Independent Australian and global macro analysis

Wednesday, February 27, 2019

Australian CapEx rises in Q4; intentions lift

Australia's Capital Expenditure (CapEx) survey for the December quarter was stronger than anticipated for both actual and expected investment. The ABS reported a 2% rise in CapEx in Q4, while the latest intentions for investment in the 2018/19 financial year according to estimate 5 were upgraded by 4% compared to the previous total nominated three months earlier.

CapEx — Q4 | By the numbers

  • 'Actual' CapEx in Q4 increased by 2.0% to $A30.093bn, surpassing the market forecast that looked for a 1% rise. Q3's figure was revised to 0.0% from the initial estimate of -0.5%. CapEx through the year lifted by 1.9%.  
  • Equipment, plant and machinery CapEx, which feeds into GDP calculations, increased modestly by 0.7% in Q4 to $14.019bn (prior rev +3.5% from +2.2%) 
  • Building and structures CapEx posted a 3.2% rise in the quarter to $16.074bn (prior rev -3.0% from -2.8%)

  • The 5th estimate of investment intentions for 2018/19 was increased by 4.0% compared to estimate 4 to $118.361bn, which would be a 3.6% rise in total CapEx from 2017/18 
  • Estimate 1 for CapEx in 2019/20 was nominated at $92.144bn, an upgrade of 11.0% on the 1st estimate for 2018/19
CapEx — Q4 | The details 

Starting with CapEx in Q4, the ABS reported that investment from the mining sector declined by 4.3% in the quarter to $7.928bn, to be -11.5% across the year. The underlying detail for the quarter showed a 2.7% fall in buildings and structures CapEx and equipment, plant and machinery down by 6.3%. This implies a residual drag associated with the completion of major resources projects.

CapEx from the non-mining sectors (manufacturing and services) lifted by 4.5% in Q4 to $22.165bn, representing annual growth of 7.8%. This was sufficient to offset the fall in mining CapEx. However, this was driven entirely by the services industries, in which CapEx lifted by 5.6% to $19.819bn (+9.1%Y/Y), while the manufacturing sector fell by 4.4% to $2.346bn (-2.1%Y/Y). The services industries boosted investment in buildings and structures (+9.3%q/q) and in equipment (+3.5%q/q). Manufacturing CapEx declined in both buildings and structures (-4.2%q/q) and equipment (-3.3%q/q).

Nationally, CapEx lifted by $592m in the quarter and this was driven by New South Wales (+$294m) and Queensland (+$240m). There were more modest rises in Victoria (+105m) and South Australia (+99m). Confirming the residual unwind from completing resources projects, CapEx in Western Australia fell by $247m and the Northern Territory declined by $242m (click chart, below, to expand). 

Turning to the outlook, firms' reported to the Bureau during January and February, at which point forward-looking activity indicators from the business sector weakened notably. However, the survey showed that estimated CapEx for the 2018/19 financial was upgraded by 4.0% — a stronger than normal increase from estimate 4 to 5 — to $118.361bn. This figure points to CapEx in 2018/19 being 3.6% above the total from the previous financial year. 

That increase is expected to be driven by an 8.5% rise in non-mining sector CapEx, with the services industries rising by 8.9% and manufacturing by 5.2%. The drag from the mining sector is now expected to be 6.8% across the current financial year (click chart, below, to expand)

For 2020/21, the 1st estimate was nominated at $92.144bn, which is an 11% rise when compared with the 1st estimate for 2018/19, and is the highest since estimate 1 in 2015/16. There is always a high degree of caution in over-interpreting from '1st estimates', though this figure was above what most analysts had been forecasting. Estimate 1 for mining sector CapEx was a 21.4% increase on a year earlier, possibly pointing to plans to lift investment to maintain operations during the production phase, while the non-mining sector showed a 6.6% lift, with manufacturing +5.2% and services industries +6.8%.  

CapEx — Q4 | Insights 

Today's report was broadly stronger than expected, coming amid a slowing in other indicators ahead of next week's GDP growth figures. The lift in the equipment, plant and machinery component was modest at 0.7% and only accounts for around 60% of business investment covered by the National Accounts, though it is still is a positive lead from a growth perspective to what appears to be a soft Q4. The investment outlook is the more significant takeaway from today's report. After a period of several years of transition, the drag to growth in the domestic economy from unwinding mining sector investment looks to have reached the end of the line. Rising investment expectations sets the path for non-mining business investment to become a growth driver, which is a key assumption within the Reserve Bank of Australia's growth forecasts. 

What to expect: CapEx (Q4)

The ABS releases its capital expenditure (capex) survey for the December quarter today (11:30am AEDT). The survey will provide an insight into business investment from Q4 of last year ahead of next week's GDP growth numbers, while also outlining intentions for future investment levels. 

From an investment standpoint, the past few years have been a period of major transition in the domestic economy. Mining sector investment has come off sharply from a construction-led boom in the early part of the decade, against only a subdued uptrend in investment from the non-mining sectors. This transition has now largely run its course, with mining investment likely to be near its trough, which explains why the Reserve Bank of Australia is forecasting business investment to support economic growth in the coming years.   

