In the private sector, wages growth posted its 4th consecutive quarterly rise of 0.5% but the annual pace moderated from 2.25% to 2.16% to its softest in more than a year. A sharper slowdown was seen in the public sector, with the quarterly pace stepping down from 0.5% to 0.4% as annual growth weakened from 2.49% to 2.25% to a 3-year low. The cross-industry breakdown highlighted the weakness of the wages impulse, with the pace of wages growth picking up in only 5 of 18 measured industries over the year, including in the mining and healthcare sectors. Outside of the Fair Work Commission's 2019 decision to raise the minimum wage by 3.0%, there appears to be very little underlying pressure being applied to wages from labour market conditions.
This week, the first update on the labour market for 2020 was released by the ABS (reviewed here). The good news was that employment posted its third straight above-consensus result with a 13.5k increase in January, with markets anticipating a more modest rise of 10.0k. However, with the participation rate ticking up from 66.0% to 66.1%, employment growth in the month was vastly slower than growth in the labour force. As a result, the unemployment rate was driven from up 5.08% to 5.29%, which was its sharpest rise (+0.21ppt) in a single month in 4 years and unwound the declines achieved over the final two months of 2019. Of more concern for policymakers, spare capacity in the labour market became more elevated at the start of 2020, rising to its highest levels since mid 2018 as the underemployment rate (workers currently wanting more hours) lifted from 8.3% to 8.6% and the underutilisation rate (including the underemployed and unemployed) rose from 13.4% to 13.9% (see chart of the week, below).
Chart of the week
These are challenging dynamics for the RBA. On the one hand, it will see workforce participation at or near record highs as a long-term positive that will add to the nation's growth potential, but on the other, the current pace of employment growth means that it can only achieve gradual progress towards its objectives of full employment and inflation within the 2-3% target. The RBA's minutes from its February meeting showed that the Board had discussed further lowering that cash rate in an attempt to speed up the pace of employment growth and bring it closer to meeting its objectives, though it opted against that action on the basis that more time was needed to assess the impact of its three rate cuts in 2019, while it had also become mindful that even lower rates could pose risks to financial stability with house prices continuing their upswing. The Board's deliberations on policy settings are set to become even more nuanced following the outbreak of the coronavirus, which it noted: "presented a material near-term risk to the economic outlook for China and for international trade flows, and thereby the Australia economy". The Bank's recent set of updated forecasts implied that it anticipates activity to be held back over the first half of 2020, due largely to the coronavirus and bushfires, before picking up over the second half. Overall, it appears the Board will seemingly be prepared to look through some weakness in the near-term data flow, though its confidence in its outlook will be tested if this shows signs of being a more material deterioration.
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Moving abroad, the response to the coronavirus outbreak from authorities in China ratcheted up as the People's Bank of China (PBoC) announced a range of interest rate cuts, while government sources in media reports had also indicated that the banking sector had been providing key firms with cheap loans to support activity through the disruption. The stimulus measures saw Chinese equity markets surge higher on the week, though concerns around the global economic outlook in the face of the outbreak saw weakness ensue across the other regions. The first signs of the disruption caused outside of China were provided on Friday through weak Purchasing Managers' Index (PMI) readings for Japan, with manufacturing conditions falling further into contraction from 48.8 to 47.6, while the services sector swung from modest expansion (51.0) into contraction at 46.7. This followed a much sharper-than-expected contraction in activity in Japan in Q4 where GDP fell by 1.6%, and while this was influenced by a sharp decline in household spending following a rise in the sales tax rate from 8% to 10%, effective from the start of the quarter, it also reflected weakness from business investment and residential construction.
In the US, the minutes of the Federal Reserve's (Fed) policy meeting at the end of January were released, where the Committee remained on hold and continued to assess that the "current stance of monetary policy (1.5-1.75%) was appropriate" to support the ongoing expansion in the economy, strong labour market conditions and inflation returning to target. Vice Chair of the Federal Reserve Richard Clarida reaffirmed these themes during the week, noting that "the fundamentals in the US are strong... It's a good picture". However, the Committee is clearly cautious on the global outlook due to the prominence of risks around trade uncertainty and the coronavirus, highlighted in the minutes by the line that it is "mindful of the possibility that the tentative signs of stabilization in global growth could fade". A deterioration in the global economy would have implications for the US and, most likely, the Fed's policy stance and this played through markets this week as yields across the curve flattened; the 10-year Treasury yield going sub 1.5% for the first time since 2016. Meanwhile, US equity markets reflected this risk-averse sentiment where declines accelerated after February's flash PMI readings came in weaker than expected, with the composite index falling into contraction for the first time in more than 6 years (from 53.3 to 49.6), which was driven activity in the services sector rolling over from 53.4 to 49.4 to signal its first contraction in 4 years. In the manufacturing sector, activity was also weaker in the month, though it was still able to remain in expansion at 50.8.
Over in Europe, expectations were that Friday's flash PMI reads would show signs of the impact of the coronavirus spilling over into activity in the bloc. In the event, the readings came in better than expected, with the composite PMI for the Eurozone rising to a 6-month high of 51.6, as the services sector continued to show resilience (52.8) amid the ongoing contraction in manufacturing (49.1). In the Account of the European Central Bank's most recent policy meeting, released this week, the Governing Council had agreed that the performance of the services sector was a sign that its stimulus measures announced back in September were supporting the economy, even though investment intentions were still weak. With the euro area being heavily trade-exposed economy, the completion of the phase one deal between the US and China had been generally perceived as lessening the downside risks to the outlook. Nonetheless, some members had warned against becoming Governing Council "becoming too optimistic". Certainly, caution seems warranted on this week's PMI readings, with the impacts of the coronavirus on supply chains, tourism and external demand seemingly yet to be reflected in the data.
