Independent Australian and global macro analysis

Friday, May 31, 2019

Macro (Re)view (31/5) | Risk aversion takes hold

Risk aversion swept across markets this week as concerns over the global growth outlook intensified. Markets have shifted to the view that the uncertainty around trade tensions is likely to persist for at least the foreseeable future, whereas throughout the early part of 2019 the prevailing sentiment was that a resolution was nearing. This uncertainty is also beginning to impact business activity, as confirmed by last week's 'flash' reading of the IHS Markit Purchasing Managers' Index for the US falling to a 3-year low of 50.9 (readings > 50 signal expansion) in May. 

The index has slowed from much stronger levels throughout 2018 driven largely by manufacturing, where firms have been impacted by weaker demand from clients in response to the trade uncertainties, though there were also signs that the more resilient services sector is beginning to turn down presenting clear risks for both investment and employment. It has been a similar theme 
of weakening manufacturing but stronger services sector activity in other major economies and this was repeated again on Friday with the official PMI reads for China easing further in May for manufacturing from 50.1 to 49.4 but holding steady for non-manufacturing at a solid 54.3.  

Though less of a factor for markets, political uncertainty is likely to also be driving risk-averse sentiment. The provisional results from last week's European Parliamentary elections indicate that the two largest centrist parties (centre-right EPP and centre-left S&D) will maintain their majority, but in line with what the polls had predicted their support was fragmented by a shift to nationalist parties, including in the UK where Nigel Farage's Brexit Party clearly headed the voting. The other main development was in Italy where the far-right League party gained more than a third of the vote and was well clear of its coalition governing partner the Five-Star movement. The result saw League leader Salvini pushing his agenda for deep tax cuts, which has renewed concerns that Italy may again be set to clash with the EU's fiscal rules. 

Throughout the week, global yields at the longer end of the curve fell away sharply as safety was sought from riskier assets. In the US, the 10-year treasury yield fell to its lowest since mid-2017 at around 2.12% to sit well inside the fed funds rate (2.25-2.5%), which is shown as our chart of the week, below. The fall was accelerated when overnight on Thursday Federal Reserve Vice Chair Clarida said that the Committee was prepared to respond with more accommodative policy if warranted by persistently low inflation and downside risks to their economic outlook. In its recent commentary, the Fed has been consistently constructive in their assessment of conditions and has described slowing inflation as 'transitory', thereby justifying its 'patient' stance on policy. Markets, however, clearly view rates as too restrictive at the current setting and are expecting a cut by October followed by 2 more by end-2020.  

Chart of the week  

— — 

The main development in Australia this week was a much weaker-than-expected update on business investment for the March quarter. Capital expenditure (capex) by the private sector fell by 1.7% in Q1 (the median forecast was +0.5%) driven by weakness in buildings and structures and equipment, plant and machinery providing another indication that next week's National Accounts are likely to show that activity in the domestic economy slowed further since the turn of the year (see our full review here). Firms' capex intentions were more constructive; plans for 2018/19 lifted by 3.8% on a year-to-year basis to $122.2bn, while estimate 2 for 2019/20 showed an increase of 12.8% through the year to $99.1bn. For 2019/20, capex plans indicated that mining sector investment is likely to turn and bring to end 6 consecutive years of decline from the peak in the cycle, while plans from the non-mining sector were broadly solid. The early indications 
appear supportive of the thesis of the Reserve Bank of Australia (RBA) that business investment will be a growth driver for the domestic economy over the next couple of years, though there are uncertainties given these are early estimates and were reported during the lead up to the recent federal election.  

Also this week, dwelling approvals fell by a sharp 4.7% in April (the market forecast was for 0.0%) to be down by 24.2% on the level from a year earlier (see our review here). The deterioration in house approvals accelerated during April, while unit approvals weakened for both the low and high-rise segments. Weakening activity in the residential construction sector is in part driven by tight credit conditions, with data released by the RBA on Friday showing that housing credit growth slowed to a 3.9% annual pace — its lowest on record dating back to 1977. In the owner-occupier segment, credit growth eased to its slowest pace since mid-2015 at 5.5% in year-on-year terms, while credit has essentially stalled to investors (0.6%) over the past 12 months. Total private sector credit growth lifted by a softer-than-expected 0.2% in April, with the annual rate slowing to a 5½-year low of 3.7%.


