Preview: Construction work done Q2

Details of the impact of the COVID-19 pandemic on Australian construction activity come to hand at 11:30am (AEST) when the ABS is due to release its update for the June quarter. Ahead of the onset of the pandemic, the nation's construction cycle had entered a downturn with activity in the residential sector continuing to unwind from elevated levels, non-residential work slowing and major projects in the resources sector nearing completion. The disruption from the onset of the pandemic appeared to be relatively minor in the March quarter but is expected to be much more accentuated in today's update.   

As it stands | Construction Work Done

Australian construction activity has contracted in 6 of the past 7 quarters, with the most recent being the 1.0% decline that came through in the March quarter, taking it to 6.5% lower through the year (see here). The downturn in the residential construction cycle, the wind down in mining sector investment have been the key factors, while non-residential work has weakened more recently.   

Private sector construction work fell for a 5th straight quarter declining by 0.6% in Q1 for a year-on-year contraction of 8.7%. The downturn in residential construction that started from in the second half of 2018 continued as work done pulled back by a further 1.6% (-12.4%yr). Non-residential work lifted by 0.5% in Q1 but is trending lower (-2.2%yr) around a volatile profile over recent quarters, matching the slowdown in the approvals data. Engineering activity was stable in Q1 (0.2%) but fell by 7.3% over the year as major projects in the resources sector were completed. Public sector construction activity also declined in the March quarter (-2.5%), slowing the pace in annual terms to 1.1% from 2.0%. Both engineering (-3.0%) and building work (-1.4%) contributed to Q1's soft outcome. 

Market expectations | Construction Work Done 

The median estimate according to Bloomberg is for construction activity to fall by 5.8% in the June quarter, with individual estimates ranging from -3.4% to -11.7%.  

What to watch | Construction Work Done

A heavy decline will be reported in headline construction activity reflecting the disruption caused by the pandemic. The underlying detail will convey a deeper story around the impact of a weak economy and an uncertain outlook, with residential construction and non-residential work likely to be temporarily delayed or shelved altogether. There is likely to be some offset though, with mining sector investment picking up after several years of decline and governments looking to fast track infrastructure projects.  

Macro (Re)view (21/8) | Fed keeps markets guessing

The main development in global markets over the past week came in the US as the minutes from Federal Reserve's policy-setting committee's meeting in July were published. At that meeting late last month, as expected, the FOMC left its policy stance unchanged, but the key interest was around the committee's discussion regarding its currently-underway monetary policy framework review. The Fed has since confirmed that committee chair Jerome Powell will be discussing the review during a speech at next Thursday's Jackson Hole Symposium. However, in the interim, markets were left guessing as to the outcome after the July minutes proved to be less insightful than they might have been. 

The Fed's long-running review has been in progress since late 2018 and has been looking into how the central bank can best use its tools and communicative strategies to meet its employment and inflation objectives in a world of structurally lower interest rates. The onset of the pandemic has only accentuated the importance of the review given the Fed's shift to ultra-loose policy settings. It has been widely touted that the Fed will shift to an average inflation-targeting regime in which it will take into consideration earlier periods of low inflation and thus allow it to tolerate periods of overshoot of its 2% inflation objective. Such a shift would pave the way for the existing monetary policy stance to be left in place for longer, or perhaps eased further, providing a more extended period of accommodation to both financial conditions and the recovery of the US economy. The July minutes also showed detailed consideration of options to provide more explicit forward guidance to markets in terms of the economic outcomes that would need to be achieved before rates would start to be increased, or alternatively, it could turn to a calendar-based approach where it would pledge to not lift rates before a specified period of time had elapsed. Another option that has come under consideration has been yield curve control, similar to the approach used by the Reserve Bank of Australia, though the July minutes suggest this is out of favour with the FOMC.