As it stands Capital Expenditure

For the moment, late-cycle weakness in the mining sector continues to weigh on business investment. New capex disappointed in Q3 falling by 0.5% in Q3 (market forecast was +1%), with spending on buildings and structures down by 2.8% with a partial offset from equipment, plant and machinery at +2.2%. The detail indicated mining investment was taking a final step lower due to construction on major LNG projects completing, though investment on equipment and plant was on an uptrend. Investment from the non-mining side was moving higher on a gradual trajectory.  

The intentions component of the survey according to estimate 4 pointed towards total capex in the 2018/19 financial year of $114.1bn. This was 4.4% higher compared to a year earlier and its strongest uplift since 2011/12. The drag from mining investment was expected to be greatly diminished at just -1.1% over the year, while non-mining firms' investment intentions pointed to a 6.8% increase over the year.

Market expectations | Capital Expenditure

Today, markets look for capex to in Q4 to post a 1% rise. For investment intentions, today we receive the 5th estimate for capex in the 2018/19 financial year, which incorporates 6 months of 'actuals' and 6 months of expectations reported between January and February, and also the 1st estimate for capex in 2019/20. 

There are no market medians for these outcomes, however; the history of the survey points to of modest upgrade of around 2% for estimate 5, implying an updated capex estimate for 2018/19 at around $117bn. For estimate 1 in 2019/20 the uncertainties are far greater. For the past 3 years, estimate 1 has come in a little above $80bn. Due to the greatly diminished drag from mining investment, this figure could be somewhat stronger.

What to look for | Capital Expenditure

The result for capex spending in Q4 can be taken as a guide for business investment ahead of next week's GDP growth figures, in particular for the equipment plant and machinery component. It is important to note that these data only cover around 60% of total business investment and excludes a number of major industries, two of which are education and healthcare with the Bureau working towards including these sectors in the survey.   

Markets will be more focused on the intentions component of the report as it is a forward-looking indicator for business investment and economic conditions in general. With the growth outlook both domestically and abroad having been lowered due to a wide array of uncertainties in the real economy and in financial markets, it will be interesting to see if this has been incorporated into firms' investment intentions, particularly for 2019/20 at this very early stage. 

Tuesday, February 26, 2019

Australian construction work falls in Q4

Activity in Australia's construction sector declined in the December quarter, with notable weakness in residential construction in a weak lead towards next week's GDP growth figures for Q4.

Construction Work Done — Q4 | By the numbers

  • The total value of construction work done fell by 3.1% in Q4 to $51.092bn, against the market expectation for a 0.5% increase. Q3's initially reported fall of 2.8% was revised down to -3.6%.  
  • Across the categories in Q4;
    • residential work fell by -3.6% to $18.88bn (+2.1%Y/Y)
    • non-residential work lifted by +1.9% to $10.712bn (+0.4%Y/Y)
    • engineering work declined by -5.0% to $21.493bn (-7.8%Y/Y)  

Construction Work Done — Q4 | The details 

The details showed the weakness during the quarter was broad based across the sectors and categories. Private sector construction work fell by 2.2% in the quarter to $39.168bn (-3.2%Y/Y), while the public sector posted a surprisingly sharp 6% fall in Q4 to $11.925bn (-0.8%Y/Y).

In the private sector, building work (including residential and non-residential construction) fell by 2.7% in the quarter to $26.222bn (-0.1%Y/Y). This fall was driven mostly driven by a 3.7% contraction in residential activity, in which new construction fell by 3.6% and alterations declined by 4%. Annual growth in residential work pulled back to +2.3% from +5.4% in the previous quarter.   

Non-residential work in the private sector, including commercial projects such as offices and warehouses etc, eased by 0.2% in the quarter to $7.589bn but deteriorated further on an annual basis from -2.1% to -5.1%. 

Private engineering work, which is a highly volatile component, declined by 1.3% in Q4 to $12.946bn to be 9.1% lower over the year. 

In the public sector, engineering work posted a surprisingly steep fall of 10.3% in Q4 its sharpest quarterly decline since 2000 — to $8.547bn. This followed a 2.6% decline in the previous quarter, however; given the strong pipeline of work in public infrastructure projects, this could be a soft patch ahead of a resumption in its upturn. Meanwhile, public building lifted by 6.9% in Q4 to $3.378bn, with annual growth running at a strong 14.2% pace.

The table, below, provides a breakdown of the state detail for Q4, inclusive of both the private and public sectors. When taken in conjunction with Q3's data, it becomes clear that activity in the residential sector was weak across the nation in the second half of 2018, and notably so in the three largest states of New South Wales, Victoria and Queensland.

Commercial work is generally faring better across the states, though that cannot be said for Queensland and Western Australia where the deceleration is gathering pace.

The engineering detail showed widespread weakness in Q4. The 6.9% fall in Western Australia (-19%Y/Y) indicates that unwinding investment in resources projects continues, though tomorrow's capital expenditure data should provide further insight here.  