Wednesday, May 29, 2019

Australian building approvals fall by 4.7% in April

Australian dwelling approvals made a weak start to Q2 after posting a  4.7% month-to-month decline in April. House and unit approvals are both down by more than 20% in year-on-year terms, with residential construction activity now turning down sharply as a result.  

Building Approvals — April | By the numbers

  • Total dwelling approvals (including the private and public sectors) fell by 4.7% in April to 14,123 (seasonally adjusted) with the market forecasting a flat (0.0%) outcome. Approvals fell by 13.4% in March revised from -15.5% in this release.

  • Over the year, dwelling approvals are down by 24.2% (prior rev: -25.4%)

  • Unit approvals fell by 7.2% (prior rev: -24.5%) in the month to 5,672 to be down by 27.8% through the year (prior rev: 33.8%)  

  • Approvals for houses fell by 2.9% (prior rev: -3.3%) to 8,452 with the annual decline extending to -21.5% (prior rev -18.1%) 

  • The trend series detail showed total dwelling approvals down by 0.6% in April and by 21.8% through the year. Unit approvals lifted by 1.3% month-to-month but are -27.5%Y/Y. House approvals declined by 1.9% in April to -17.1%Y/Y.

Building Approvals — April | The details 

The available detail, which is not seasonally adjusted, indicated that the weakness in April was broad based. House approvals continued to weaken, while for units there was a sharp contraction from the low-rise category and a more modest fall from the high-rise segment. The chart, below, highlights the deteriorating trend for all dwelling types.  

Dwelling approvals fell in most states in April, though New South Wales (+4.8%) and Queensland (+11.3%) both recorded increases. However, approvals have fallen sharply year-on-year in all states with the exception of Tasmania (+2.9%). The full breakdown is shown, below.    

The value of alteration work approved to be done on residential properties fell by 5.4% in April to $703.5m but remains modestly up on a year earlier (+1.4%). The value of non-residential work approved is volatile month-to-month and this was the case in April with a 16.1% rise to $4.05bn (+19.3%Y/Y).   

Building Approvals — April | Insights 

April's report was another weak update, with dwelling approvals continuing to slide across the categories. It will be interesting to watch this series over the coming months given recent developments including; the clear signal from the Reserve Bank of Australia that they are prepared to cut interest rates, the removal of uncertainty around the impact of proposed changes to capital gains tax and negative gearing following the outcome of the federal election and the proposal by banking regulator APRA to ease its serviceability assessment criteria. 

Australian CapEx weaker than expected in Q1; intentions rise again

Australian capital expenditure (capex) was much weaker than anticipated in the March quarter providing a soft lead ahead of next week's National Accounts. Looking ahead, firms' investment intentions strengthened again, both for the current financial year and for 2019/20.  

CapEx — Q1 | By the numbers

  • 'Actual' CapEx in Q1 fell by 1.7% (-$519m) to $29.29bn; a sizeable miss on the expected outcome of +0.5%. Q4's previously reported increase of 2.0% was revised down to show a gain of 1.3%. Through the year, capex fell by -1.9% after swinging from a +1.0% pace for the year ending Q4. 

  • Equipment, plant and machinery investment fell by -0.5%q/q (-$73m) to $13.80bn (prior rev 0.0% from +0.7%). The annual pace slowed sharply from 6.8% to 2.4%.

  • Investment on building and structures declined by -2.8%q/q (-$442m) to $15.49bn (prior rev +2.5% from +3.2%), which accelerated the annual decline from -3.6% to -5.5%.

  • The 6th estimate of investment intentions for 2018/19 was nominated at $122.19bn, which is a 3.7% upgrade on estimate 5 and a rise of 3.8% on a year-to-year basis 

  • Estimate 2 for CapEx in the 2019/20 financial year was forecast at $99.14bn, lifting by 7.6% on estimate 1 and by 12.8% compared with estimate 2 for 2018/19

CapEx — Q1 | The details 

The headline fall in capex of 1.7% (-$519m) to $29.29bn included broad-based weakness. Mining sector investment fell by 1.3% (-$102m) to $7.83bn to be down by 12.9% across the year. The underlying detail showed a 3.4% decline on capex for buildings and structures, but equipment, plant and machinery lifted by 7.6%. 

