After a busy week of negotiations, a Brexit deal was reached between UK PM Johnson and the EU and will likely mean that a disorderly withdrawal process will be avoided. The stumbling block in the UK's withdrawal from the EU has largely related to the contentious Irish backstop solution that was negotiated by former PM May. Under this new deal of hybrid arrangements, the UK will exit the European customs zone but Northern Ireland will remain as an entry point into the EU. In practice, this means that goods coming into Northern Ireland will face UK-levied tariffs. However, if those goods are deemed at risk of later crossing over the border into Ireland (or anywhere else in the European customs zone), then EU tariffs will apply. This process will be administered by the UK authorities on behalf of the EU. The deal now heads to the House of Commons where the parliament will convene for a special Saturday sitting from 9:30am London time. The vote looks as if it will be finely balanced, with the DUP party to vote against the deal, which means that PM Johnson will require the support of some Labor or other opposition MPs, though it is not certain all of his Conservative MPs will vote for it in any case. If the vote fails, the PM will be forced against his insistence to seek an extension to the October 31 withdrawal date. (Saturday's vote was ultimately thwarted after an amendment was tabled by former Conservative MP Oliver Letwin and was approved 322 to 306, resulting in the PM writing to the EU to request an extension to the withdrawal date to January 31, 2020).
In China, GDP growth in Q3 was in line with estimates at 1.5%, though the annual pace at 6.0% was a touch below the 6.1% pace expected and is on the lower bound of the 6.0-6.5% range targeted by authorities in Beijing. Trade data released earlier in the week highlighted the impact of tariffs, with exports contracting by a sharper-than-expected 3.2% over the year to September. Aside from external weakness, momentum in China's economy has been slowing due to a deceleration in investment over recent years, which in part reflects the impact of structural reforms that have sought to reduce overcapacity by industry and lower corporate debt levels. There were, however, upside surprises from growth in industrial output at 5.8%Y/Y and retail sales at 7.8%Y/Y. Recent actions from fiscal and monetary authorities have been focused on tax cuts, infrastructure investment, and reductions to banks' reserve ratios to effectively spur lending, though more stimulus appears to be required and what form it may take is unclear.
Developments from the US this week were headlined by a soft outturn from retail sales, which fell by 0.3% in September against an expected rise of 0.3%. The retail control group (used as a gauge for total consumer spending) also disappointed expectations with a flat outcome in the month. With a robust consumer sector remaining key to the US growth outlook, market pricing firmed to be factoring in an 80% chance the Federal Reserve's policy-setting Committee will maintain its proactive stance by delivering another 'insurance' rate cut at the end of the month. This was a view that found support with Chicago Federal Reserve President and Committee member Charles Evans, who in a speech this week outlined he could also see "an argument for more accommodation now" to guard against the risks attending the economic outlook, despite noting that monetary policy is "probably in a good place right now". Federal Reserve Vice Chair Richard Clarida in a speech noted the risks to the Committee's economic outlook were around weakness in business investment and exports and a contracting manufacturing sector. Together with inflation running below target, the Vice Chair reiterated the Committee "will act as appropriate" to sustain the US's 11-year economic expansion.
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The highlight from Australia this week was September's Labour Force Survey, which showed employment increased by a near-consensus 14.7k in the month. The unemployment fell against expectations from 5.3% to 5.2% to reverse the increase recorded in August as the participation rate eased from its record-high of 66.2% to 66.1% (see our review here). Meanwhile, the broader measures of spare capacity showed signs of improvement in the month given the underemployment rate fell from 8.5% to 8.3% and the undertilisation rate declined from 13.8% to 13.5%.
Against signals from forward-looking indicators pointing to an upcoming moderation, employment growth remains robust. If anything, the momentum looks to have strengthened recently. On net, employment lifted by 87.6k in the 3 months to September (average of 29.2k per month), which was its strongest quarterly increase since Q4 2017 (see chart of the week, below). This compares with outturns of 70.9k in Q1 and 70.0k in Q2. Through the year, employment growth remained at around 2.5%, which is up from a 2.2% pace at the end of Q2, and continues to run well ahead of growth in the working-age population (around 1.7%Y/Y). Robust labour demand continues to be met with a rising supply of workers, with participation rising by a net 85.0k in Q3. Longer-term this is a positive development for Australia because it will add to the nation's growth potential, though in the near term it is making it challenging for policymakers to reduce spare capacity in the labour market. Consider that despite the recent strength in employment, the unemployment rate (at 2 decimal places) was little changed over the quarter at 5.20% compared to 5.25% in June.
Chart of the week
These minutes also revealed that before deciding to cut the cash rate in October, the Board went into an in-depth discussion around the current effectiveness of the transmission of an easing in monetary policy into the real economy. It was assessed that the cash flow boost to households' budgets from lower rates and exchange rate depreciation were the channels most likely to work much as they have done in the past. Regarding the latter, RBA Governor Philip Lowe was quoted as saying; "The exchange rate is a better stabiliser than our own monetary policy" during a panel discussion at an IMF conference in Washington on Friday. On the other hand, some concern was expressed that there could be a confidence impact on savers from low rates. Also acknowledged was that the flow-through to the residential building sector might be less impactful than in past easing cycles. This theme was covered in greater detail in a speech this week by the RBA's Deputy Governor Guy Debelle, noting that with turnover in the housing market at low levels, credit growth was also likely to remain low, while households constrained by low income growth and faced with tight lending standards were factors unlikely to drive an acceleration in borrowing. As such, the Board was sanguine to the risks to financial stability associated with an overinflation of house prices fuelled by low rates.
