sustainably. Following lunar new year celebrations at the end of January, look for additional actions by policy makers targeting consumer income and sentiment as well as property and equity markets.