Looking at the non-mining sectors (including manufacturing and services), capex fell by a combined 1.9% (-$413m) in Q1 to $21.462bn, which slowed annual growth to 2.8%. Investment from the services sector fell by 1.2% (-$242m) to $19.31bn, though the detail was mixed; building and structures -1.2% and equipment +0.8%. Investment by manufacturing firms fell for the second consecutive quarter, slumping by 7.4% (-$171m) to $2.15bn (-8.5%Y/Y). There were sharp falls for both buildings and structures (-10.0%q/q) and equipment (-5.2%q/q). 

Turning to investment intentions, the ABS reported that firms expect total capex in 2018/19 to be $122.19bn as of estimate 6. This is a 3.7% upgrade on the previous estimate and is similar to the increase from estimate 4 to 5 (+3.6%). Currently, the forecast implies that capex in 2018/19 will be 3.8% above the level from 2017/18. Investment from the non-mining sector is now projected to rise by 9.4% through the year, with mining dragging by 6.7%.

In 2019/20, the 2nd estimate for capex for the full 12 months was nominated at $99.14bn. This is 7.6% above estimate 1 and a 12.8% increase on estimate 2 for 2018/19. It was also stronger than markets had anticipated at $96.0bn. Mining investment, with a forecast rise of 21.0% through the year, appears likely to finally turn in 2019/20 after 6 consecutive years of decline following the wind down from the construction-driven boom in the early part of the decade. Surging commodity prices are likely to be a key factor driving the turnaround in intentions. Non-mining investment is projected to rise by 9.2% over the year, with services up by 9.6% and manufacturing lifting by a more modest 6.5%.   

On the surface these details are upbeat, but it should be noted that the early estimates are not always accurate guides for actual investment. That seems particularly relevant here, as firms were reporting to the ABS during April and May which coincided with the lead up to the recent federal election. Due to the inherent uncertainties, firms may have been delaying investment plans until the result was known. 

CapEx — Q1 | Insights 

This update was disappointingly weak for Q1 and is another indication that GDP growth is likely to ease further following the sharp slowdown recorded over the second half of last year. The Reserve Bank of Australia is optimistic in its outlook for business investment and expects it to help support economic growth over the next couple of years. The detail from the intentions for 2019/20 appear constructive to that view, though given the uncertainty associated with the federal election it may be best to wait for Q2's update to gain a clearer understanding. 

Preview: CapEx Q1

The ABS is scheduled to release its capital expenditure (capex) survey for the March quarter at 11:30am (AEST) today. The capex survey provides a partial estimate of business investment activity over the quarter, as well as firms' investment intentions for the next financial year. 

While today's update is expected to be relatively subdued, the outlook for business investment is constructive and should support economic activity over the next couple of years. Investment from the non-mining sectors of the economy is expected to lead the way, supported by a solid pipeline of infrastructure projects and building work. Meanwhile, indications are that mining sector investment is nearing its trough after several years of decline following the wind down from the construction-led boom in the early part of the decade. Surging commodity prices are likely to firm expectations that mining sector investment will finally begin to rise from 2019/20.   

As it stands Capital Expenditure

Capex lifted by a stronger-than-expected 2.0% in Q4 to $30.1bn (market forecast was +1.0%). That was led by a 3.2% increase in spending on buildings and structures to $16.1bn, while equipment, plant and machinery recorded a modest rise of 0.7% to $14.0bn.

By sector, non-mining capex posted a 4.5% rise in Q4 -- its strongest quarterly percentage gain since Q3 2014 -- to $22.2bn. This was driven entirely by a 5.6% increase in investment from the services industries to $19.8bn, as manufacturing declined by 4.4% to $2.3bn. Mining sector capex continued to weigh on overall business investment after falling by a further 4.3% to $7.9bn.   