On conditions within the US economy, the FOMC remains firmly of the view that the path of the virus is the key factor in determining the sustainability of the recovery. In the near term, the pandemic was assessed to be weighing heavily on economic activity and employment and was leading to disinflationary pressures overall with the hit to demand outweighing price rises stemming from supply-side disruptions. Given that there had been signs of a slowdown within higher-frequency indicators such as credit card spending and mobility data recently, the FOMC saw risks that the medium-term outlook for the domestic economy could weaken. However, that slowdown is yet to show up in the more conventional data which remains robust. According to Markit's flash Purchasing Managers' Index (PMI) readings for August, momentum in the US economy was picking up as activity on a composite basis advanced to 54.7 from 50.3 (readings > 50 indicate expansion) — its fastest pace of growth in 18 months. The services sector led the improvement with activity firming to 54.8 from a steady outcome in July, while the manufacturing sector also saw a faster pace of expansion to 53.6 from 50.9 as output and new orders picked up. Meanwhile, existing-home sales surged at a record pace in rising by 24.7%m/m in July with low rates and pent up demand driving a rebound in the housing market. 

Over in Europe this week, the account of the mid-July meeting by the Governing Council of the European Central Bank highlighted caution around the economic outlook and was wary of the rebound being reported in the data through the initial phase of the reopening not being sustained. Evidence of this was seen in August's preliminary Markit PMI readings for the euro area, with activity on a composite basis falling from 54.4 to 51.6, suggesting that the pace of the recovery was moderating. A return of virus-related concerns saw activity in the services sector pullback from 54.7 to 50.1, though the manufacturing sector showed resilience with activity essentially unchanged on the month prior. The other key aspect within the July account was the argument from some members that the €1,350bn envelope of its Pandemic Emergency Purchase Programme "should be considered a ceiling rather than a target". However, the prevailing consensus of the Governing Council is that the envelope will be used in full to support the transmission of the ECB's monetary policy stance across the continent and to address risks to its inflation objective. On inflation, CPI in the euro area was little changed in rising by 0.1ppt to a 0.4% pace through the year to July, with higher energy prices post shutdown helping to lift it off the low point reached back in May (see chart, below). The UK also reported its latest inflation outcomes for July this week, with the headline CPI advancing above consensus in rising from 0.8% to 1.1%Y/Y driven by increased prices for petrol and clothing. The uptick in inflation in the euro area and in the UK follows a stronger-than-expected CPI print in the US last week (1.0%Y/Y) but is more likely to reflect volatility in the data as these economies reopen rather than the building of price pressures, though constraints on supply amid ongoing restrictions could be a factor.   

Chart of the week 

In a relatively quiet week on the domestic front, the minutes from the RBA's August board meeting reiterated the message from the recent Statement on Monetary Policy and parliamentary testimony that the outlook for the Australian economy had been set back by the reversal of Victoria's reopening, while the indirect effects to confidence were seen to be contributing to a slowing in the recovery more broadly through a loss of momentum in the mobility indicators. While policy settings were left unchanged in August, the board has not ruled out adjusting its current stance and the options discussed during last week's parliamentary testimony included a further reduction in the cash rate to a still-positive level and more bond purchases. In a limited data flow this week, the strains of the virus outbreak in Victoria were starting to become evident as the August flash estimate of the CBA composite PMI rolled over into contraction at a reading of 48.8 from 57.8 in the month prior. The slowdown in the recovery was felt acutely by the services sector as activity pulled back to 48.1 from an expansionary read of 58.2 in July, with weakness coming through in firms' order books and the pace of employment declines lifted as a result of the impact of the shutdown in Victoria. Conditions in the manufacturing sector remained resilient, with August's reading of 53.9 little changed over the month. The ABS's preliminary estimate of retail sales in July also reported signs of divergence with a strong result coming through at the national level of 3.3%m/m against a 2.0% decline in Victoria in response to the impact of the stage 3 restrictions. After surging by 16.9% during the national reopening in May, retail spending has continued to be well supported driven by the Federal Government's income support measures, loan deferrals, early access to superannuation and by shifts in consumption patterns away from areas such as travel and recreation to more home-based spending.