Construction Work Done — Q4 | Insights

This report is clear negative ahead of next week's National Accounts for Q4. In particular, it highlighted weak momentum in residential construction activity over the second half of the year, which follows a sharp deterioration in approvals. While residential construction activity was widely expected to slow over the coming quarters, risks of a sharper slowdown have risen. With construction activity to subtract from growth in the quarter, expectations for GDP growth in Q4 are likely to be lowered following on from soft leads from retail volumes and trade.   

Friday, February 22, 2019

Weekly note (22/2) | RBA rate cut prospects in focus

Prospects for the Reserve Bank of Australia (RBA) to cut its cash rate in 2019 were in focus this week. This was in no small way influenced by Westpac's call for two RBA rate cuts in 2019, shifting from its long-held expectation for no change this year and next — the first of the nation's 'major 4' to be forecasting a lower cash rate. Westpac's Chief Economist Bill Evans highlighted a "slower growth profile" in 2019 and 2020 and an expectation for "the unemployment rate (to) lift to 5.5% by late 2019" as the determining factors in the decision. Financial markets reacted by bringing forward expectations for a 0.25% rate cut into late 2019 from early 2020. However, that had been reversed by week's end following RBA Governor Philip Lowe's parliamentary testimony.   

The minutes from the RBA's February meeting released this week reiterated its slower growth outlook for 2019 and 2020 was conditioned on an expectation for lower household spending, acknowledging a negative wealth impact from falling property prices, and a sharper-than-anticipated downturn in residential construction activity. Notwithstanding, its forecasts are for above-trend GDP growth of 3.0% in 2019 and an at-trend pace of 2.75% in 2020. Clearly, the Bank takes the view that the falls in property prices that have occurred over the past year or so will only have a relatively limited impact on household spending, and therefore overall economic growth. This was a point emphasised on Friday during the RBA's semi-annual parliamentary testimony, in which Governor Lowe said that "this adjustment in the housing market is not expected to derail the economy". 

As noted in the minutes, the clear risk to that outlook is that further and larger falls in property prices lead to weaker-than-forecast household spending, which "would result in lower GDP growth, higher unemployment and lower inflation than forecast". However, in line with earlier RBA commentary, Governor Lowe highlighted on Friday that this risk to household spending was considered to be secondary to continued low growth in household income. 

On this front, wages growth is a key factor in household income growth. Data out this week showed that Australian wage inflation remained soft at 0.5% in the December quarter and 2.3% through the year (see our separate analysis here). The positive was that growth in private sector wages continued on its upward trajectory, albeit a very gradual one, lifting to a 4-year high at 2.29%, which features as our chart of the week.

Chart of the week
Overall, the pace of wages growth continues to lag improvements in the labour market. Data out on Thursday showed that the strong momentum evident in the labour market towards the end of 2018 extended into the new year, with employment rising by 39,100 in January compared an expected +15,000 outcome (read our analysis here). The nation's unemployment rate held at 5.0% due to a lift in workforce participation, but the broader measures of underemployment and underutilisation eased to multi-year lows, though are evidently still sufficiently elevated to be restraining wages growth.  

— — —

Looking at developments abroad this week, the focus from the US was on the Federal Reserve's (Fed) minutes from its meeting at the end of January. The minutes confirmed the wait-and-see approach to policy settings the Committee has now shifted to. Of note, the Committee members agreed to soften their assessment of the pace of growth in the domestic economy from "strong" to "solid" on the basis of a moderation in the strength of incoming data since the turn of the year.

Notwithstanding, the Committee's central scenario remains upbeat; solid economic growth is expected to be sustained, as are strong conditions in the labour market, while inflation is seen to be near the 2% target. In the post-meeting press conference last month, Federal Reserve Chair Jerome Powell mentioned "cross-currents" as potential risks to this outlook. The minutes provided further detail around this, with the Committee noting concerns due to slowing global economic growth, trade tensions, fading fiscal stimulus, and political uncertainty both in the US and abroad.

There was also considerable discussion around the risks to the outlook posed from financial conditions that were now assessed to be "materially tighter" than in recent months, due to rising credit spreads and declines on equity markets towards the end of 2018. The minutes also showed that "several" Committee members had noted a flattening in the US yield curve as a potential concern, which has in the past been linked to weaker future economic conditions.  

On balance, given those prevailing economic and financial uncertainties the line was adopted that "the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate", while also highlighting that it retained a flexible approach dependent on the strength of incoming data. While markets have priced out expectations for further rate increases this year, the Committee has not ruled out this prospect 
— notably if inflation outcomes were to prove stronger than expected — though not before a pause to its tightening cycle. Additionally, the minutes pointed to the Fed stopping its balance sheet run-off by the end of the year. The Fed is currently running down its near US$4 trillion balance sheet by $50 billion per month, with the minutes implying that it is likely to reach a higher terminal value than previously expected in reference to the concerns regarding the tightening in financial conditions. 

Looking over to Europe, the European Central Bank (ECB) also published its January meeting minutes this week. Similar to the Fed, the ECB's Governing Council is also taking a wait-and-see approach to policy following slowing momentum in economic activity in the continent. The assessment of the Governing Council was that the risks to its economic outlook "had moved to the downside" shifting from its "broadly balanced" assessment towards the end of last year. 