The intentions component showed the 5th estimate for capex in 2018/19 was $118.4bn, representing a 3.6% increase on the same estimate from a year earlier. This was the strongest year-to-year increase for the 5th estimate since 2011/12. Through the year, non-mining investment was projected to rise by 8.5%, moderated by a 6.8% decline from the mining sector. 

Estimate 1 for investment intentions in 2019/20 was nominated by firms at $92.1bn, which was the highest level since 2015/16 and 11% above the 1st estimate put forward for 2018/19. Notably, mining sector capex was forecast to rise (+21.4%) for the first time since 2012/13. The non-mining sector was expected to provide a more modest increase (+6.6%).  


Market expectations | Capital Expenditure

In today's survey, markets forecast capex to rise by 0.5% in Q1. The investment intentions component in Q1's survey are based 
on data compiled by the ABS during April and May and will include the 6th estimate of capex for the current financial year (incorporating 9 months of actual expenditure and 3 months of forecast investment) and the 2nd estimate of expected capex for the full 2019/20 financial year.  

Markets tend focus more on the investment intentions component in this release and will be closely watching the 2nd estimate for 2019/20, which according to Bloomberg is forecast to come in at $96.0bn. That outcome would represent a 4.2% upgrade from estimate 1 at $92.1bn and a rise of 9.2% on estimate 2 from a year earlier. Meanwhile, the 6th estimate for 2018/19 is likely to firm to around $120.0bn. 

What to watch | Capital Expenditure

The capex survey provides a lead towards next week's GDP growth figures for Q1, with these data covering a little over half of total business investment. In particular, watch for the outcome from capex on e
quipment, plant and machinery in Q1, as this provides us with the best indication of the contribution this component will make to overall business investment in the quarter.

For investment intentions, watch out for the 2nd estimate of capex for 2019/20. While noting that the early estimates do not always turn out to be an accurate guide for future investment activity, the 1st estimate for 2019/20 was seen as a robust result by markets. A miss on expectations today ($96.0bn) would clearly disappoint, particularly as it would be reasonable to expect a firmer result from the mining sector on the back of the recent surge in commodities prices. Another factor to consider is that today's report would have largely been compiled by the Bureau pre the result of the recent federal election, so it may be wise to wait for Q2's update for a clearer picture of firms' investment intentions.  

Friday, May 24, 2019

Macro (Re)view (24/5) | RBA to announce June rate cut

The Reserve Bank of Australia (RBA) is almost certain to deliver a rate cut at its June Board meeting, with an additional 25 basis points of easing fully priced in by the end of the year. The decision to remain on hold at 1.5% at May was finely balanced, with the minutes from the meeting released this week signaling the Board's shift to an easing bias, which was later confirmed by RBA Governor Philip Lowe following a speech in Brisbane.  

Both the minutes and Governor Lowe's speech conveyed that the risks to the domestic economy are to the downside given the headwinds from abroad posed by a slowdown in China and renewed trade tensions and a weaker consumer at home. It is also clear that the sharp slowing in inflation in Q1 (reviewed here) surprised the Bank. For some time the RBA has been buoyed by robust labour market conditions, expecting that spare capacity would gradually be eroded, in turn generating faster wages growth to drive inflation back to target. However, with the headwinds strengthening and with inflation stuck below target since Q1 2016, the recent signs from April's labour market data that conditions are softening (see herewill seal the case for the Board to make its move in June.   

During his speech, Governor Lowe highlighted that Australia can now sustain an unemployment rate below its historical estimate of around 5% without generating capacity and inflationary concerns. To achieve that outcome, the Bank's strategy will be to lower the cash rate, which according to markets will fall to 1.0% by end 2019, to spur on employment growth and drive and earlier return of inflation back to target. Importantly, though, Governor Lowe pointed out that "relying on just one type of policy has limitations" and called for increased fiscal support and structural policies targeted at boosting the nation's productive capacity. 