Macro (Re)view (14/8) | Recovery continues but remains fragile

There was both upside and downside news on Australia's economic recovery this week, which speaks to the RBA's anticipation for it to "uneven and bumpy" and likely to be more protracted than previously expected. On the upside, the rebound in the nation's labour market that started in June as the economy reopened continued into July, albeit ahead of the impact of the reversal of Victoria's reopening in early August. The easing of restrictions in line with the Federal Government's 3-stage reopening plan led to 228.4k jobs coming back to the economy in June (revised up from 210.8k) and in July a further 114.7k jobs were recovered in a result that was well above the median estimate for a 30.0k increase (see here). The underlying detail was better balanced in July with the job gains spread across both part-time (+71.2k) and full-time employment (+43.5k) than in the month prior where the increase came entirely from the part-time segment (+252.0k) as full-time work fell further (-23.6k). Through June and July, the reopening has seen around 39% of the jobs that were lost through the shutdown being returned to the economy. Hours worked also added to the 4.2% rebound that came through in June with a further 1.3% lift in July. In terms of where the situation stands in the recovery, employment is 4.1% below its pre-pandemic level while hours worked are around 5.5% lower (see chart, below) 

Chart of the week 

Against expectations, the national headline unemployment rate lifted only slightly to 7.5% despite a strong uptick in the participation rate from 64.1% to 64.7%, which is now well off the low in May of 62.7%. However, the extent of spare capacity in the labour market is better reflected by the extremely elevated levels of underemployment (11.2%) and underutilisation (18.7%), though both improved in July. The impact of the sharp rise in spare capacity brought on by the onset of the pandemic was reflected by a downside result in the pace of wages growth to a record low in the June quarter (see here). Annual growth in the headline Wage Price Index slowed from 2.2% to 1.8% (consensus was 1.9%), with an even sharper slowdown hitting the private sector at 1.7%Y/Y from 2.2%Y/Y. The slowdown in wages growth started from the second half of 2019, which was then intensified and broadened to industries across the economy by the effects of the pandemic. Given the severity of the shock to the labour market, the RBA anticipates that wages growth will slow further and remain lower for longer than previously expected. 

The rebound in the labour market through June and July showed the capacity for activity to return to the economy if the virus can be contained. However, the opposite is also true, not only in the case of Victoria after being placed back into shutdown but also more broadly across the nation through the confidence channel and this was highlighted by the sharp 9.5% decline in the Westpac-Melbourne Institute of Consumer Sentiment Index to a reading of 79.5 in August. The return of virus concerns has seen the index rollover to be just 5.1% above April's record low after it had lifted to as high as 24% above the trough in June. While confidence in Victoria understandably weakened (-8.1%), the surprise was that confidence in New South Wales is at a weaker level after falling by 15.5% despite not being in shutdown. The broader sense of nervousness was also seen with noticeable declines in Queensland (-8.1%) and South Australia (-5.8%). The other striking aspects of the report were a deterioration in consumers' economic outlook on both a 12-month (-19.2%) and 5-year (-8.7%) horizon, while expectations around unemployment are now more elevated than at any stage of the pandemic with households appearing to be coming to the view that its impacts will be longer-lasting than earlier thought and this underscores the fragility of this recovery. Also fragile is business confidence after falling to a reading of -14 from 0 in NAB's Business Survey for June, and this is likely to worsen materially in July to reflect the Victorian shutdown. 

At Friday's appearance by senior officials of the RBA to the House of Representatives Standing Committee on Economics, Governor Philip Lowe outlined that the impact of the Victorian shutdown will be significant to the domestic economy and is expected to take at least 2 percentage points off national GDP in Q3. With Governor Lowe reiterating that the current policy stance is working effectively, the RBA does appear reluctant to do any more at this stage, though its bond-buying did step up by $4bn this week having been restarted recently. While Governor Lowe emphasised the importance of fiscal policy in supporting the economy, the door is still ajar for further monetary easing with the potential options mentioned including a lower cash rate, a separate bond-buying program more directed at lowering yields at the longer end of the curve and changes to the specifications of the Term Funding Facility. 

