Macro (Re)view (30/4) | Staying patient through the recovery

This week's soft Australian March quarter inflation print will likely see the RBA reaffirming its commitment to its forward guidance for rates not to rise until 2024 at the earliest at next Tuesday's policy meeting. The RBA will also release its updated set of economic forecasts next week where the key will be the revised profile for the unemployment rate. Earlier in the year, the RBA forecast the unemployment rate to end 2021 at 6% and then fall to 5.5% by the end of 2022. But a strong first quarter for employment, occurring at a time of very low growth in the workforce, has surpassed these expectations with national unemployment declining to 5.6% as of March. The withdrawal of key fiscal supports is expected to result in some slowing in employment rather than a derailing of the recovery. As a result, unemployment may be forecast next week to end this year around 5.25%. The downward trajectory can be then expected to continue with growth running at an above trend pace, though in the event of open borders, the progress would slow as inbound migration boosts growth in the labour force. The June 2023 forecast for the unemployment rate is currently 5.25% but may be lowered into the high 4s range. Ahead of the upcoming Federal Budget, Treasurer Frydenberg this week confirmed that the fiscal authority is aligned with the RBA in the objective to drive the unemployment rate into the 4s. Overall, the intent to continue with policy accommodation will continue while inflation is soft. 

In the March quarter, headline CPI undershot market estimates coming in at 0.6%, with the annual pace only a little firmer at 1.1% from 0.9% (reviewed here). While there is a range of policy-related effects currently impacting the measures, including the HomeBuilder grants and government rebates on utilities, there were few signs of broad-based price pressures building. To this point, trimmed mean inflation—the RBA's preferred measure—was subdued at 0.35%q/q as the annual pace slowed to a new record low of 1.09%; well short of the 2-3% target band (see chart below). Despite a sharp economic recovery in which activity rebounded by 6.6% over the second half of last year, broad-based inflationary pressures have not materialised to the extent seen in other economies during their reopenings. While inflation will spike higher next quarter, the RBA has already communicated that it will assess this as transitory, reflecting statistical base effects rather than being supported by underlying forces in the economy.

Chart of the week

Offshore this week, the US has been at the centre of developments as the Federal Reserve maintained its patent tone on policy amid a tape of data releases that underscored the robust momentum that the economy has built up since reopening. The Fed's FOMC left all policy settings on hold this week, giving no indication that it is nearing contemplating a slowing in the pace of its monthly asset purchases from the current run-rate of $120bn/mth. In the post-meeting press conference from Chair Jerome Powell highlighted that activity and employment had strengthened since the start of the year but the overall recovery still had a long way to go and remained dependent on the path of the pandemic. The most encouraging sign was March's 916k surge in nonfarm payrolls, but with employment still 8.4 million below its pre-pandemic level, the line was maintained that "substantial further progress" was required before asset purchases would be tapered. These were supportive tones to a recovery that is increasing pace on the back of the vaccine rollout, with GDP growth in the March quarter advancing by 1.6%q/q compared to a 1.1% rise in the December quarter. With growth being sustained for three consecutive quarters since the reopening, US GDP has rebounded to 0.9% below its pre-pandemic level from a trough of more than -10% in June last year. Household consumption remains the driving force picking up by 2.6%q/q from just a 0.6%q/q pace in Q4. An earlier round of stimulus cheques helped drive a 5.4% surge in goods-related consumption, with the category a stunning 12.5% higher through the year. This compared with a relatively subdued 1.1% advance in services consumption and has contracted by 3.2% year-on-year as social distancing and precautionary behaviour continues to weigh on demand. Adding to the optimism around the recovery was President Biden's latest fiscal stimulus plans, with $1.8bn in family assistance measures unveiled following on from his announcement earlier in the month of $2.3bn in infrastructure spending.