The minutes outlined that the Governing Council is not yet clear if slowing momentum in the economy was due to a loss of confidence from temporary factors, such as uncertainty relating to trade tensions, Brexit developments, and sector-specific issues that have impacted European manufacturing, notably Germany's auto sector; or if there was cause for concern regarding a more persistent slowdown than currently expected. There is likely to be further clarity on that assessment at the Governing Council's next meeting in two weeks time, which will include updated economic growth and inflation forecasts. 

Also of interest, the ECB said that analysis of policy options to address potential liquidity concerns "needed to proceed swiftly". This refers to another round of Targeted Long-Term Refinancing Operations (TLTRO), which is the technical name given to a form cheap funding the ECB has previously made available to the banking sector to incentivise lending to businesses and households. With more than 700 billion of that funding due to be repaid by the banks in 2020 and 2021, the ECB is mindful of "cliff effects" causing liquidity conditions to tighten; a situation that could prove problematic in certain countries such as Italy. Changing its forward guidance is another policy option the Governing Council has often turned to, which were noted in the minutes as being effective in the past in terms of leading to an easing in financial conditions. 

Wednesday, February 20, 2019

Australia's labour market starts 2019 strongly

Strong momentum in Australia's labour market continued into 2019, with employment increasing by more than expected in January. The nation's unemployment rate held steady at 5.0% on a seasonally adjusted basis, as labour force participation edged to up slightly to a near record-high level. 

Labour Force Survey — January | By the numbers
  • Total employment increased by 39,100 in January, more than twice the market forecast for +15,000. December's increase was revised down to +16,900 from +21,600
  • The unemployment rate remained at 5.0%, in line with expectations
  • Measures of spare capacity lowered in January; underutilisation rate by -0.1ppt to 13.2% (prior: 13.3%), and the underemployment rate by -0.2ppt to 8.1% (prior: 8.3% revised from 8.4%)
  • The participation rate increased by 0.1ppt to 65.7%, ahead of expectations for no change from 65.6%
  • Hours worked increased by 0.4% in January to 1.766bn hours to be 3.2% higher on a 12-month basis (prior: +0.1%m/m, +1.5%Y/Y) 

Labour Force Survey — January | The details

The granular detail from today's release showed that the size of the labour force increased by a strong 45,700 in January. With employment up by 39,100 in the month, that meant a slight lift of 6,600 in the number of unemployed. Consequently, the nation's unemployment rate at two decimal places is now 5.01%, compared to 4.98% in December. The ABS reports only at 1 decimal place, so for all intents and purposes, the nation's unemployment rate was steady in the month at 5.0%. 

However, both the underemployment (employed but wanting more hours) and underutilisation rates (underemployed plus unemployed) eased slightly to 8.1% and 13.2% respectively. The underemployment rate moved to its lowest since March 2015, while the underutilisation rate improved to a 5-year low. Yesterday's Wage Price Index data indicated these levels were still elevated. 

On a compositional basis, full-time employment increased by 65,400 in January and part-time contracted by 26,300. Note that last month the split was full-time -9,500 and part-time +26,400. It is not unusual to see this sort of volatility from month to month. More importantly, the overall pace of employment growth remained robust at around 2.2% on a 12-month basis and remains in front of growth in the working-age population (around 1.6%Y/Y). For the record, full-time employment growth in annual terms to January increased to +2.8% from +1.9%, while part-time slowed to +0.9% from +2.7%.     

Hours worked lifted 0.4% higher in the month, with a base effect seeing annual growth jumping to +3.2% from +1.5%. Adjusting for the increase in employment, the average number of hours worked per employee in January was 138.5, little changed from the previous month (+0.1%) but up by 1% compared to a year earlier.   

The state detail showed another fall in New South Wales' unemployment rate, down by 0.4ppt to a record-low 3.9%. The news was not so good elsewhere, with rises for Victoria (+0.4ppt to 4.5%), South Australia (+0.4ppt to 6.3%), Western Australia (+0.4ppt to 6.8%) and Tasmania (+1ppt to 7.0%). Queensland's unemployment rate lowered from 6.1% to 6.0%.

Fitting with these trends, though the national increase in employment was strong in January at 39,100, that reflected a 47,200 increase in New South Wales. For the other states, Victoria added 2,200 jobs, but Queensland (-19,900) and South Australia (-4,500) fell, while Western Australia (+800) and Tasmania (+200) were broadly flat.   

Labour Force Survey — January | Insights 

In isolation, this was a strong update given that net employment blitzed the median forecast, while the measures of excess capacity in underutilisation and underemployment eased to multi-year lows, though still have scope for improvement. Employment growth held solid at the turn of the year at around 2.2%Y/Y to remain ahead of growth in the working-age population. However, the disparity in the state detail has to be taken into consideration. Though these numbers tend to be volatile from month to month, employment growth in both New South Wales (+4.1%Y/Y) and Victoria (+3.5%Y/Y) is very strong but is weak in the other states. 