On that front, the re-elected Coalition government will set its sights on implementing its tax relief measures from April's Budget (see here), though the full scale of its planned increase to the low and middle-income tax offset will be delayed until the new parliament can be convened. Also this week, banking regulator APRA announced a proposal to lower its long-standing serviceability requirement for home loan assessments from a minimum of at least 7.0% to buffer of 2.5% above the prevailing interest rate (see here). The proposal is intended to address concerns around overly restrictive lending criteria amid the ongoing correction in the housing market and will now go through a consultation phase ending mid next month before a final decision is reached shortly thereafter.

Data this week showed construction activity slid by 1.9% in Q1 (reviewed here), with activity in the residential sector continuing to deteriorate (see chart below), while public infrastructure work was also surprisingly weak. In better news, the Commonwealth Bank IHS Markit Composite Purchasing Managers' Index showed activity by the nation's business sector expanded in May to a reading of 52.2 in May — its first expansionary result in 4 months — driven mostly by the services sector with modest support from manufacturing. With uncertainty over the outcome of the federal election consigned to the past and stimulus to come from rate cuts and tax relief, this may have further to run. 

Chart of the week

— — 

Politics and central banks led the headlines offshore this week, while US-China trade tensions continued to escalate hitting tech firms in both countries. Starting in the US, the minutes from the Federal Reserve's meeting from April and May were released showing that the Committee anticipated that their patient approach to monetary policy settings "would likely remain appropriate for some time". That stands in direct contrast to expectations in financial markets for two rate cuts over the next 12 months, in part prompted by slowing inflation, however in the Committee's view that is likely to prove "transitory". While economic growth was expected to moderate from Q1's strong 3.2% pace, the outlook is still constructive given the household sector is robust due to a strong labour market, increasing wages growth and positive sentiment. Committee members' views around business investment were decidedly mixed; easier financial conditions were supportive but concerns around trade and slower global growth were likely to be dampening sentiment. Overall, the Committee remains optimistic but notes that uncertainty around the global growth outlook, geopolitical and trade developments combined with subdued inflation warranted its patient policy approach. 

In Europe, the account of the European Central Bank's policy meeting in early April showed that the Governing Council acknowledged the loss of momentum in economic growth evident over the second half of 2018 had continued into the new year. Activity was expected to pick-up later on in 2019, albeit with risks to the downside due to trade and geopolitical uncertainty from abroad. Those concerns are somewhat moderated by a strengthening labour market and rising wages growth, which was expected to gradually drive the inflationary pulse. Though details of the upcoming TLTRO-III (a source of cheap funding to the banking sector) are yet to be finalised, April's account showed a general agreement that pricing should reflect underlying economic conditions as well as the effectiveness of transmission into the real economy.

Over in the UK, after a tumultuous week and following the loss of the support of key Conservatives, PM Theresa May announced her resignation effective on June 7. The announcement came amid the European Parliamentary elections, where in the UK the Nigel Farage-led Brexit Party (campaigning for a no-deal Brexit) is expected to come out on top according to the polls. 

Tuesday, May 21, 2019

Australian construction activity slides in Q1

Australian construction activity declined for the third consecutive quarter in Q1, driven by a weakening residential sector, while public sector infrastructure work appears to have softened for the time being, though a strong pipeline of projects will continue to support output in the domestic economy. 

Construction Work Done — Q1 | By the numbers

  • The total value of construction work done fell by 1.9% in Q1 to $50.788bn, with the market forecasting a flat (0.0%) outcome. Q4's initially reported fall of 3.1% was revised down to -2.1%.  
  • Across the categories in Q1;
    • residential work fell by -2.5% to $18.732bn (-3.2%Y/Y)
    • non-residential work lifted by 3.6% to $11.103bn (+3.1%Y/Y)
    • engineering work declined by -3.9% to $20.953bn (-12.4%Y/Y)  

Construction Work Done — Q1 | The details 

The 1.9% slide in activity in Q1 reflected weakness in residential construction and in infrastructure work in both the public and private sectors. Construction work in the private sector fell by 1.3% over the quarter to $39.308bn (-4.8%Y/Y), while public sector activity declined by 3.7% in Q1 to $11.48bn (-10.0%Y/Y).