— — —

In events offshore, negotiations in the US over the next fiscal plan remained frustrated by ongoing disagreement between both sides of the aisle, with the Republicans proposing $1tn in support as the Democrats continue to push for a $3tn package. Also in focus is bilateral relations between the US and China, with meetings to take place over the weekend to review progress on the implementation of the Phase One trade deal. Notable this week was the move higher in US Treasury yields as record issuance of 10-year and 30-year bonds came onto the market. Perhaps the move reflected unease given that the size of the Federal Reserve's balance sheet has remained broadly stable over recent weeks, or maybe there was some fundamental basis behind the lift after inflation data for the month of July came in stronger than expected. Annual growth in headline CPI strengthened well above consensus (of 0.7%) in rising from 0.6% to 1.0% driven in the main by higher gasoline prices. Core CPI, which excludes the impact of energy and food prices, also surprised to the upside rising to 1.6% through the year from 1.2%, whereas it was forecast to soften to 1.1%, with medical costs the main contributor. Following on from the outperformance in last week's non-farm payrolls report for July, the latest data on the labour market provided further positive signs. Initial jobless claims in the week through to August 8 came in at their lowest level since the onset of the pandemic at 963k beating the median estimate of 1,110k, while continuing jobless claims also came down by more than expected to 15,486k from 16,090k. Meanwhile, the level of US retail sales has rebounded to be above where they were pre-pandemic after turnover lifted by a slower-than-expected 1.2% in July. Whether that can be sustained with the enhancements to unemployment insurance now expired and with the delays in Washington on the terms of the next fiscal support package remains to be seen.     

Over in Europe, the second estimate of GDP in Q2 was unchanged showing a 12.1% contraction, driving the decline in through the year terms from -3.1% to -15.0%. The emergence of the pandemic leading to stringent shutdowns hit Spain the hardest as its economy contracted by 18.5% in Q2, while a surge in virus cases back in March led to a 12.4% decline in GDP in Italy. Germany, the bloc's largest economy, fared slightly better but still contracted by 10.1% in the quarter. The labour market sustained significant damage through the June quarter as employment declined by a record 2.8% to be down by 2.9% over the year. As severe as Q2's decline in GDP in Europe was, a more protracted shutdown in the UK led to that economy posting an even steeper contraction of 20.4% quarter on quarter. With spending constrained by the shutdown, household consumption plunged by 23.1% in the quarter, while the stress placed on firms' cash flow amid an extremely uncertain climate saw business investment collapse by 31.4%q/q. The monthly estimates showed the economic contraction was at its most severe in April (-20.0%m/m), but the gradual easing of restrictions led to the initial phase of the rebound coming through by the end of the quarter with the June estimate for GDP up by 8.7%m/m. Paradoxically, despite the UK experiencing a historic economic contraction, its measured unemployment rate for the 3 months through to June was unchanged at 3.9%. Explaining that situation is the effect of the UK Government's furlough scheme that has been keeping workers attached to their employers, though with that due to be wound up by the end of October the extent of the dislocation to the labour market will not be known for some time. Lastly, amid an unnerving return of virus cases in New Zealand, the RBNZ added more policy support this week by expanding and lengthening its asset purchase program and also keeping the option of moving to negative rates on the table.  

Australian employment +114.7k in July; unemployment rate 7.5%

The recovery in Australia's labour market continued into July following the rebound that started in the month prior as the economy started to reopen. In a stronger-than-expected report, a further 115k jobs came back in July adding to the 228k jobs that were restored in June, with around 39% of the jobs that were lost through the national shutdown having been recovered. The unemployment rate also showed a much more muted rise than forecast to 7.5%. However, today's report comes ahead of the impact of the reversal of Victoria's reopening that will set back the overall recovery in the labour market.      

Labour Force Survey — July | By the numbers

• Employment on net lifted by 114.7k in July (seasonally adjusted); well ahead of the median estimate for a 30.0k rise. Employment in June was revised to show a larger gain of 228.4k from the 210.8k reported initially. 

• Headline unemployment increased from 7.45% to 7.49% in July; lower than the 7.8% level expected by markets. Underemployment declined by 0.46ppt to 11.22% and underutilisation came down by 0.41ppt to 18.72%. 

• The participation rate advanced by 0.6ppt to 64.66% to be up by 2ppts from the low in May.

• Aggregate hours worked were up by a further 1.3% in July to 1.68bn hours after rebounding by 4.2% in June, though that still leaves the level down by 5.5% pre-pandemic. 

Labour Force Survey — July | The details

With Australia's reopening on track through June into July, the labour market made a solid start to its recovery. Following the return of 228.4k jobs in June, a further 114.7k jobs were restored in July. Taken together, the initial phase of the reopening was able to claw back 343.1k (or around 39%) of the 871.5k jobs that were lost ahead of and during the shutdown through April and May. A better compositional mix came through in July with part-time employment rising by 71.2k and full-time jobs up by 43.5k, whereas in June this was lopsided with part-time up 252.0k and full-time falling 23.6k. Still, the damage done has been hugely significant with part-time employment down by 210.5k and full-time work lower by 317.9k from their pre-pandemic levels.    