What to expect: Labour Force Survey (January)

Australia's labour market performed solidly in 2018, with a notably strong finish to the year over Q4. Analysts and markets will be looking to today's release from the ABS at 11:30AM AEDT (21/2) to see if that momentum was maintained into the new year. Recently, the Reserve Bank of Australia (RBA) lowered its forecasts for GDP growth over the next couple of years, due to slower growth in household consumption referencing some negative wealth impact from declining property prices and an expected downturn in residential construction activity. Ongoing strength in labour market conditions will be key to keeping the domestic economy on track through these headwinds, though forward-looking indicators point to a likely moderation this year.  

As it stands Labour Force Survey 

On a seasonally-adjusted basis, employment increased by 21,600 in December, which exceeded the market forecast for a gain of 18,000. However, the detail was patchy with part-time rising by 24,600 and full-time declining by 3,000. The unemployment rate fell by 0.1ppt to 5.0%, which was an upside surprise to the market forecast for no change from 5.1%. Measures of excess capacity also tightened; underutilisation rate -0.2ppt to 13.3% and the underemployment rate -0.1ppt to 8.4%. This was against an easing in the participation rate by 0.1ppt to 65.6%. 

Market expectations Labour Force Survey 

Today, the median market forecast according to Bloomberg is for employment to rise by 15,000, around a range from +5,000 to +27,000. The nation's unemployment rate is expected to hold at 5.0% (range 4.9% to 5.1%), based on the participation rate remaining at 65.6% (range 65.6% to 65.8%).

The expected outcome of +15,000 in employment is marginally lower than in recent months, which reflects a moderation in employment expectations from the NAB's Business Survey, and slowing momentum in other forward-looking indicators analysed by markets. The pace of employment growth also slowed across 2018.  

What to look for Labour Force Survey

Given the recent trend of stronger-than-expected employment outcomes, it will be important to see if this continued into the start of 2019. Markets are typically sensitive to any change in the unemployment rate, though it is also important to monitor the broader measures of underemployment and underutilisation. 

Keep a close watch on the pace of employment growth. A further moderation is widely expected this year, including from the RBA, given the signals from the forward-looking indicators, while also noting that it was running at a very strong level averaging around 3%Y/Y through the first half of 2018. The upcoming federal election could also create some additional uncertainty. 

In its communications and analysis, the RBA often focuses on the pace of employment growth relative to growth in the working-age population. Despite slowing, employment growth is still robust at 2.1%Y/Y and above the pace of growth in the working-age population at around 1.6%Y/Y. That situation is key to the unemployment rate outlook. 

Tuesday, February 19, 2019

Australian wage price growth remains soft in Q4

Growth in Australia's Wage Price Index (WPI) measuring total hourly rates of pay excluding bonuses was slightly softer than expected in the December quarter, though the annual rate met the consensus forecast to remain at a soft pace of 2.3%. The nation's labour market tightened notably through 2018, however; wage pressures look to only be lifting very gradually, helped by strong minimum wage rises. 

Wage Price Index — Q4 | By the numbers

  • The headline WPI (total hourly rates of pay ex-bonuses) increased by 0.54% in Q4, just below the market forecast for +0.6%. In Q3, the index increased by 0.62%.
  • In annual terms, the WPI increased by 2.27%, broadly in line with the consensus of 2.3% and with the pace from the preceding quarter at 2.29%. 

Wage Price Index — Q4 | The details 

The WPI released by the ABS each quarter effectively measures wage inflation in the domestic economy. It measures changes in the price employers pay for labour associated with particular jobs, keeping characteristics such as hours worked, tasks and responsibilities and qualification levels of workers constant from quarter to quarter. It does not reflect changes in income received by employees. 

Overall, there was little change to the pace of wage prices in the December quarter. Rounded to 1-decimal place, the WPI increased by 0.5%; a modestly slower pace than in the previous quarter at 0.6%. The annual pace was unchanged at 2.3%.

Breaking this down further, wage prices in the private sector increased by 0.62% in the quarter, a slightly stronger pace than Q3's +0.55%. Positively, the uptrend in the annual rate continued from 2.14% to 2.29% — its strongest since Q4 2014 — though, the progress remains very gradual considering the solid performance of the labour market in 2018, following on from a stronger year in terms of net employment growth in 2017. 

The pace of wage prices continues to be led by the public sector, though there was a very modest easing in the December quarter from +0.68% to +0.6%, while the annual pace was virtually unchanged at +2.53%. 

Labour market conditions are not the only factor that impacts wage prices. Minimum wage increases also have a direct impact on employers' wage costs. The Fair Work Commission in its 2018 decision announced a 3.5% increase, which applied from the September quarter onwards, while 2017's increase was 3.3%. These outcomes were notably stronger than in the preceding few years. The headline increase to the WPI in today's data of 2.3%Y/Y includes a boost from the minimum wage rise, likely by around 0.2-0.3ppt.

Adjusting for the impact of inflation, real growth in wage prices continued to remain very modest at around 0.5% in annual terms to Q4, expand chart (below). 