Starting with the private sector, building work (including residential and non-residential construction) lifted by 0.5% in Q1 to $26.683bn (-1.4%Y/Y). Within this, residential work contracted by 2.4% to $18.524bn in Q1, as annual growth turned negative (-2.9% from +3.8%). This was driven by weakness from 'new' construction (-2.2%q/q, -2.9%Y/Y) and from alterations (-3.6%q/q, -3.0%Y/Y).    

In better news, non-residential construction (offices, warehouses etc) picked-up by 7.8% in the quarter to $8.159bn to be +2.4% through the year. This appears consistent with the improving capital expenditure data and rising investment intentions from businesses. 

Private sector engineering work declined by 5.0% in Q1 to $12.625bn (-11.2%Y/Y) around a softening trend over recent quarters. 

Turning to the public sector, engineering work declined by 2.2% to $8.328bn for the quarter. Surprisingly, activity has contracted for 3 consecutive quarters now, with the annual pace decelerated to -14.1% from -6.1%. Overall, though, the strong pipeline of public infrastructure projects is likely to see this period of softness pass. Public sector building work fell by 7.4% in Q1 to $3.152 that mostly reversed last quarter's gain but is still positive in through-the-year terms (+2.8%Y/Y).

The state-based detail is provided in the table, below, inclusive of both private and public sector activity. The slowing in residential work has been broad-based across the states since the second half of 2018 and has further to run. Non-residential work is being supported mostly by rising investment in the two largest states of New South Wales and Victoria, with strength also in Tasmania, but the other states have been weak. Engineering work showed broad-based weakness, with Western Australia impacted by the completion of major resources projects.   

Construction Work Done — Q1 | Insights

Today's report showed that the weakening in residential construction continued in Q1 and  can be expected to remain that way throughout 2019 weighing on national economic growth. Though public infrastructure work has slowed recently, it is still likely to be a key support going forward. Non-residential work has picked-up and investment intentions from the capital expenditure survey are on the rise — including in the mining sector, which may now firm given the strength in commodities prices. 

Friday, May 17, 2019

Macro (Re)view (17/5) | RBA closer to easing

Despite Saturday's upcoming federal election, the focus of local markets continued to remain firmly on the Reserve Bank of Australia's (RBA) policy outlook as prospects for a rate cut firmed, possibly by as early as June. Last week's Board meeting and subsequent quarterly statement were clear in identifying labour market developments as the key focus for the Bank. In that context, there were two instructive data points released this week — April's Labour Force Survey and Q1's Wage Price Index report. 

April's labour force report contained mixed detail as employment growth strengthened while the unemployment rate and broader measures of excess capacity increased (read our full review here). After a solid Q1, employment increased by a net 28,400 in April — near twice the market forecast for +15,000. That outturn strengthened the pace of employment growth through the year to 2.6% (net rise of 322,900) from around 2.2% at the end of 2018. However, as per our chart of the week (below), the unemployment rate lifted to 5.2% from an upwardly revised 5.1%, due to the participation rate rising to a new record high of 65.8%. A lift in the unemployment rate in that situation is not a negative per se, but a rise in the underemployment rate to 8.5% (+0.3ppt) and underutilisation rate to 13.7% (+0.4ppt) suggests that conditions are softer than required.  

Consistent with that assessment, growth in the Wage Price Index remained subdued at 0.5% in Q1 (expected +0.6%) and 2.3% through the year (read our review here). Wage inflation is trending higher but the progress remains gradual and arguably slower than expected considering the strength in the labour market over the past couple of years.

Remaining with the labour market theme, this week's NAB Business Survey for April was notable in that the employment index reading fell to -1, which was its first negative result since late 2016. According to NAB economists, that indicates employment growth is likely to slow to around 14,000 per month if that result is confirmed in upcoming reads. More broadly, business confidence ticked up to a reading of 0 but remains well below average, while business conditions softened (from +7 to +3) having turned down noticeably over the past year. 