Over in Europe, the extent of backsliding in the bloc's recovery following the extension of shutdowns through the first quarter of the year in response to fast-spreading variant strains of the virus was revealed. After contracting by 0.7% in the December quarter, GDP fell by a further 0.6% in Q1, resulting in a 1.3% retracement in activity over the period. This put the brakes on a recovery which started with significant momentum after GDP surged by 12.5% in Q3 last year but was unable to be sustained as the virus situation deteriorated and the vaccine rollout was plagued with operational delays early on in the program. Overall, euro area GDP remains 5.5% below its pre-pandemic level but high frequency data including PMIs and sentiment surveys point to a robust rebound in activity when restrictions are rolled back. Other European data points came in around consensus this week, with the initial estimate of headline inflation lifting by 0.6% in April as the year-over-pace firmed from 1.3% to 1.6%. But the increase in the annual pace mainly reflects much higher energy costs over the past year (10.3%) as global oil markets rebounded after shutdowns. Highlighting this, core inflation (excludes energy and other volatile items) remains much softer, with the annual pace easing from 0.9% to 0.8%. Meanwhile, euro area unemployment declined against expectations for a steady outcome, falling from 8.3% to 8.1% in March and continuing its downward move since reaching its highs of the pandemic of 8.7% in Q3 last year.

Australian Q1 CPI 0.6%, 1.1%yr

Australia's Consumer Price Index (CPI) came in weaker than expected across all key readings in the March quarter. Policy-related effects are creating a lot of volatility within the data, but there is little to indicate that a strong economic rebound is leading to broad-based underlying inflationary pressures.   

Consumer Price Index — Q1 | By the numbers 

• Headline CPI (not seasonally adjusted) was softer than expected at 0.6% in Q1 against the median estimate of 0.9% and was down from 0.9% in Q4. Annual CPI firmed to 1.1% from 0.9% but was below the 1.4% rate expected. Seasonally adjusted CPI softened to 0.5% in Q1 (from 0.9% in Q4), leaving the annual pace little changed at around 1%.  
• Details for the underlying measures (measures are seasonally adjusted);
• Trimmed mean lifted 0.35%q/q, coming in well below the 0.6% pace expected, while the annual pace eased to 1.09% from 1.17%. 
• Weighted median increased by 0.42%q/q as the pace through the year held around 1.3%. 

Consumer Price Index — Q1 | The details 

Headline inflation was muted in the March quarter at 0.6%, much slower than the rises in the previous two quarters (1.6% in Q3 and 0.9% in Q4). The RBA's preferred measure of inflation has remained broadly unchanged over the period of the reopening, with the trimmed mean printing at 0.35% in the quarter as the annual pace softened slightly to around 1.1%. A range of policy impacts continues to push and pull the inflation data and base effects, which will kick in next quarter, will drive the pace of inflation higher, but there remains little to suggest that these effects will prove anything more than transitory. Goods-related inflation soared at the onset of the pandemic due to shifts in consumption patterns with many services becoming unavailable, but it may have peaked after it rolled over in Q1 to 2.8%Y/Y from 3.4%. Services inflation has picked up to 0.7%Y/Y but is still weak considering the extent of the reopening. 

The main influence on headline inflation in the quarter was from higher petrol prices, with automotive fuel up by 8.7% in Q1 in response to the rebound in global oil prices post lockdowns, but it is still 3.6% lower than a year earlier. This added a little more than 0.3ppt to headline inflation, accounting for most of the 0.38ppt contribution from the transport group.

 

Prices for the health group advanced by 2.0% in Q1 to be 3.0% higher through the year. Increases in the group included a 1.5% rise for medical and hospital services due to the January 1 reset for the PBS and Medicare safety net thresholds, and a 4.7% rise in medical products, appliances and equipment.

The key housing group, which contains the two largest individual items by weight in the CPI, lifted by 0.1% in Q1 to be 1.1% lower through the year. Despite strong demand for new homes in response to policy stimulus, new dwelling costs were recorded to have declined by 0.1% in the quarter, partially retracing the 0.7% boost in Q4. The ABS notes that this was a consequence of the Federal Government's HomeBuilder grants, which in the absence of the scheme would have led to new dwelling prices surging by 1.9% in the quarter. Rents were hit hard by elevated vacancies due to the border closures and introduction of rent reduction mechanisms at the onset of the pandemic but have held flat over the past two quarters. Household utilities fell further in the quarter (-0.2%) and are sharply lower than a year earlier (-7.4%) reflecting the impact of government rebates to support households through the pandemic.  