With the reopening allowing jobs to come back to the economy, hours worked have risen by 5.5% off the low point that came in May. However, there is still a long way to go because the shutdown saw hours worked contract by 10.4% between March and May. Even after the improvements in June (+4.2%) and July (+1.3%), total hours worked are still down by 5.5% from their pre-pandemic level. 

The boost in hours worked generated by the reopening has helped to lower Australia's rates of underemployment and underutilisation from their April peaks to 11.2% and 18.7% respectively. The ABS also reported a fall in the number of Australians working zero hours due to economic reasons in July to 165.8k from 232.1k in the month prior, though around 120.0k of those who worked zero hours in June moved to not being employed this month (note these workers do not necessarily become classified as unemployed). The unemployment rate was contained at around 7.5%, which was a better-than-expected result considering the level of workforce participation lifted sharply to around 64.7% reflecting the return of some mutual obligation requirements linked with the JobSeeker support payment. However, the unemployment rate still understates the scale of the dislocation as the chart below shows and is also being held down by the Federal Government's JobKeeper policy.   

The state employment outcomes are shown in the next chart. After seeing the largest hit from the shutdown, New South Wales has led on the way back to drive the national recovery. Ahead of the reversal of its reopening, Victoria had only seen a modest rebound in employment of 52.4k after 198.1k jobs were lost between April and May.

Labour Force Survey — July | Insights

The positive in today's report was the confirmation that the rebound generated by the reopening in June was able to carry over into July as employment and hours worked added to their gains in the prior month. A lot has since changed post the reference period for the July survey with Victoria being placed back in shutdown after a surge in new virus cases. This will be a jolt the continuation of the national recovery, though the Federal Government has responded by extending its key fiscal measures and the RBA has recently restarted its bond purchases so significant policy support remains in place. 

Preview: Labour Force Survey July

Australia's monthly update on the labour market for July is due to be released by the ABS today at 11:30am (AEST). Having come through the initial dislocation of April and May coinciding with the national shutdown, the labour market saw a partial rebound in June as the domestic economy started to reopen. The ABS weekly payrolls data suggests the rebound in hiring continued into July, though today's report will to a large extent be viewed by markets as out of date as it comes ahead of the reversal of Victoria's reopening after Melbourne was placed into a stage 4 shutdown and regional areas went to stage 3 restrictions in early August. 

As it stands | Labour Force Survey

Australia's labour market collapsed through April and May with 871.5k jobs lost (comprising -533.7k part-time and -337.8k full-time). In June, the reopening led to 210.8k of these jobs being restored to the economy around an uneven mix as 249.0k part-time jobs came back but full-time employment continued to fall (-38.1k). 

The nationwide shutdown resulted in hours worked falling by around 10.4% over April and March, though the reopening generated a solid rebound of 4.0%m/m in June. That still left hours worked down 8.5% over Q2 and the overall level 6.8% below its pre-pandemic level in March. 

With the reopening leading to more Australians returning to the labour force, the participation rate lifted off its 20-year low of 62.7% to 64.0%. This contributed to a 0.3ppt increase in the national unemployment rate to 7.4% — its highest level since November 1998. Both the underemployment rate and underutilisation rate remain extremely elevated, though they did at least move lower to 19.1% and 11.7% respectively helped by the 4% rise in hours worked in June.

See the full review of the June report here

   

Market expectations | Labour Force Survey

Further improvement is expected to have come through in the labour market in July with the median forecast situated at +30.0k on the employment number. However, there remains an extraordinarily high degree of uncertainty around the outcome with individual estimates ranging between -120.0k and +150.0k. The unemployment rate is expected to be driven up to 7.8% (range: 7.3% to 8.2%) on increased labour force participation. 

What to watch | Labour Force Survey

With the reopening on track through the early part of July, it will be of interest to assess the momentum in employment and hours worked following on from the rebound that started in the month prior. Another area worth following is the participation rate that is likely to rise further, in part reflecting the reintroduction of the mutual obligation requirements linked to the JobSeeker support payments from early June. 

