The strong momentum in the recovery of the Australian labour market from the pandemic crisis was the key development domestically this week. For the month in December, employment matched consensus in rising by 50.0k adding to the gains in October (180.4k) and November (90.0k) (full review here). Back when the onset of the pandemic forced the economy to be shuttered, employment fell by 872.1k over April and May, but over the remainder of 2020 a stunning rebound occurred with 784.5k of those earlier losses coming back to the economy, with the only bump in the road coming in September (-44.1k) reflecting the impact of Victoria's return to shutdown (see chart of the week). Provided that the nation can continue to keep the virus at bay, the momentum should be able to continue in 2021.
Chart of the week
Overall, the level of part-time employment has been more than fully restored and is around 25k or 0.6% higher than where it was pre-pandemic, but full-time employment has been slower to come back and is 112.4k or 1.3% lower over the period. But the good news is that over the December quarter, it was full-time employment (218.7k) that saw stronger growth than the part-time segment (101.7k), indicating that the recovery was broadening out with the earlier and more severe disruptions from shutdowns out of the way and with the benefit of more time enabling the strong fiscal and monetary stimulus response to gain significant traction. The unemployment rate declined by more than expected to 6.6% from 6.8% and is well down from its pandemic peak of 7.5%, but it is still a long way from levels that can be deemed acceptable and given that the participation rate lifted to a new record high in December at 66.2% significant policy support can be expected to remain in place for some time yet, particularly with the outlook being more uncertain than usual.
The other data points out during the week highlighted the susceptibility of the economy to virus-related effects as occurred over the Christmas/new year period. This was seen in the softening in consumer sentiment with the Westpac-Melbourne Institute's index declining by 4.5% in January, though it was still sharply higher than a year earlier (14.6%). As this survey has consistently shown during the pandemic, covid-related uncertainty typically generates a deterioration in consumers' assessment of economic conditions and this was the case in January with the year-ahead outlook falling by 8.3% and the 5-year outlook declining by 4.5%, though both are elevated compared to the same stage in early 2020 at +21.1% and +31.6% respectively. On the back of this, the unemployment expectations index also took a hit rising by 11.9%, but it is still comfortably below its long-run average level.
Meanwhile, Australia's flash PMI readings for January softened slightly in the month; the composite index easing from 56.6 to 56.0 as activity in the services sector slowed to 55.8 from 57.0 — attributed to the impact of the pandemic concerns and state border closures. But the overall levels still indicated that the economy was sustaining a solid pace of momentum. Lastly, December's preliminary estimate of retail sales pulled back by 4.5% in the month and may have been affected by weaker spending in Sydney following some localised virus clusters (NSW sales -5%m/m). However, it should be noted that in the month prior, retail sales had surged to a record high level after rising by 7.1%, boosted by Victoria's reopening and the Black Friday period (see here), so a slowing was not unexpected. Consider also that the level of spending in December was 9.4% higher than 12 months earlier and 9.2% above its pre-pandemic level.
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Macro developments over the past week offshore were shaped by central bank meetings, comments from US Treasury Secretary nominee Janet Yellen following President Biden's inauguration and the latest global economic activity surveys at the start of the year amid ongoing caseloads and containment measures. There were few expectations from the market going into this week's European Central Bank (ECB) meeting given that the Governing Council had significantly eased its monetary policy stance in December, and that was largely how things played out with the decision statement confirming no policy changes. The statement did, however, give greater prominence to the point that the ECB has been keen to highlight of late, which is the degree of flexibility of its Pandemic Emergency Purchase Programme (PEPP) to respond to changes in financing conditions. In the post-meeting press conference, ECB President Christine Lagarde said that the Governing Council's objective is to maintain "favourable financing conditions" to offset downside risks to its inflation outlook as a result of the pandemic.
Further expanding on this, President Lagarde outlined that the Governing Council's assessment of financing conditions was based on "a holistic and multifaceted approach" involving a range of indicators such as credit growth, sovereign bond yields, and yields on corporate bonds, but that if they were to remain favourable, then the full €1,850bn envelope under the PEPP need not be exhausted. Equally, however, the quantum of purchases could be recalibrated higher if financing conditions were to deteriorate. On the economy, President Lagarde said that the imposition of shutdowns would result in GDP contracting in Q4 and then weigh on activity through Q1, as highlighted by the weakening in the euro area composite PMI with January's flash reading diving deeper into contraction at 47.5 from 49.1 in the month prior. Still, the ECB's assessment was that some of the downside risks to its growth outlook had lessened due to the vaccine being rolled out and the recent Brexit agreement.
Other major central banks that met during the week included the Bank of Japan and Bank of Canada, with both reiterating the need for their highly accommodative policy stances to remain in place until the effects of the pandemic on their respective economies had dissipated. Over in the US, the former Federal Reserve Chair and current Treasury Secretary nominee Janet Yellen during testimony urged Congress to "act big" by taking advantage of historically low interest rates and ramping up spending to pursue the agenda of the Biden Administration around issues of economic inequality as well as the response to the pandemic. The current proposal as outlined last week is a $1.9tn stimulus package, though to pass the Senate the bill would need full Democratic support as well as the votes from at least 10 Republican senators, which according to the reports appears difficult even at this early stage. Attention now turns to next week's Federal Reserve meeting where markets will be keen for insight around how it is assessing the outlook and the implications for asset purchases. It is possible that the FOMC delivers a relatively upbeat message next week with the vaccine roll-out underway and with signs of resilience in the economy; the flash composite PMI for January advancing to 58.0 from 55.3 on stronger manufacturing activity (59.1 from 57.1) and an encouraging lift in the services sector (57.5 from 54.8), but January's weak non-farm payrolls outcome (-140k) should temper any optimism.