Prices across the furnishings, household equipment and services group fell slightly in Q1 (-0.2%) as post-Christmas sales led to discounting for furniture (-3.0%). However, furniture prices were still 5.9% higher through the year after demand for home office equipment surged due to the lockdowns. Meanwhile, the unwinding of free child care services has seen prices there return to above pre-pandemic levels after rising by 2.2% in Q1. 

There were a couple of downside surprises in today's report. Recreation and culture fell by 0.2%q/q on the back of a 1.8% slide in domestic travel costs. While the reopening of state borders led to increased demand for accommodation and higher hotel prices, this was more than offset by discounting by the airlines. Meanwhile, the alcohol and tobacco group posted its slowest quarterly outcome in 2 years (0.3%) as a 0.6% fall in tobacco, with no tax excise increase being applied, moderated a 1.0% rise in alcohol prices.  

Consumer Price Index — Q1 | Insights 

Pandemic -and policy-related effects continue to push and pull on the inflation data but the main takeaway is that the underlying pulse is still very soft. Despite the economy rebounding sharply since the reopening, inflation that is well below target will allow the RBA to keep its foot to the floor with its very accommodative policy settings. Inflation will spike higher next quarter on base effects, though the Board has repeatedly said that it expects this to be transitory and will weaken soon after reflecting the level of spare capacity in the economy and slow wages growth.   

Preview: Australian CPI Q1

Australian inflation data for the March quarter is due to be released by the ABS at 11:30am (AEST) today. Headline inflation rebounded over the second half of 2020 in line with the reopening, though the annual rate at 0.9% was sharply lower than year earlier, due largely to the impact of government policy decisions around free child care services and other cost-saving initiatives such as rebates for utilities. Inflation is now rising with these effects unwinding while other transitory factors are also contributing as activity in the economy continues to recover.  

As it stands | CPI 

Headline CPI was stronger than expected in the December quarter rising by 0.9%, leaving the pace through the year a little firmer at 0.9% from 0.7% previously. Measures of underlying inflation were more subdued and in line with consensus forecasts; trimmed mean 0.4%q/q and 1.2%Y/Y and weighted median 0.5%q/q and 1.5%Y/Y. (full review here)  

The main influences on inflation in the quarter were the reversal of free care services as well as the annual tax excise increase on tobacco. Contributing around 0.4ppt to quarterly inflation was the return of out-of-pocket costs for child care services (including outside school hours care) as the state of Victoria reopened from lockdown. On the other hand, government policy decisions in other areas weighed on inflation in the quarter, most notably through rebates for household utilities in Western Australia.  

New dwelling costs lifted by 0.7% in the quarter on the back of strengthening demand in response to low rates and government incentives. In response, developers increased base prices for new homes and offered fewer discounts, partially offsetting the downward impact on prices from the $25k HomeBuilder grants. Rents stabilised in Q4 after falling in each of the two previous quarters and were 1.3% lower than a year earlier, reflecting the impact of reduced demand due to the border closures and rent reduction mechanisms.   

Market expectations | CPI

The consensus forecast on headline inflation for the March quarter is 0.9%, with the range of estimates between 0.6% to 1.0%. Annual CPI is expected to rise from 0.9% to 1.4% (range: 1.3% to 1.7%). Consensus on trimmed mean inflation is for a quarterly rate of 0.6%, lifting the annual pace to 1.4% from 1.2%.    

