That situation would make it considerably more difficult to lower the spare capacity that exists in the labour market given that the participation rate remains close to its highest level on record, notwithstanding a decline from 66.1% to 66.0% in this latest report. As it stands, Australia's unemployment rate returned to 5.3% after easing from this level to 5.2% in September, while underutilisation (13.5% to 13.8%) and underemployment (8.3% to 8.5%) also unwound their improvements from the previous month. Consistent with a labour market that it some way off testing its capacity constraints, wage pressures remain subdued. In Q3, the Wage Price Index matched market expectations at 0.5% in the quarter and 2.2% through the year; the latter easing from a 2.3% annual pace in Q2 (full review here). Public sector wages growth continues to outperform, though it slowed from 2.6% to 2.5%, as private sector wages growth held steady at around 2.3% (see chart of the week, below). Overall, it will remain clear to the RBA that labour market conditions need to be considerably tighter to generate a pace of wages growth that is consistent with inflation between its 2-3% target band. Thus, further easing appears likely in early 2020 and market pricing for this has firmed accordingly.
Chart of the week
For firms, NAB's Business Survey indicated a slightly improved, though still soft, tone in October. Business confidence firmed from 0 to +2, while conditions lifted from +2 to +3; however, both are still comfortably below their long-run averages of +6. The improvement in overall conditions came from the trading sub-index rising from +4 to +7 and from profitability lifting from -2 to 0. Relevant to our earlier discussion on the labour market, this was not enough to generate stronger employment expectations, which after holding at +4 indicated that jobs growth was likely to average around 18.0k per month over the next 6 months, based on analysis from NAB Economics. Meanwhile, the Survey's forward-looking indicators showed further signs of stabilisation, with forward orders up from -2 to +3 and capacity utilisation broadly flat at 81.7%, though they still remain tilted towards a continuation of below-average conditions.
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Turning to the offshore perspective, trade developments continued to be the main focus for markets, which on the whole were fairly subdued over the course of the week. Risk sentiment appeared to cool slightly as the data flow disappointed somewhat, tensions in Hong Kong escalated, and a modest bid came into bond markets to halt their sharp sell-off from the past couple of weeks. In the US, President Trump at an address to The Economic Club of New York said that the phase one trade deal with China was "close" to being finalised but offered few new insights into the negotiations. Trump also maintained his criticism of the Federal Reserve (Fed) for not being aggressive enough with its recent easing in monetary policy, arguing that it has placed the US at a competitive disadvantage with other countries. During his testimony to the Congress this week, Fed Chair Jerome Powell outlined that weakness in global growth, trade uncertainty and soft inflation had prompted the Committee to cut its benchmark interest rate 3 times this year and now assessed the current stance as "likely to remain appropriate", though "noteworthy risks" remain to its baseline outlook for moderate GDP growth, strong labour market conditions and inflation near to the 2% target. Key data this week showed a modest 0.3% lift in retail sales in October, while core sales (adjusted for gasoline and vehicle purchases) increased by 0.2%, as both categories reversed declines in the previous month. Meanwhile, headline inflation firmed from 1.7% to 1.8% year-on-year in October, though core inflation softened against expectations from 2.4% to 2.3%.
Over in Europe, the second estimate of GDP growth in Q3 for the 19-nation euro area was unchanged at 0.2%, though the annual pace was revised up from 1.1% to 1.2%. Germany, the largest economy in the bloc, avoided sliding into a technical recession as had been expected by markets with output rising by 0.1% in Q3 following a downwardly revised contraction of 0.2% in the previous quarter. In annual terms, growth lifted from 0.3% to 0.5% but remains soft and has been heavily impacted by weakness in foreign demand for exports, while production in its key automotive sector has also faced headwinds in adjusting to new emissions regulations. Germany's Finance Minister Scholz said the result was not indicative of an economy in crisis and, much to the disappointment of markets, pushed back against the notion that fiscal stimulus was required. In the UK, despite a 58.0k fall in employment over the 3 months to September, the unemployment rate eased from 3.9% to 3.8% to its lowest level since 1974. Overall, the labour market appears to remain tight but conditions could be softening as the pace of wages growth slowed from 3.8% to 3.6% over the past 3 months. Inflation was also contained in October with the headline reading easing from 1.7% to 1.5%Y/Y, while it was unchanged at 1.7%Y/Y on a core basis.
In Asia, the latest activity indicators out of China continued to point to headwinds for the world's second-largest economy as retail sales (7.2%Y/Y), industrial production (4.7%Y/Y) and fixed asset investment (FAI) (5.2%ytd) all fell short of expectations in October. Weakness in investment remains a key concern for authorities with this latest FAI result the softest since 1998. In Japan, GDP growth almost stalled in Q3 rising by just 0.1%, with the annualised pace pulling back sharply from 1.8% to 0.2%. The result reflected a slowing in consumption and weakness in exports, though business investment provided some offset. Closer to home, the Reserve Bank of New Zealand surprised markets this week by keeping its benchmark interest rate on hold at 1.0% on the basis that economic conditions had not yet deteriorated to the extent that called for an additional 25 basis point cut to be delivered; an outcome that had largely been discounted within market pricing in the lead up to the meeting. However, the Bank remains alert to the downside risks domestically and offshore and is prepared to provide additional support "if economic developments warranted it".
In Asia, the latest activity indicators out of China continued to point to headwinds for the world's second-largest economy as retail sales (7.2%Y/Y), industrial production (4.7%Y/Y) and fixed asset investment (FAI) (5.2%ytd) all fell short of expectations in October. Weakness in investment remains a key concern for authorities with this latest FAI result the softest since 1998. In Japan, GDP growth almost stalled in Q3 rising by just 0.1%, with the annualised pace pulling back sharply from 1.8% to 0.2%. The result reflected a slowing in consumption and weakness in exports, though business investment provided some offset. Closer to home, the Reserve Bank of New Zealand surprised markets this week by keeping its benchmark interest rate on hold at 1.0% on the basis that economic conditions had not yet deteriorated to the extent that called for an additional 25 basis point cut to be delivered; an outcome that had largely been discounted within market pricing in the lead up to the meeting. However, the Bank remains alert to the downside risks domestically and offshore and is prepared to provide additional support "if economic developments warranted it".