Australian Q2 Wage Price Index 0.2%;1.8%yr

The onset of the pandemic and the dislocation that resulted in the labour market saw the pace of Australian wages growth slide to record lows in the June quarter. Wages growth was already slowing ahead of the pandemic and is now likely to weaken further and remain there for longer given the severity of the shock to the economy.  

Wage Price Index — Q2 | By the numbers

• The headline WPI (total hourly rates of pay ex-bonuses) saw a softer-than-expected increase of just 0.2% in the June quarter (consensus was at +0.3%), which is its weakest quarterly outcome on record, after a 0.5% rise in Q1.
• Annual growth slid from 2.2% to a record low of 1.8%, below the median forecast for 1.9%. 

Wage Price Index — Q2 | The details 

The WPI is a measure of wage inflation tracking changes in hourly rates of pay for a fixed group of jobs. Factors that can impact the WPI include minimum wage settings, variations in awards, enterprise and workplace agreements and individual contracts, however it is not impacted by the Federal Government's JobKeeper (wage subsidy) policy as it falls outside its scope of measurement. The ABS advises that it will release separate indexes that capture that impact over the next month. 

Wages growth was expected to pullback in Q2 in response to the upheaval in the labour market as shutdowns and ongoing social distancing restrictions led to the loss of around 660k jobs and a contraction of around 8.5% in total hours worked in the three months to June. The pullback that occurred seems broadly in line with expectations, though the RBA held a more pessimistic forecast (1.75%Y/Y) than the market (1.9%Y/Y). The headline WPI lifted by 0.22% in Q2 as the pace through the year slowed to 1.82%, with both at record lows. There was a severe slowdown in private sector wages to 0.08% in Q2 (from 0.53% in Q1) as the annual pace rolled over to a record low of 1.68% from 2.15%. Public sector wages growth was unchanged on the quarter at 0.58%, as a base effect slowed to the annual pace to its weakest on record at 2.14% from 2.39%. 

The table below shows the changes across the sectors for the quarter and over the year. Several industries saw wage deflation in Q2 including 'other services' (-0.9%), professional, scientific and technical services (-0.45%), construction (-0.45%), while much more modest falls came through from accommodation and food services (-0.08%), wholesale trade (-0.08%) and rental, hiring and real estate services (-0.08%). In annual terms, wages growth in the construction industry slowed by 1ppt in Q2 to a record low of 0.76%.    

Compared to a year earlier, annual wages growth has pulled back across every measured industry in the domestic economy. A broad-based slowdown in wages growth was already underway ahead of the pandemic, with its onset now worsening that earlier dynamic. The slowdowns have been sharpest in 'other services' (from 2.44% to 1.07%), construction (from 1.86% to 0.76%), professional, scientific and technical services (from 2.36% to 1.31%) and health care and social assistance (from 3.27% to 2.43%). 

  

The details across the states are shown in the table below. Wages growth slowed in the June quarter in New South Wales, Victoria, Queensland and Western Australia and held steady in South Australia and Tasmania. The weakness was most notable in Victoria (-0.07%qtr) as wages growth in its private sector contracted by 0.22% in the quarter. Wages growth in New South Wales flatlined as the pace of private sector wages growth hit record lows.  

Wage Price Index — Q2 | Insights

With wages growth in the Australian economy already losing momentum ahead of the pandemic, its onset is likely to lock in a period of lower for longer wage inflation in response to the highly elevated level of capacity in the labour market. In last week's quarterly Statement on Monetary Policy, the RBA materially downgraded its outlook for wages growth slowing to around 1.25% by the end of the year and remaining at that level through 2021. 

Preview: Wage Price Index Q2

Australia's Wage Price Index for the June quarter is due to be released by the ABS at 11:30am (AEST) today. The COVID-19 pandemic upended the nation's labour market in Q2 with a net 660.7k jobs lost and hours worked contracted by around 8.5%. With spare capacity now at highly elevated levels, the outlook for wages growth has taken a material downgrade as per the RBA's August Statement on Monetary Policy and is now expected to go lower for longer.  

As it stands | Wage Price Index

The headline Wage Price Index (WPI) matched consensus in the March quarter coming in at 0.5%q/q for the 5th consecutive quarter (review here). This slowed the annual pace to 2.1% from 2.2%, its softest since Q2 2018. Private sector wages growth went nowhere at 0.5%q/q and 2.2%Y/Y, though in the public sector the quarterly pace lifted from 0.4% to 0.6% to drive annual growth higher from 2.2% to 2.4%. 