What to watch | CPI 

A number of pandemic-related influences will continue to affect the March quarter inflation data. The strength in the housing market, driven by stimulatory policy, will likely see new dwelling costs rise further, though price rises will be muted in other areas, such as household utilities, due to government rebates. The sizeable shift towards good-related consumption away from services at the onset of the pandemic appears to be rebalancing now on a wider reopening and fewer restrictions and will be an area to watch. For now, annual inflation should remain contained ahead of a surge higher next quarter to north of 3% on base effects as the impact of cost-saving policy measures to support households roll out of the calculation. However, underlying inflation is likely to remain at a subdued pace with the economy still recovering from the pandemic shock. 

Macro (Re)view (23/4) | Prospects for less accommodative policy in focus

As was widely anticipated, the European Central Bank left all of its monetary policy settings unchanged at this week's meeting. The sense was that this meeting was largely bridging time until the northern summer, by which stage the vaccination rollout is expected to enable the economy to be reopened gradually. In the meantime, ECB President Christine Lagarde said that conditions remained constrained by shutdowns with GDP growth likely contracting over the first quarter. The upshot is that the Governing Council sees the near-term outlook for the economy being weighed by uncertainty and largely dependent on the health situation, though it remains more confident in prospects for the second half of the year with activity expected to rebound at pace as restrictions are phased out. The contrast here has led to some tension, with a few ECB officials in recent times raising the possibility that its bond-buying could be scaled back in anticipation of improved economic conditions, but a Reuters report quoting sources with knowledge of the matter indicated that the Governing Council agreed prior to this meeting that it would not discuss policy implications for June onwards. In the post-meeting press conference, President Lagarde emphasised that any talk of tapering at the highest level of the ECB was premature and would ultimately be guided by the next set of staff macroeconomic projections, which will be available for discussion at its next meeting in June. Tapering is also premature in the context of the Governing Council's decision only last month where it agreed that bond-buying under its €1,850bn Pandemic Emergency Purchase Programme (PEPP) be ramped up at a "significantly higher pace than during the first months of this year". However, gauging the extent of the follow-through on that announcement has been difficult for markets to assess and commentary around this matter was left vague. But for the ECB "preserving favourable financing conditions" is the objective and the Governing Council assesses that it has made progress here since deciding to lift the pace of PEPP purchases in March.

In the US, it was an unusually quiet week in terms of headline events; the main development for markets being reports of the Biden Administration considering a proposal to increase capital gains tax for wealthy Americans. North of the border, the Bank of Canada (BoC) was in the headlines after it withdrew some of its policy accommodation by lowering the weekly pace of its bond purchases from $4bn to $3bn. This was a widely expected move and was justified as being "consistent with the progress toward economic recovery we have already seen". In response, speculation has been mounting as to which central bank might be next in the process of gradually making policy less accommodative, though there are a couple of factors worth highlighting for the BoC. Firstly, at the onset of the pandemic, the Governing Council had more scope to cut rates than other central banks and in response it lowered its benchmark rate by a total of 150bps. Secondly, by comparison, the BoC has made far larger government bond purchases since the crisis than many of its global peers; it now owns around 42% of total government bonds outstanding, which is much higher than is the case for the Federal Reserve and ECB. Furthermore, in line with the updated forecasts in the BoC's April Monetary Policy Report, the output gap in the domestic economy is now expected to close in the second half of 2022, brought forward from 2023, leading to the prospect of rate hikes next year to come across the radar screen for markets.   