One trend that has been noted over recent quarters is the uptrend in the WPI including bonuses, indicating that firms may be using bonuses to assist in staff retention while also keeping wage costs contained. Growth in the WPI including bonuses lifted from 2.67%Y/Y to 2.81%Y/Y in Q4, led entirely by the private sector from 2.69%Y/Y to 2.75%Y/Y. The public sector eased from +2.63%Y/Y to +2.53%Y/Y.

Looking across the industries, the chart (below) shows that wage price increases are running above the national rate in 9 of the 18 surveyed industries, the same ratio as it was in the preceding quarter. Wage costs are running fastest in the healthcare sector (+2.8%Y/Y), a position it has held for most of the past couple of years reflecting strong employment growth, likely associated with the rollout of the National Disability Insurance Scheme.   

On a state-by-state basis, wage prices in annual terms were unchanged in New South Wales (+2.4%), Queensland (+2.3%), Western Australia (+1.6%) and Tasmania (+2.6%). Both Victoria (from 2.5% to +2.7%) and South Australia (from 2.2% to +2.3%) saw increases.

The two largest states of New South Wales and Victoria are important to analyse as they have the best performing and tightest labour markets in the nation. Wage price growth in Victoria continues to show a faster trajectory than in New South Wales, though both are probably still below where they might be expected to be given that their respective unemployment rates sit a touch above 4%, which is well below the national rate at 5.0%.  

Wage Price Index — Q4 | Insights 

Australian wage price growth continues to remain soft at a little above 2% in annual terms. This follows the notable improvements made in the labour market over the past couple of years combined with the strong minimum wage increases. Underlying wage price pressures appear to remain well contained, suggesting that further progress is required in terms of reducing excess capacity in the labour market. While the national unemployment rate has been cut to 5.0% — its lowest since mid-2011 — both underemployment and underutilisation remain at historically elevated levels and will need to tighten to generate faster growth in wages. The Reserve Bank of Australia and most analysts expect this to remain a gradual proposition over the next couple of years. The positives are that private sector wage prices are on an upward trend, while New South Wales and Victoria are likely to see faster increases in the quarters ahead given their tight labour markets. 

What to expect: Wage Price Index (Q4)

Australia's Wage Price Index (WPI) data for Q4 are scheduled to be released by the ABS at 11:30AM AEDT today (20/2). Historically not regarded as market moving, this is now one of the most closely watched indicators in Australia, with implications for household spending heightened by the ongoing weakness in the nation's housing market and also in providing some insight into the level of excess capacity in the labour market. Slow wages growth has been a persistent headwind to Australian households over recent years, not unlike the experiences of most other major advanced economies in the post-GFC period. 

As it stands Wage Price Index 

In Q3, growth in the WPI (total hourly rates of pay ex-bonuses) matched market expectations at 0.6% for the quarter and 2.3% over the year. Wages growth continues to be sluggish around a 2% annual pace, with signs of a very gradual lift in recent quarters. Public sector wages (0.6%q/q, 2.5%Y/Y) again outpaced the private sector (0.6%q/q, 2.1%Y/Y). 

Market expectations Wage Price Index 

According to Bloomberg data, the median forecast for wages growth in Q4 points to a repeat of the outcome from the previous quarter at 0.6%q/q and 2.3%Y/Y. There are two major factors supporting the outlook for wages growth. Firstly, the nation's labour market made a strong improvement last year; the unemployment rate fell from 5.6% to 5.0% and the broader measure of underutilisation declined from 14.1% to 13.3%, though this is still elevated. Secondly, the national minimum wage increase for 2018 of 3.5% was stronger than in recent years and implied a boost of around 0.2ppt to wages growth in Q3. The new award applies from Q3 onwards so it will provide a further lift to today's figures.    

What to look for Wage Price Index 

The Reserve Bank of Australia in their recent Statement on Monetary Policy forecast wages growth to rise on a gradual trajectory to 2.5% by year-end and then to 2.6% in 2020. Look for the recent gentle uptrend to continue in today's release. 

Particular focus should also be attached to the state-level data, notably in the two largest states of Victoria and New South Wales. Victoria's labour market is now the tightest in the nation after a sharp improvement in 2018 and New South Wales is not far behind. Wages growth has been modest at 2.4%Y/Y for New South Wales and 2.5%Y/Y for Victoria, though stronger outcomes appear likely going forward and will be key to driving the headline national rate. 

Also, watch for the Wage Price Index including bonuses measure, which has indicated a recent uptrend in businesses turning to bonuses to assist with retention while keep wages growth contained.  

Friday, February 15, 2019

Weekly note (15/2) | Stronger sentiment drives markets

Global markets were driven higher this week following indications from US President Trump of a potential delay in the introduction of an increase in tariffs on Chinese imports. The US and China are working towards reaching a trade agreement by a jointly-agreed deadline of March 1 this year, with tariffs on US$200bn of imports from China set to rise from 10% to 25% in the event of no resolution by that date. Amid signs of progress being made in high-level negotiations during the week, President Trump told an assembled press group that he was prepared for the deadline to "slide for a little while", possibly for up to 60 days according to Bloomberg sources. Sentiment received a further boost on strong indications that another partial US government shutdown would be averted.