Meanwhile, households remain slightly optimistic according to Westpac-Melbourne Institute's Index of Consumer Sentiment following a 0.6% month-to-month rise to 101.3 in May. The headline reading has come in above the 100-line that separates optimists and pessimists in 10 of the past 12 surveys. The main contribution to the rise came from a surge in the 'family finances vs a year ago' index (+6.3%), which according to Westpac likely reflects the benefit of consumers having more time to assess the details from April's Federal Budget that had been favourably received. Increased media coverage firming consumers' expectations for an RBA rate cut may also be supporting. After rising in April, sentiment towards house price expectations and purchasing a property declined in May, with the latter still below average indicating that affordability is a lingering constraint notwithstanding the ongoing correction. Unsurprisingly then, data out this week for March showed that housing finance approvals and commitments resumed their slide to -13.8% and -18.4% respectively in through-the-year terms (for our full review see here). 

— — 

US-China trade tensions continued to dominate the focus of global markets this week, remaining highly sensitive to tweets from US President Trump and news headlines. Last Friday, the US confirmed a tariff increase from 10% to 25% on a $200bn tranche of Chinese imports. In response, China had vowed to "take necessary countermeasures" and those details were announced during the week, with tariff increases ranging from 5% to 25% to be applied to $60bn of US imports taking effect from 1 June. With the ball back in the US' court, a public hearing is due to take place on June 17 regarding a further $300bn tranche of imports from China that could be subject to a tariff of up to 25% from early July. Any substantive progress towards a resolution appears unlikely until Osaka's G20 Summit in late June, with indications that President Trump and President Xi are set to meet. In more optimistic news, a decision regarding the US imposing tariffs on auto imports from Europe and Japan has been delayed by up to 6 months according to media reports. 

The re-escalation in trade tensions is a clear headwind to the global growth outlook as it was across the second half of last year, though markets had clearly expected those concerns to abate in 2019. The prevailing sentiment is that the impact will be felt more by China than the US, mainly because China's exports to the US account for a much larger share of its economy compared to the reverse situation. Markets will look to the high-frequency data for confirmation of that view and that was forthcoming this week as industrial production in April slowed to 5.4% from 8.5% in annual terms, fixed asset investment from businesses eased to 6.1% on a year-to-date basis and retail sales faltered to 7.2% through the year  its slowest pace in nearly 16 years. 

Over to Europe where the data flow pointed to a stabilisation after activity lost momentum over the second half last year. The 2nd estimate of GDP growth in Q1 was unchanged at 0.4% in the quarter and 1.2% through the year and employment growth also matched expectations at 0.3% in Q1 and 1.3% on the year. Meanwhile, inflation on a headline basis lifted slightly to 1.3% year-on-year to April, while the core measure remained steady at 1.7%. Finally, Brexit developments came back onto the radar late in the week, with cross-party talks between the Conservatives and the Opposition breaking down. PM May's draft Brexit deal is due to return to the parliament in early June, with prospects for gaining support having clearly lengthened.

Wednesday, May 15, 2019

Australia's unemployment rate rises to 5.2%; employment growth strengthens

Australia's labour force report for April contained both positives and negatives. While momentum in terms of employment growth remains robust, unemployment and broader measures of excess capacity drifted up.  

Labour Force Survey — April | By the numbers
  • Employment increased by a net 28,400 in seasonally adjusted terms; a vast outperformance relative to the 15,000 increase forecast by markets. March's initially reported gain of 25,700 was upwardly revised to 27,700.  
  • The nation's headline unemployment rate increased to 5.2% from an upwardly revised 5.1% in March (from 5.0%), with the market forecasting a 5.0% outcome.
  • The underutilisation rate deteriorated by 0.4ppt after allowing for revisions to 13.7%, and the underemployment rate increased by 0.3ppt to 8.5%. 
  • The participation rate lifted by 0.1ppt to a record-high 65.8% (exp: 65.7%).
  • Aggregate hours worked increased by 0.1% in the month (prior rev +0.8%) to 1.79bn hours, with annual growth easing back to 1.9% from 3.0%.

Labour Force Survey — April | The details 

To the underlying metrics, the national unemployment rate lifted from 5.07% to 5.20% to mark a 0.26ppt deterioration since reaching its low (4.94%) in February. However, participation increased by 0.1ppt in April to 65.8% after also rising by that amount in March. In absolute terms, the labour force increased by a robust 49,600 in April to outpace the net gain in employment of 28,400. As a result, the unemployed total increased by 21,200. The trend series data from the chart, immediately above, suggests that unemployment is beginning to drift up as participation remains in a firm uptrend. 