Switching to the domestic scene, the minutes of the Reserve Bank of Australia's meeting held at the beginning of the month reaffirmed the Board's commitment to its patient stance on policy, expecting that a return to tight labour market, consistent with generating wages growth to sustainably hold inflation within the target band, would not occur "until 2024 at the earliest". The Board acknowledged that markets hold a more optimistic view by noting that 50 basis points of rate hikes are factored into pricing by the end of 2023, but it is wary of the years prior to the pandemic where wages growth was slow and inflation ran consistently below the target. On bond-buying, with the QE program now into its second $100bn tranche, the Board notes that it is prepared to announce further extensions to provide more stimulus to the recovery effort. Domestically, the key point of uncertainty in the economy is how businesses and households adjust to the recent withdrawal of key fiscal support measures, with the sustainability of the rebound in activity hinging on the extent to which accumulated savings are drawn down to fund spending. An example of this caution may have been evident in March's preliminary estimate of retail sales, which despite rebounding by 1.4% in the month were left broadly flat (-0.1%) over the quarter (see chart of the week), though this could also be a sign of spending rebalancing towards services areas in which opportunities to spend are now more widely available than over the past year. Adding to the noise, the annual pace decelerated from 9.1% to 2.3% on base effects, though it will snap back sharply next month. The strength of the recovery to date was underlined by Australia's flash PMI reading for April lifting from a reading of 55.5 to 58.8, indicating a record pace of expansion in the month (albeit the series only dates back to 2016). Encouragingly, activity in both the services and manufacturing sectors advanced at their fastest rates in the survey's history, with conditions strengthening on the back of earlier stimulus and fewer restrictions, consistent with what was reported in the more widely followed NAB Business Survey last week. 

Chart of the week

Macro (Re)view (16/4) | Strength to strength in Australia's recovery

News on Australia's economic recovery was unequivocally strong this week, with signs that the established momentum can be durable to the withdrawal of fiscal support. One month after employment was restored to its pre-pandemic level, further gains came through in March with an increase of 70.7k that exceeded the top end of the range of market forecasts (reviewed here). In a shift from recent months, the strength swung back to part-time employment (91.5k) after a surge in the full-time segment between October to February. Strong employment at a time of very low growth in the working-age population, impacted by international border restrictions, continues to see the national unemployment rate retrace from its pandemic high of 7.5%, falling a further 0.2ppt to 5.6% in March. With fewer restrictions on activity and trade, more Australians have been able to return to their usual rosters, with total hours worked replicating employment in rising above their pre-pandemic level (see chart below). This was also reflected in sharp declines in underemployment (7.9%) and underutilisation (13.5%) to rates lower than prevailed before the onset of covid. While a period of uncertainty is at hand due to the withdrawal of the Federal Government's JobKeeper wage subsidy scheme, strength in leading indicators of labour demand suggests the transition will be taking place at a favourable juncture. But with this yet to play out and with the economy still operating with considerable spare capacity, there will be no shift in the emphasis of the RBA to support a return to a tight labour market by leaving its accommodative settings in place. 

Chart of the week

Summarising the level of optimism in the recovery despite the prevailing headwinds from the wind-up of the JobKeeper policy and a slower-than-expected vaccine rollout, Australian consumer sentiment advanced by 6.2% in the month of April, driving the Westpac-Melbourne Institue Index to its highest level since mid-2010. The internals of the report showed large increases of more than 10% in optimism around the economic outlook for the next 12 months and in assessments of family finances compared to a year ago. Strength in both measures will be key to the durability of the surge in household consumption that has occurred since the reopening of the economy. In the housing market, consumers continue to expect further price rises—this sub-index stands 8% higher than prior to the pandemic and the ensuing stimulus measures—and this is leading to some discouragement from first home buyers as affordability becomes more stretched. A strong read on consumers came alongside a stellar NAB Business Survey in March. Business conditions lifted from +17 to +25 hitting a record high that was matched by each of the sub-components across trading, profitability and employment. Encouragingly, a record high result for forward orders suggests that strong activity levels will be sustained beyond the short term. Business confidence softened a little to +15 from +18 but remained very elevated in the month.  

— — —

Moving offshore, the robust recovery in the US economy continues to drive market narratives as officials from the Federal Reserve stayed on message this week. With inflation central to these discussions, this week's CPI report for March was a highlight release. Headline inflation printed above consensus rising by 0.6%m/m as base effects drove a rise in the annual pace from 1.7% to 2.6% (vs 2.5% expected). However, the main influence was from higher gasoline prices, which lifted by 9.1% in the month (22.5%yr), as services inflation remained subdued (0.3%m/m, 1.6%yr) amid the ongoing disruptions associated with the pandemic restrictions. While the outcomes for core inflation were also stronger than anticipated, the rise in the annual pace to 1.6% from 1.3% only takes it back in line with its level from the end of last year when the economy had lost some of its reopening-driven momentum as the health situation worsened. Base effects will see inflation rise rapidly next month, but the dynamics are not indicating that they will concern the Fed. 