In terms of key data releases, US inflation according to the Consumer Price Index was stronger than expected in January on both headline (1.6%Y/Y) and core (2.2%Y/Y) measures but remains well contained. Weakness in oil prices saw the headline rate ease from 1.9%Y/Y to its lowest since June 2017, while core inflation held steady. Retail sales slumped by 1.2% in December, which was its sharpest monthly fall in 9 years as shown in our chart of the week, below. This report was heavily delayed by the government shutdown but matched with poor retail sales data seen in other major economies in December. Of particular note, online sales fell by a sharp 3.9% — its largest monthly slide in more than a decade — which as we have discussed before might be indicative of a broader trend of a shift in purchasing patterns as consumers take advantage of online sales promotions around Black Friday (in November), with spending then attenuating in the following month.   

Chart of the week 

European markets gained strongly this week, driven by the lift in sentiment and also ongoing results from the corporate reporting season covering Q4 last year. The European data flow, however, continued to come in on the soft side of expectations in line with slowing activity in the continent. The second estimate of GDP growth in Q4 was 0.2% in Q4 and 1.2% through the year, unchanged from the first estimate, but a moderation from annual growth of 1.6% in Q3. Highlighting concerns, GDP growth in Germany - the euro area's largest economy - was weak over the second half of 2018, with growth stalling in Q4 following a 0.2% contraction in Q3. Meanwhile, euro area industrial production contracted at a sharper-than-expected pace in December, falling by 0.9% and by 4.2% on the year. The result was impacted by notable weakness in the output of capital and consumer-related goods. 

Shifting over to the UK, GDP growth for Q4 slipped to 0.2% lowering growth over the year from 1.8% to 1.4%, its slowest pace in 6 years. The underlying detail highlighted weakness in net exports and business investment, due in large part to what Bank of England Governor Mark Carney described at last week's policy meeting as the "fog of Brexit" hampering confidence in the economy. Also this week, UK inflation eased from 2.1% to 1.8% in January, a two-year low driven by changes around household energy pricing. The central scenario from Bank of England is for inflation to remain below target at a sub-2% pace this year before lifting next year.   

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Turning to the Australian perspective, most of the headlines were focused on the ongoing reporting season, though there were several points of interest for macro watchers. The National Australia Bank's Business Survey for January retraced some its sharp deterioration from the previous month, with business conditions rising by 4pts to +7 to be around its long-run average. Conditions had collapsed by 8pts in December to a revised reading of +3. For January's read, there was moderate improvement across the trading, profitability and employment sub-components. The first half of 2018 was very strong for business conditions, where the index averaged a +18 reading, though there was a notable loss of momentum over the second half. Consistent with this, employment expectations were indicating growth of around 19,000 jobs per month, a moderation from 2018's pace. Business confidence increased by 1pt in January to +4 but remains below average. 

Westpac-Melbourne Institute's Index of Consumer Sentiment also posted an improvement, with February's reading rising by 4.3% to a "cautiously optimistic" 103.8. The rebound appeared to be driven by last week's change in guidance from the Reserve Bank of Australia to a more dovish stance. Overall, consumer sentiment appears to be holding up despite headwinds from slowing economic growth, weakening housing market conditions and political uncertainty both at home ahead of the federal election and abroad. Views around the housing market deteriorated in February across price expectations and sentiment towards purchasing a property. These developments will need to be closely monitored for signs of a spillover into consumption spending. Assessments of family finances recovered from a sharp fall in the previous month, though are only around long-run average levels.  

Housing finance data posted another weak outturn in December, with falls in both approvals (-8.2%) and lending (-5.9%) in the month. Weakness continues to be led by the investor segment, though over recent months a more entrenched deterioration from owner-occupiers has become evident. Tighter lending standards continue to weigh on access to finance, while declining property prices are also likely to be impacting on the demand side as highlighted in Westpac-Melbourne Institute's survey of consumer sentiment.      

Friday, February 8, 2019

Weekly note (8/2) | RBA shifts to neutral

The Reserve Bank of Australia (RBA) was the key focus this week, highlighted by its shift to a neutral policy stance from its long-held mild tightening bias. The Governor's statement that accompanied Tuesday's decision to leave the cash rate on hold at 1.5% contained no clear indication of this forthcoming shift, though it did signal a lower growth outlook for the domestic economy, and also noted an increase in "downside risks" for global growth, the latter regarded by the Bank as the predominant headwind. 

Wednesday's speech (titled: The Year Ahead) by Governor Lowe to the National Press Club maintained a positive assessment of domestic conditions pointing to expectations for "reasonable" growth; further progress in the labour market; strong infrastructure investment; and ongoing contributions from resources exports. However, it was an increased level of uncertainty around the outlook for household consumption and the housing market that has driven the shift of the Board. 

The key line from the Governor regarding the cash rate was that "over the past year, the next-move-is-up scenarios were more likely than the next-move-is-down scenarios. Today, the probabilities appear to be more evenly balanced." This assessment replaced the line used in preceding communications that "members continued to agree that the next move in the cash rate was more likely to be an increase than a decrease". Financial markets were surprised by the shift, and as shown in our chart of the week (below) have now fully priced in an expectation for a rate cut by February of next year. 

