Key insights from the week that was.
After a very strong run, Australia’s labour market took a breather in April, with only 4k jobs created in the month (market consensus 30k). Still, the unemployment rate recorded a new near 50-year low of 3.9% (note, March was also revised down to 3.9%). Further highlighting the current strength of labour demand, hours worked rose 1.3% in the month as part-time roles transitioned to full-time, and more full-time positions were created.
Ahead, we continue to expect further strong gains for employment, resulting in a low for the unemployment rate of 3.2% late this year despite record participation. As this trend persists, the wage pulse is set to build, from a modest 2.4%yr at Q1 2022 to 4.0%yr in 2023. The detail of the Q1 WPI provides support for this view, with the 15% of private workers who received an increase in the quarter seeing their pay rise by 3.4%, a percentage point more than the current annual rate and the largest increase since June 2013. The 2022 minimum wage decision may provide additional support, with unions having put forward an ambit claim for 5.5%.
The minutes of the May RBA meeting provided additional evidence from their business liaison work of labour market strength and growing momentum for wages. Also of significance for the inflation outlook, firms reported they were becoming more confident in raising prices.
As detailed by Chief Economist Bill Evans, the current momentum in inflation and uncertainty surrounding the outlook suggests the most appropriate path for policy is a moderate but front-loaded hiking cycle from the current level of 0.35% (following May’s 25bp increase) to 0.75% in June; 1.75% come November; and a peak of 2.25% by May 2023. Australia’s high level of household debt will then see debt service at highs back to the GFC, affecting both discretionary income and sentiment.
In New Zealand, this week saw the release of our team’s latest quarterly Economic Overview, a detailed assessment of current conditions and the outlook for the NZ economy. In this release, the team upgraded their expectation for the RBNZ, with a peak cash rate of 3.50% now seen at year end to combat a potent combination of global and local inflation pressures. House sales and prices have already taken a hit and are expected to weaken further as the cycle continues. That said, the cumulative decline should only take prices back to the level seen in early 2021. Through confidence and wealth, this shock is expected to pass to consumption and GDP growth in time, creating the slowdown necessary to quell inflation pressures and risks. Recognising the hit household incomes are taking, the NZ Government’s Budget 2022 provided some temporary, targeted cost-of-living relief.
For the US, FOMC speakers including Chair Powell again highlighted this week that, for the time being, inflation pressures and risks remain their focus. Concern over the strength and persistence of inflation in the UK and Euro Area meanwhile had a broad impact, global equities hit hard by fears of stagflation.
We believe it is important to distinguish between the risk of above-target but decelerating inflation with activity growth near trend and that of a stalled or contracting economy with inflation a multiple of target (stagflation).
Our baseline forecast for the US sees GDP growth modestly below trend in 2023; but, throughout that year, inflation is expected to throttle back to be only marginally above 2.0%yr. Achieving this feat in the US requires the abating of energy price growth, not a material fall, and other supply-side price pressures coming back from extreme levels to a moderate positive pace – a process that has clearly set it but has a long way to run.
As emphasised by Chair Powell this week, it is not enough to trust this trend will run its course. Instead, demand’s strength has to be actively reined in through financial conditions and real household incomes. Equally though, this does not mean central banks have to halt growth altogether and risk recession. In the US and across most of the developed world, there is a clear belief in acting quickly to move policy and tighten financial conditions towards a neutral level, but only taking an outright contractionary stance if risks materialise. Fears over the outlook for growth therefore should be recognised as a function of market behaviour and uncertainty, not the actions of central banks.
Finally to events in China. Data headlines over the past week caused considerable angst over the economic outlook, far more than the detailed data suggest is warranted. The biggest concern was retail sales, reported to be down 11% in April versus a year ago. However, assessed on a year-to-date basis, the cost to 2022 consumption from COVID-zero policies is seen to be much more manageable, with activity down only 0.2% in the first four months of 2022 versus the same period in 2021. Also important is that year-to-date growth in fixed asset investment largely held up in April, the narrow geographic focus of the lockdowns helping to maintain activity elsewhere.
If success in controlling the spread of the virus in Shanghai and Beijing holds, then the recovery should be swift and sizeable. Supporting this view, the past month has seen authorities’ support of the economy continue to build through announced and mooted policy initiatives, and by encouraging credit availability/ borrowing. This is not to say that we will see a surge in any and all projects no matter their profitability; but rather that local government and State Owned Enterprises’ curated lists of productivity enhancing old and new economy infrastructure projects are being given the green light. Meanwhile, with the residential construction sector having completed its reform phase and given recently announced policy easing, confidence should return amongst buyers and builders in the second half of 2022, supporting a strong recovery in activity.
Clearly, as long as it is active globally, COVID-19 will remain a risk for China. But the continuation of heavy restrictions on international travel should give authorities comfort that the domestic economy can re-open and operate with limited risks hence. This approach to COVID-zero would provide a double win for GDP, limiting the loss to imports while building momentum and confidence in local activity. This is a key support for our view that GDP can still achieve growth near authorities’ target for 2022 despite a weak Q2. Apart from the virus, looking ahead the other significant risk to China growth is external demand which is coming under pressure from tighter financial conditions, weakening real incomes and, of course, uncertainty.