That means that the pace of employment growth is all important to absorb new entrants into the workforce, and the trend here is positive. Total employment growth on an annual basis lifted from 2.44% in the previous month to 2.58% in April and has strengthened from around 2.2% since the turn of the year. Annual full-time employment growth eased from 3.41% to 2.9% but is still robust (absolute change was -6,300) while the part-time pace increased from 0.38% to 1.89% (+34,700). *Click on charts to expand 

From the other perspective, pessimists can point to another deterioration in underemployment (counting those employed but wanting more hours) from 8.2% to 8.5%, having increased from 8.3% at the end of 2018, while underutilisation (unemployed + underemployed) lifted from 13.3% to 13.7% after ending 2018 at 13.3%. 

Aggregate hours worked increased by 0.1% in April to 1.79bn hours as annual growth slowed to 1.9% from 3.0%. Adjusting for the rise in employment, average hours worked per employee eased by 0.1% in the month to 139.5 hours to be -0.7% through the year. Caution is warranted in interpreting this result given the impact of public holidays from Easter and ANZAC Day during the month.

In a broad sense, the state data reflected the national result with employment growth looking to have remained solid amid a rise in unemployment. There was a deterioration in unemployment in New South Wales (from 4.3% to 4.5%) and Victoria (from 4.6% to 4.9%). There were also increases in South Australia (from 5.9% to 6.1%), Western Australia (from 6.0% to 6.1%) and Tasmania (from 6.7% to 6.8%). Queensland's unemployment rate, though, declined from 6.1% to 5.9%. 

Labour Force Survey — April | Insights

There were both positives and negatives in today's report. On the plus side, momentum in terms of employment growth is robust and has actually strengthened over 2019. Likewise, the ongoing rise in participation can be seen as favourable in terms of signaling confidence in the labour market. On the other hand, even with robust employment growth, there has been a rise in unemployment and in the broader measures of excess capacity (as per the chart, below). The forward-looking indicators are also pointing to softer employment growth, though that may not be evident in this series for a few months yet. That puts the RBA on track for a rate cut as per their recent guidance, which is likely to come by August.

Preview -- Labour Force Survey (April)

Australia's latest labour force update is due to be released by the ABS at 11:30am (AEST) today. In the decision statement following last week's Reserve Bank of Australia (RBA) Board meeting where the cash rate was left unchanged at 1.50%, Governor Philip Lowe made it clear that developments in the labour market would be the key consideration for the policy outlook in the months ahead.  

As it stands Labour Force Survey 

In March, employment increased by a net 25,700 printing well above the median forecast for a 15,000 gain. As expected, the national unemployment rate lifted from 4.9% to 5.0%, reflecting a 0.1ppt increase in workforce participation to 65.7%. Both underemployment (from 8.1% to 8.2%) and underutilisation (from 13.0% to 13.2%) deteriorated slightly over the month. Lastly, total hours worked increased by 0.7% in the month and annual growth accelerated from 2.2% to 3.0%. For full details see March's review here.  

After a solid showing in 2018, the labour market remained robust over Q1 as employment increased by 71,000. As a result, annual employment growth increased to 2.4% from 2.2% in Q4, with Q1's outturn contributing 0.6ppt to the annual rate.

Market expectations Labour Force Survey 

Today, the median forecast according to Bloomberg Australia is for employment to rise by a net 15,000 in April around a wide range from 1,000 to 29,000. The national unemployment rate is anticipated to hold at 5.0%, with estimates ranging between 4.9% and 5.1%. The workforce participation rate is seen remaining at 65.7% on a median basis between estimates from 65.5% to 65.8%.    

What to watch Labour Force Survey

The second last line of the Governor's May decision statement noted "...there was still spare capacity in the economy and that a further improvement in the labour market was likely to be needed for inflation to be consistent with the target". With that being the case, look out for any deterioration in the unemployment rate and the in the broader measures of labour market slack including the underemployment and underutilisation in today's report. That scenario would follow on from increases in the previous month and take the Bank closer to its threshold for a rate cut.