Chart of the week

Friday's quarterly Statement on Monetary Policy for February contained a detailed analysis behind the changes to the Bank's assessment of conditions. Updated forecasts (see here) confirmed the RBA has lowered its outlook for growth in the domestic economy in 2019 to 3% from 3.25% and to 2.75% from 3% in 2020. The near-term growth outlook was revised more heavily; growth for 2018 was expected to slow to 2.75% (from 3.5%) before easing to 2.5% (from 3.25%) by mid-2019. The Bank regards trend growth to be 2.75% to maintain stability in unemployment and inflation.

The lower growth outlook is conditioned on household consumption growth slowing to 2.75%, revised down from its previous expectation for 3%. This, in part, reflects the impact of statistical revisions over recent years, though it was notable that the Bank is now prepared to allow for some downward impact on consumption growth from declining property prices. Growth in households' disposable income, which the Bank regards as having a greater impact on consumption growth, was also expected to increase by around 2.75%.

The other main downside risk comes from a sharper slowdown in residential construction activity. The Bank now expects dwelling investment to contract by 4.5% (from -2.4%)  in 2019 and by 5.3% (from -2.4%) in 2020, which acknowledges an increasing deterioration in building approvals and tighter financing conditions.

The Bank expects growth in the domestic economy to be driven by business investment, supported by non-residential construction and a gradual lift in mining investment, public demand in infrastructure and services, and resources exports. Stronger-than-expected conditions in the labour market were also positive, while wages growth was forecast to lift gradually.   

In line with the slower growth outlook, the Bank adjusted its outlook for the unemployment rate, which is expected to take a little longer to tighten below 5%, while the pace of employment growth in 2020 was revised lower. Accordingly, inflation is now forecast to return to within the 2-3% target band in 2020 — a year later than previously expected — though weaker oil prices and slower increases in utilities and other administered prices were contributing factors.   

The key developments the RBA will be focused on this year are around the household sector, notably the impact of declining property prices on spending decisions, housing market activity, labour market conditions, and rising uncertainties abroad. 

In other local events, the domestic data flow remained decidedly disappointing this week. Building Approvals contracted by a sharp 8.4% in December, with weakness evident across all dwelling types (read our analysis here). The deterioration in building approvals gathered pace over the second half of last year and points to an increased risk of residential construction becoming a headwind to growth in the domestic economy over the next couple of years. Retail spending slowed at a sharper-than-forecast pace in December, posting a decline of 0.4% (see here). Though seasonality did appear to impact the result, the detail also contained indications of softening dynamics around the consumer, potentially in response to ongoing declines in property prices, while retail volumes increased by just 0.1% in the quarter pointing towards a subdued contribution from household consumption to GDP growth in Q4. International trade data for December showed a greatly increased trade surplus in the month, though that was driven by weaker outcomes for both exports and imports (see here). With stronger commodity prices over the quarter resulting in a boost to the nation's terms of trade, a reduced contribution to growth from international trade in Q4 appears likely.

Also this week, the final report of the government inquiry into the nation's banking and financial services sector was released. The key recommendations of the report tabled by Commissioner Kenneth Hayne were focused around enhancements to the regulatory environment, with ASIC and APRA set to be overseen by a newly-established independent body. Wide-sweeping changes to overhaul fee structures across the financial services industry were recommended, though report contained no recommendation for an enforced separation for providers of both advice and wealth products. From a macro perspective, Commissioner Hayne indicated that no further changes to tighten existing lending laws were required, noting the improved compliance measures already taken by the banks in this area.

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It was an unusually quiet week for global markets with few major events or data releases on the calendar. Market closures for Chinese New Year holidays also kept Asian trade thin across the week.

The European Commission lowered its forecasts for economic growth in the 19-nation euro area for 2018 (from 2.1% to 1.9%), 2019 (from 1.9% to 1.3%) and 2020 (from 1.7% to 1.6%), reflecting weaker output from global trade, contracting car production in Germany and social and political tensions. Sharp downgrades were expected in Germany, the euro area's largest economy, where growth is forecast to slow to 1.1% in 2019 mostly in response to major changes occurring in the auto sector to meet emission targets that have impacted output, and also in Italy, the third-largest euro area economy, where uncertainty over government fiscal policy was expected to restrain growth to just 0.2% over the year. Weaker oil prices also resulted in inflation forecasts declining to 1.4% (from 1.8%) this year before lifting modestly to 1.5% (from 1.6%) in 2020.

The Bank of England maintained policy settings in line with expectations at its latest meeting on Thursday. The key development was that the Bank sharply lowered its forecast for growth this year from 1.7% to 1.2%, which would be the slowest pace since the financial crisis, and from 1.7% to 1.5% in 2020. The Bank highlighted "an intensification of Brexit uncertainties" as having notable impacts on business investment and exports. 

Sentiment around a global trade resolution turned down this week when US President Trump confirmed he did not plan to meet with China's President Xi before March 1, which is the deadline to reach a trade deal to prevent an increase in the tariff rate from 10% to 25% to US$200bn of Chinese imports to the US.