Key insights from the week that was.
This week, we received updates on Australian business and consumer confidence as well as a speech by RBA Governor Lowe.
Beginning with business confidence and conditions, the NAB survey provided tentative evidence that this wave of the virus and the consequent lockdowns are having less of an effect on the economy than in 2020. Confidence in NSW looks to be responding to the vaccination drive, the state’s index rising 8pts to -12 in August. The extension of Victoria’s lockdown however saw confidence deteriorate there to -10. Both outcomes are materially below the national figure of -5, itself a well-below average reading, but up 2pts in the month.
Business conditions meanwhile are well off their June quarter highs (+14pts in August versus Q2’s +30pt average); however, the index did rise 4pts in August and the current level is still above the long-run average of the series. Explaining these outcomes: coming into these lockdowns, the economy was carrying strong momentum; as we speak, restrictions are impacting our largest cities, but not the whole nation; and, thanks to the rapid vaccination drive, there is a clear path out of this lockdown.
While challenged by present circumstances, Australian consumers are optimistic on the outlook, the Westpac-MI consumer sentiment index rising 2% in September to an above-average reading of 106.2. Behind this headline result was material strength in the components related to the economic outlook, the 1-year and 5-year views up almost 5% in the month to respectively be 15% and 25% above their long-run averages. Views on family finances are modestly above average levels currently, supported by strong gains for house prices, equities near all-time highs and labour market resilience (more on this below).
As highlighted by our Chief Economist Bill Evans this week, the recent strength shown by consumer sentiment rests on the rapid vaccination of Australia’s population which is materially reducing health risks related to the virus and should soon allow the nation to re-open. Also discussed in the above video is the structural challenge faced by households with respect to housing affordability, a potential headwind for consumption in the recovery – particularly once the cash rate lifts off the lower bound.
Looking beyond the immediate, critical for consumer spending in coming years will be the strength of our labour market. August’s loss of employment was in line with our expectation at -146k (WBC-150k). While a large fall in jobs, the 3.7% decline in hours worked was more significant, resulting in a percentage point increase in the rate of underemployment to 9.3%, more than twice the published unemployment rate (4.5%). Hours worked were, unsurprisingly, weakest in NSW (-6.5%), but also down sharply in Qld (-5.2%) and Vic (-3.4%).
These outcomes highlight that the benchmark for success in recovery will be hours worked and the rate of underemployment instead of the level of unemployment. To see lasting strength in consumer spending and hence GDP, household incomes must return to their full employment level, not just the headcount of those who seek employment and find it.
This issue is very clearly on the mind of the RBA. Notable in Governor Lowe’s speech on “Delta, the Economy and Monetary Policy” was the belief that to achieve its inflation target in the medium-term, “wages will need to be growing by at least 3 per cent”, almost double the annual growth rate for the Wage Price Index at June 2021. It is worth emphasising that the RBA not only believe the slack present in our labour market must be removed if their wage and inflation goals are to be achieved, but also that the adverse inertia present in wages growth pre-pandemic must abate. This additional headwind stems from several forces including “multi-year employment contracts; [the] strong cost-control mindset of Australian business; and low and stable inflation expectations”. These are challenges entrenched the world over, making them a significant challenge to overcome.
Offshore this week, GDP and house price data for New Zealand confirmed the strength of their economy and justified the RBNZ increasing rates with no delay. Our NZ team have consequently moved forward their first-rate hike from November to October 2021. In the US meanwhile, the August CPI report gave support to the view that the recent surge in inflation is transitory, with the monthly headline gain coming in a touch below the market’s expectation at 0.3%, and core inflation soft at 0.1%. Retail sales then showed resilience, with August’s much stronger-than-expected gain only partly offset by downward revisions to July.
The most significant international data this week however came from China. The chasm between annual retail sales growth to August (2.5%yr) and year-to-date growth (18.1%) highlights how severe the impact of recent restrictions against COVID-19 has been on spending. Although the year-to-date reading also signals the underlying strength of the sector which, as best we can tell from the PMIs, continues to be well supported by the labour market. Fixed asset investment was essentially in line with expectations in the month, despite property investment disappointing again. The troubling situation faced by Evergrande and hit to confidence for the rest of the sector is likely to continue to affect investment in coming months. But the reforms underway and strength of households should lay a strong foundation for robust growth in 2022, 2023 and beyond.
