Key insights from the week that was.
This week in Australia, the health of the labour market was in focus as was households’ response to Budget 2021.
Beginning with the labour market, the April labour force survey surprised to the downside as 31k jobs were lost in the month. However, because of declining participation, the unemployment rate edged down, from 5.6% to 5.5%, and the underemployment rate declined 0.2ppts to 7.8% to be 1ppt lower than its level prior to COVID-19.
We believe the surprise decline in jobs and participation in April is the result of seasonality caused by the Easter holiday period, not the end of JobKeeper. Supporting this view: the number of respondents working zero hours for economic reasons fell again in the month to a level broadly in line with that seen prior to the pandemic; meanwhile those working zero hours because they took leave jumped higher.
More broadly, it is important to note that the level of employment in Australia is higher than it was before COVID-19, and that households are confident in the outlook for the labour market, with Westpac-MI unemployment expectations at a 10-year low having fallen 15% in May. We believe these expectations are well founded, with further progress towards full employment forecast in 2021 and 2022, as the RBA intends.
Until full employment is achieved however, wage growth will remain modest. In the March quarter, the wage price index rose by a further 0.6%, leaving annual growth a touch higher at 1.5%yr. As the weak outcomes of 2020 drop out of the calculation in the second half of 2021, annual wage growth will strengthen to around 2%yr. However, this acceleration will largely be offset by strengthening inflation, keeping growth in real wages negligible.
Cost of living pressures are, arguably, part of the reason why Westpac-MI consumer sentiment moderated from its historically elevated April reading following last week’s Federal Budget 2021. As discussed by Chief Economist Bill Evans, the key initiatives in Budget 2021 were essentially known ahead of time, except for the decision to extend tax breaks for business investment to 2022/23 which has little-to-no direct consequence for households.
This is not to say that Budget 2021 was viewed unfavourably by households. Quite the contrary. Despite the 4.8% decline in May, Westpac-MI consumer sentiment is still at it second-highest reading since mid-2010; there has also only been one more-positive response to our budget question on family finances in the 11 years it has been run – in 2020. Still, with the outlook for family finances over the coming year now ‘only’ a touch above its long-run average and as ‘time to buy a dwelling’ signals housing affordability is becoming a bigger concern, perhaps “the Budget would have been even better received if the government had announced some surprise positive initiatives on the night that were targeted at households”.
Next week, the Australia data flow will shift from Budget 2021 and the labour market to the partials for Q1 GDP, due the week after on 2 June.
Moving offshore, New Zealand’s Budget 2021 included a modest increase in spending and conservative revenue assumptions, the latter providing scope for more substantial spending initiatives in future fiscal updates if the economy performs well. On the outlook, this week also saw the release of Westpac New Zealand Economics’ quarterly Economic Overview, detailing in depth their expectations for coming years.
In the US, the FOMC was again in frame. Several speakers and the minutes of the April Committee meeting repeated the key messages of recent weeks. On the economy and labour market overall: “participants generally noted that the economy remained far from the Committee’s maximum-employment and price-stability goals”; and “some participants remarked that the pandemic continued to pose downside risks”. While Committee members cited some evidence of wage pressure because of restricted labour supply, for consumer inflation, after “the transitory effects of these factors fade, participants generally expected measured inflation to ease…. achieving the Committee’s objectives over time”.
Consequently, in “their discussion of the Federal Reserve’s asset purchases, various participants noted that it would likely be some time until the economy had made substantial further progress”. Only “if the economy continued to make rapid progress toward the Committee’s goals, it might be appropriate at some point in upcoming meetings to begin discussing a plan for adjusting the pace of asset purchases”. Westpac remains of the view that tapering will be seen in the US in the second half of 2022, though it will work its way into discussions progressively before then. When exactly will depend on the speed of recovery in the labour market and the strength of activity growth as stimulus fades.
