Key insights from the week that was.
Owing to the focus that the RBA has placed on the labour market’s health, the April labour force survey and Q1 wage price index were the key releases for Australia this week. The April labour force report was mixed. The increase in employment was materially above both our and the market’s expectation. And, as a result, annual and 6-month annualised employment growth remained elevated at 2.6%. Nonetheless, the unemployment rate edged higher again to 5.2% as the participation rate rose to a record high. More telling on the state of the labour market, underemployment rose to 8.5%, just 0.5ppts below its previous peak. It is unsurprising then that wages growth disappointed in the March quarter, with a gain of just 0.5% (2.3%yr). Wage weakness remains broad-based by industry and across the states, with Victoria the only state to experience a sustained, robust uptrend in wage growth.
The NAB business survey for April highlighted that a further deterioration in the labour market should be expected in coming months. At -1, the survey’s employment index now points to annualised job growth of just 1.3%, half the annual (and annualised) pace of April and also below growth in the working age population (1.7%yr) – the latter indicates that the unemployment and underemployment rates will continue to trend up through 2019. The other detail of this survey was also weak, with both business conditions and confidence below long-run average levels and capital expenditure expectations in a downtrend.
On consumer sentiment, the Westpac-MI Consumer Sentiment Index rose slightly in May to 101.3 from April’s 100.7. Note however that the May reading is below the April post-Budget responses, which equate to an index reading of 104.3. The detail imply that the Budget’s tax measures and a strong expectation of rate cuts in coming months are supporting views on family finances. That said, they are still below long-run average levels, as is ‘time to buy a major household item’. The labour market deterioration and continuing house price declines pose clear risks to already-weak consumption and to investment in consumer-related sectors.
Offshore, market headlines have again been dominated by US/China trade tensions as China retaliated in kind on Monday to last Friday’s US’ tariff increase. Almost all US exports to China will now face tariffs of between 5% and 25% from 1 June. Unsurprisingly the US exports hardest hit are strategically-important goods such as agricultural commodities and natural gas. There is little chance of progress before the end of June, when President Xi and President Trump meet at the Osaka G-20 meeting.
This week’s Chinese data has been supportive of the market view (and President Trump’s) that China will be hardest hit by the tariffs. Year-to-date annual growth in industrial production disappointed, decelerating to 6.2%; while growth in fixed asset investment also came in below expectations at 6.1%ytd. However, to our mind, this expectation will only prove accurate in the short run. As we move into the second half of the year and more so in 2020, China’s ability to stimulate its domestic economy will allow it to sustain robust growth of around 6%. Over the long-term, the development of higher-tech, higher-profit industry will further bolster national and household income prospects, and hence consumption. In stark contrast, not only will US corporate profits be hit in the near-term by the tariffs (and/or a need for US firms to re-organise their offshore production), but there will remain little reason to increase US business investment, with the cost of labour and the currency reducing their competitiveness, and the risk of further tariffs on US exports remaining in place. On the latter, another point of contention looms, with the US continuing to assess whether to impose tariffs on auto imports – potentially affecting trade with Europe and Japan, among others. Reportedly, this decision has been put off for six months, though the priorities of President Trump can shift abruptly.