Ahead of the full disruption from the pandemic, the signs were evident that wages growth had already lost momentum, both at the index level and also on an industry-wide basis. By the end of the March quarter, annual growth in the WPI had pulled back to 2.1% from 2.3% a year earlier, while wages growth had also slowed in the majority of industries over the period. 

  

Market expectations | Wage Price Index

Estimates for today's figure on the quarterly WPI are split between -0.3% and +0.5%, which is an unusually wide range for this report reflecting the uncertainty of the situation. The consensus forecast is for the WPI to lift by 0.3% in Q2, which would see the annual pace easing back to its weakest levels in around 3 years at 1.9%.    

What to watch | Wage Price Index

The ABS has published a note discussing the impacts of the pandemic on these data (see here). Key to note is that the Federal Government's JobKeeper policy will not have any direct impact on the WPI as wage subsidies fall outside the scope of measurement of the index. The data provided by employers will be inclusive of JobKeeper payments, with the ABS then making the necessary adjustments to remove their impact on the WPI. To account for the impact of the JobKeeper payments (and other payroll tax changes), the ABS advises that it will be publishing two additional indexes in today's report; the Labour Price Index (wage costs inclusive of JobKeeper payments and payroll tax changes) and hourly income growth (including JobKeeper payments where relevant). 

Macro (Re)view (7/8) | RBA downgrades Australia's recovery

The Reserve Bank of Australia was at the centre of developments domestically this week. Firstly, as expected, at its August policy meeting, the Board maintained the cash rate and 3-year Commonwealth Bond yield targets at 0.25% (see here). Governor Philip Lowe's decision statement highlighted increased uncertainty around the nation's economic outlook, particularly with Victoria returning to a stringent state-wide shutdown, but the Board continued to assess that policy settings were calibrated effectively. The only surprise from the meeting was the announcement that the RBA would restart its bond purchases after a 3-month pause, resulting in $1.0bn of purchases of Australian Government Securities going through by week's end.

Highlighting the impact of the increase in uncertainty, the RBA's quarterly Statement on Monetary Policy (SoMP) conveyed a more pessimistic outlook for the domestic economy than anticipated back in May, due in part to the reversal of Victoria's reopening that is expected to subtract at least 2ppt from national GDP growth in the September quarter. August's SoMP outlined the impact on the domestic economy from the national shutdown between late-March to early May was less severe than had been anticipated, though a slower recovery was now expected with ongoing uncertainty a larger weight on investment in particular. The RBA still forecasts the contraction in the economy to be 6% through the year to 2020, but it now expects business investment to decline by 17%Y/Y (was -13% in May's SoMP) and residential construction activity to fall by 14% (from -13%), whereas the profile for household consumption was revised to show a smaller expected decline of -7% from -9% previously. The outlook in 2021 is seen to be less robust at 5%Y/Y from its previous forecast 6%, with the key change in that downgrade relating to slower growth in household consumption (at 6%Y/Y from 9%) due to more and prolonged weakness in the labour market. The timing of the increase to the peak in the unemployment rate at 10% has been pushed out by 6 months to the end of the second half of 2020 and is then expected to decline more slowly ending 2021 at 8.5%, which is 1ppt higher than its previous estimate. For 2022, the RBA has penciled in economic growth of 4%, which would mean a return to pre-pandemic levels of output will take around 2 years. For a more optimistic outlook to ensue, the RBA stressed the importance of containment of further virus outbreaks and improved confidence.

On the local data flow this week, retail sales outperformed consensus in rising by 2.7% in the month of June as the annual pace lifted to 8.5% from 5.8% (see here). The pandemic has induced enormous volatility into monthly retail sales, with the shutdown leading to a record fall of 17.7% in April ahead of a record increase of 16.9% in May on the reopening. Taken together, nominal retail sales declined by 2.3% over the June quarter and with price levels reported to have increased by 1.2% over the period, the overall volume of trade in the retail sector contracted by 3.4% in Q2 (see chart of the week, below). 

