In Australia, the focus remains on the devasting welfare and ecological impacts on communities across the nation caused by the unfolding bushfire crisis. In response, the Federal government announced this week the establishment of a new agency tasked with coordinating rebuilding efforts with state and local authorities and will be funded with an initial contribution of $2bn over the next 2 years. The scale and length of the disaster are likely to mean the economic impacts will be much greater than this and as a result, GDP growth faces a hit across the December and March quarters. Following drought conditions over the past couple of years, the bushfires are likely to accentuate weakness in farm output, while tourism, which is a key industry within many of the impacted locations across the nation, will also be impacted with spillover effects for local commerce. Activity may have also been affected by health concerns relating to outdoor air quality due to smoke haze in the major capital cities. At a time of national suffering, consumer confidence has unsurprisingly taken a hit in early in the new year as conveyed by a 1.7% slump in this week's ANZ-Roy Morgan survey. With the consumer sector already fragile, a further weakening of confidence could potentially add to the downside risks to the outlook for household consumption spending.
The local data flow this week surprised to the upside of expectations, though covering the month of November it was too early to have captured any bushfire-related impacts. Dwelling approvals accelerated by 11.8% in November — their strongest rise in 9 months — coming in well above the consensus estimate of 2.0%, which more than made up for a weak October where approvals fell by 7.9% (see our review here). The result was driven by a surge in high-rise unit approvals in Sydney, though it was notable that house approvals nationally posted their sharpest monthly increase in nearly 4 years, potentially signalling the start of a stabilisation in dwelling approvals that have been in sharp decline for much of the past 18 months.
In a result that went against the recent trend as commodity prices correct from highly elevated levels, the nation's trade surplus lifted to $5.8bn in November to come in sharply above the $4.1bn level expected (reviewed here). Export earnings increased by 1.8% in the month (5.5%yr) supported in the main by iron ore, with the underlying detail indicating this was driven by rising shipments as prices softened. In line with soft domestic demand conditions, import spending declined by 2.8% in November to be down by 3.1% through the year. Weakness over the past year is centred on capital imports (-3.9%m/m, -9.1%yr), while a weaker Australian dollar appears to be weighing on consumption spending more recently (-6.6%m/m, -2.9%yr).
Rounding out the week, retail sales increased at their fastest pace in 2 years, advancing by 0.9% in November (see chart of the week, below) against an anticipated rise of 0.4%, with annual growth improving to an 8-month high of 3.2% (reviewed here). The result was boosted by Black Friday sales promotions, with online spending surging by 14.5% in the month, but may also be a sign that consumers were willing to part with some of their windfall from recent RBA rate cuts and tax relief. However, there is a risk this reflects a bringing forward of spending ahead of Christmas, while the bushfires may have also impacted spending in December.
Chart of the week
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Shifting offshore, US events were highlighted by December's employment report, with non-farm payrolls rising by 145k in the month to slightly miss expectations for 160k, while revisions from the previous two months saw a net reduction of 14k. With the participation rate remaining unchanged at 63.2%, the unemployment rate matched the consensus forecast by holding at 3.5%. However, the broader measure of underemployment (U-6) fell to a new record low of 6.7%, indicating the labour market is yet to fully test its capacity constraints. The main surprise in the report was a slide in average hourly earnings growth from 3.1% to 2.9%Y/Y (vs 3.1% expected) to its slowest pace since July 2018. Overall, while employment growth appears to be slowing in line with a moderating economy, labour market conditions remain robust and wage pressures are contained. From a policy perspective, this appears unlikely to alter the view of the Federal Reserve, with the Vice Chair Richard Clarida in a speech this week describing the current monetary policy stance as being "in a good place" and "likely to remain appropriate" while the data flow is consistent with the Committee's baseline economic outlook. Vice Chair Clarida outlined that the action taken by the Committee to cut rates three times in 2019 had been "well timed" in providing insurance to the economy from headwinds offshore and disinflationary pressures.
In other US news, this week's ISM non-manufacturing survey reported that conditions for firms in the services sector had strengthened in December, with the headline index increasing from 53.9 to 55.0. Driving this gain was a sharp 5.6ppt rise in business activity levels, though both the new orders (-2.2ppt) and employment (-0.3ppt) components softened. Overall, the picture for firms in the services sector remains in contrast to those in the manufacturing industry, with last week's ISM manufacturing survey showing a deterioration in conditions from 48.1 to 47.2 to indicate that activity had contracted at a faster pace in December. Notably, production slumped by 5.9ppt in the month, though there were at least signs that sentiment levels had improved from Q3.
In other US news, this week's ISM non-manufacturing survey reported that conditions for firms in the services sector had strengthened in December, with the headline index increasing from 53.9 to 55.0. Driving this gain was a sharp 5.6ppt rise in business activity levels, though both the new orders (-2.2ppt) and employment (-0.3ppt) components softened. Overall, the picture for firms in the services sector remains in contrast to those in the manufacturing industry, with last week's ISM manufacturing survey showing a deterioration in conditions from 48.1 to 47.2 to indicate that activity had contracted at a faster pace in December. Notably, production slumped by 5.9ppt in the month, though there were at least signs that sentiment levels had improved from Q3.
In the UK, outgoing Bank of England Governor Mark Carney made notably dovish comments in a speech this week, indicating that if weakness in the domestic economy were to persist, the Bank had ample scope between conventional and unconventional measures to ease its policy stance further. Governor Carney's term concludes in mid-March where he will be succeeded by Andrew Bailey, the current chief executive of the UK's Financial Conduct Authority.
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