Key insights from the week that was.
In Australia, the week started on a slightly more positive note for consumers, with our Westpac-MI Consumer Sentiment Index showcasing a 2.8% bounce to 85.0 in August. The primary support was a significant improvement in households’ views and expectations around their finances, likely associated with the new financial year’s tax cuts. The sub-indexes tracking ‘family finances vs a year ago’ and ‘family finances next 12 months’ rose 11.7% and 5.1% respectively. These gains are coming off an incredibly weak base however, and given earlier surveys indicated a preference among consumers to rebuild savings buffers from their tax cut, it is understandable we are yet to see a signification improvement in card spending or intentions to ‘buy a major item’.
It is constructive to see that consumers also remain relatively untroubled over the outlook for jobs – a perspective that was certainly supported by July’s labour market data. Growth in employment was far stronger than expected, with nearly 60,000 jobs created in July after a solid run of gains over recent months. However, the main surprise was around labour supply, as evinced by the surge in labour force participation to a cycle high of 67.1%, the highest read in over a century. It was impressive to see businesses absorb such a large portion of this growth via employment; but in the end, the surge in labour supply was enough to see the unemployment rate lift to 4.2%, incrementally adding slack.
Conditions from an income perspective also remain constructive. The wage price index lifted 0.8% (4.1%yr) in Q2. Containing inflation risks, nominal wage growth has undergone a significant moderation on a six-month annualised basis, from 4.7%yr in December to 3.4%yr at June as the labour market moves into balance. Though, with annual inflation having slowed more than wage growth, consumers are slowly beginning to feel the cost of living pressures they have been experiencing let up. In time, this should support a further improvement in family finance expectations and spending.
As Westpac Chief Economist Luci Ellis and Senior Economist Pat Bustamante noted earlier this week, one of the more puzzling elements of the RBA’s revised forecasts is the assertion that aggregate supply is lower than previously thought. As above, this week’s labour force update instead highlighted continued strength in labour supply. In today’s essay, Chief Economist Luci Ellis elaborates on what the latest data implies for the RBA’s view on productivity and activity.
First stop offshore this week is New Zealand. There the RBNZ surprised the market by cutting the cash rate 25bps to 5.25%. As detailed by Westpac NZ Economics, the RBNZ also lowered the OCR track significantly, implying another cut will occur at the October Monetary Policy Review and a total of 75bp of cuts will be delivered by end-2024. The RBNZ’s updated profile also suggests the RBNZ still aims to reach neutral OCR levels circa 3% by 2027, but now more quickly. Warranting the revised view on interest rates, the RBNZ’s near-term forecasts for economic growth have been revised down significantly. A wider output gap and looser labour market provides confidence inflation will ultimately fall back to the 2%yr mid-point of the target range, though this is not currently expected until Q2 2026.
The US data flow meanwhile continued to point to a goldilocks economy: benign inflation paired with robust activity growth. Consumer prices gained 0.2% in July, seeing annual inflation edge lower to 2.9%yr and 3.2%yr respectively for headline and core inflation. Food away from home and services ex-shelter were both benign, signalling wage pressures are not a concern and that the discretionary demand pulse is modest. Core goods prices meanwhile exhibited broad-based and persistent weakness. While shelter surprised to the upside in July, with the labour market cooling and households financially constrained, this momentum is highly unlikely to persist; indeed, the BLS’ real-time measures of rents point to flat or negative outcomes versus shelter’s near-5% annualised pace in July. Earlier in the week, the PPI was also constructive for the inflation outlook, rising 2.2%yr in July, undershooting expectations.
Retail sales subsequently showed strength in July, gaining 1.0% thanks to a strong rebound in autos (sales ex autos were up +0.4%, and the narrower control group +0.3%). In the year-to-date, nominal gains have been modest overall, the control group averaging a monthly gain of 0.3%, but that is a result consistent with real consumption growth modestly below trend, not recession. Of the other US data out this week, the regional Fed manufacturing surveys were weak, but initial claims continued to point to an absence of firing across the economy.
Across the Atlantic, UK data justified the Bank of England continuing with their policy easing, albeit while remaining confident in economic growth’s upturn. The July CPI print surprised to the downside, prices falling 0.2%mth. Base effects saw annual headline inflation edge up from 2.0%yr to 2.2%yr, but annual core inflation slowed from 3.5% to 3.3%. Inflation’s breadth also continued to narrow, with only 54% of the basket now growing in excess of the BoE’s annual inflation target of 2.0%, down from 86% this time last year. Helpfully for the BoE’s risk assessment and messaging, annual services inflation came in well below expectations in July, decelerating from 5.7% to 5.2% (consensus 5.5%yr). Earlier in the week, wages ex. bonus also softened to 5.4%yr in June from 5.7% in May, giving the BoE more confidence to persist with their cutting cycle.
Like in the US, UK activity data remains constructive, GDP growth printing as expected in Q2, at 0.6% (0.9%yr). That said, the detail highlighted a greater degree of downside risks, with private consumption and business investment both weak. Consumption gained just 0.2%, half Q1’s 0.4% gain and the Q2 consensus expectation of 0.5%. Investment meanwhile declined 0.1% instead of rising 0.4% as expected. Government spending offset, gaining 1.4% in Q2.
Turning finally to Asia. Japanese GDP surprised to the upside in Q2, the 0.8% gain offsetting Q1’s 0.6% decline. Private consumption was the primary support for growth in the quarter, increasing 1.0%. Business investment was similarly robust, up 0.9%. Chinese partial data, in contrast, disappointed again in July. At 5.9%ytd and 3.5%ytd respectively, industrial production and retail sales growth showed no progress from June. And fixed asset investment weakened further, year-to-date growth decelerating to 3.6% from 3.9%, as property investment’s contraction accelerated, from –9.9%ytd to –10.2%ytd, and momentum in the strong sub-sectors of high-tech manufacturing and utilities moderated. Adding further pessimism to the view for housing and consumption, new and existing home prices fell another 0.7% and 0.8% in July. There is clearly need for additional policy support into year-end; to boost sentiment, authorities next steps have to take a more active approach and be immediate for consumers and the property sector.