Chart of the week

  

In the housing market, price declines remained contained at 0.6% in July on a national basis according to CoreLogic's Home Value Index, while the easing of social distancing restrictions enabled housing finance commitments to rebound by 6.2% in June (see here). Meanwhile, the nation's monthly trade surplus widened to $8.2bn in June, though this missed the $8.8bn figure anticipated, as exports lifted by 3.5% to outpace a 1.3% rise on imports (see here). The pandemic had a significant impact on trade flows over the June quarter as earnings from exports declined by around 8%, while spending on imports plummeted by 13.7% with the collapse in offshore tourism due to the travel ban the main contributor.          

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Moving to events offshore where in the US negotiations for the next fiscal support package made next to no progress over the past week with both sides of the house still appearing to be wide apart on the size of enhancements to unemployment insurance, which expired at the end of July, and the composition of state aid to assist in the reopening process. The data flow was highlighted by the latest employment report that showed a 1.76m rise on non-farm payrolls in July, outpacing the median estimate for a 1.48m increase. Between May and July, around 9.3m jobs were restored to the US economy, representing around 42% of the jobs that came at bay to the onset of the pandemic. In a widely upbeat report, the unemployment rate continued its descent from April's peak (14.7%) falling from 11.1% to 10.2% (consensus was 10.6%) and the broader underemployment measure declined by 1.5ppts to 16.5%. Markets were also buoyed by upside results on the latest ISM surveys for the month of July. The manufacturing survey showed activity lifted to 54.2 from 52.6 in June (readings > 50 indicate expansion) that was driven by a strong lift in new orders to a two-year high (61.5) and by an expansion in production (62.1). In the services (non-manufacturing) survey, activity in the sector posted a 1.0ppt increase to 58.1 to register a second consecutive month of expansion. It was the services sector that took the brunt of the disruption caused by the pandemic and that was reflected in the patchy underlying detail. The order books of services firms saw a healthy 6.1% rise reflecting the reopening of the domestic economy, though it is a completely different story when looking at export orders that rolled over by 9.6% in the month with the pandemic weakening demand from offshore clients, while the 6.6% fall in imports is likely to reflect the impact of firms scaling back investment plans. Meanwhile, officials from the Federal Reserve were cautious in their remarks this week. Vice Chair of the Fed Richard Clarida noted signs of a slowdown in activity from high-frequency indicators, while the Cleveland Fed President Loretta Mester highlighted that many firms in her district's liason program had reported they were considering laying off staff and delaying or cancelling capital expenditure plans.  
        
Following the outbreak of the virus that led to severe and widespread shutdowns, the euro area economy contracted by around 15% through the first half of the year, but the signs this week remained consistent with growth returning at the start of Q3. Reflecting the initial phase of the reopening of the bloc, economy-wide activity advanced at its fastest pace in more than two years in July according to IHS Markit's composite PMI reading that came in at 54.9 from 48.5 in the month prior (readings > 50 signal expansion). Activity in the services sector improved to 54.7 from 48.3 to be leading the recovery ahead of a more moderate rebound that is coming through from the manufacturing sector at 51.8 from 47.4 in June. Meanwhile, the impact of fiscal support measures and the accumulation of pent-up demand has also seen households come out of the shutdown with initial vigour that has restored retail volumes to pre-pandemic levels after inflation-adjusted turnover increased by a further 5.7% in June following a 20.3% surge in the month prior. However, while these are positive signs, the sustainability of the rebound remains highly uncertain following renewed concerns around the virus, the ongoing presence of social distancing measures, and the impact of a weak global economy weighing on the bloc's key external sector. In the UK, the Bank of England's MPC held policy settings unchanged at this week's meeting, with rates at 0.1% and the target for asset purchases at £745bn. The Bank also published its latest Monetary Policy Report which conveyed a less pessimistic near-term outlook with GDP now expected to contract by 9.5% through 2020 compared to its previous estimate for a decline of 14% after the shutdown in the UK was ended earlier than had been anticipated. However, the recovery in 2021 is seen to be less robust with GDP projected to expand by 9% — a downgrade from 15% in May's forecasts — as increased uncertainty dampens the outlook for investment for longer. For the time being, the BoE are indicating that their preference for policy is around forward guidance and asset purchases, but that it has the prospect of negative rates "under review".