That was certainly the message from Fed officials this week, with the likes of Powell, Clarida, Williams and Mester all reiterating the Committee's central expectation for high inflation prints to prove transitory, with the pace to slow as the supply side responds to meet the surge in demand coming through as the economy opens up. In any case, Fed Vice Chair Clarida emphasised that the key for policy is keeping longer-run inflation expectations anchored around the 2% target rather than responding to volatile data prints. Meanwhile, Chair Powell outlined during an address to the Economic Club of Washington that the pandemic still posed significant risks to the outlook and that "substantial further progress" towards its employment and inflation goals was required before tapering of its $120bn/mth of asset purchases would occur, likely coming well ahead of rate hike prospects. In another standout release this week, retail sales soared by 9.8% in March (vs 5.9% expected) as households started to make use of their $1,400 stimulus payments, with the outturn accelerating monthly sales to 17.1% above their pre-pandemic level. Adjusting for the more volatile areas of spending, control group sales advanced by 6.9%m/m in a slight miss on consensus (7.2%), but annual growth lifted by 4ppts to its fastest pace on record at 14.2%.

To Europe where there was positive news around the bloc's trouble vaccine rollout, with the EU to take delivery of another 50 million doses of the Pfizer shot that will take the total stockpile to 250 million in Q2 that should enhance the pace of the program and alleviate concerns surrounding other vaccines. However, the situation in Europe remains precarious, with ECB President Christine Lagarde likening the current state of the economy to a patient "out of a deep crisis but still on two crutches", requiring the ongoing support of both monetary and fiscal stimulus until the recovery is assured. On the data flow, euro area retail sales surprised to the upside rising by 3.0% in February, rebounding from a weak start to the year, as the decline over the year moderated to -2.9% from -5.2%. Contributing significantly to the headline gain was Italy where sales accelerated by 8.4% in the month after some easing of restrictions. Meanwhile, March's final read on inflation was unchanged at an annual pace of 1.3% on a headline basis, up from 0.9% in the month prior, while underlying CPI was confirmed to have softened to 0.9%Y/Y from 1.1%. Switching to the UK, monthly GDP was estimated by the ONS to have broadly stabilised in February rising by 0.4% after the reintroduction of shutdowns prompted a 2.2% contraction in activity in January. With restrictions now starting to ease amid a successful vaccine rollout, growth should rise sharply in Q2. Lastly, Q1 GDP growth in China was softer than expected at 0.6%q/q, with pandemic base effects accelerating the pace through the year to 18.3% from 6.5%. Growth in retail sales (34.2%yr) speaks to the broadening out in the recovery there that was initially being driven by the industrial sector.  

Australian employment 70.7k in March; unemployment rate 5.6%

The Australian labour market approached the withdrawal of the JobKeeper wage subsidy and other income support measures full of running with employment rising by a much stronger-than-expected 70.7k in March following on from the 88.7k surge in the month prior. The national unemployment rate has declined to a pandemic low of 5.6% after hitting a peak of 7.5% during the worst of the crisis. 

Labour Force Survey — March | By the numbers

• Employment (on net) increased by 70.7k in March, topping the range of estimates for the second consecutive month and was double the 35.0k rise expected. February's outcome was unrevised by the ABS at 88.7k. 

• National unemployment declined from 5.8% to 5.6%, outperforming expectations for a smaller fall to 5.7%.

• Australia's participation rate rose to a record high at 66.3%, up from 66.1% in February, which comes 10 months the nadir where the shutdown had crunched the rate to a 21-year low.  

• Hours worked advanced by 2.2% in the month to 1.8bn hours adding to the 5.8% rebound in February (revised from 6.1%). Total hours worked have now risen back above their pre-pandemic level. 

Labour Force Survey — March | The details

Having been restored to its pre-pandemic level in the month prior, employment made further gains rising by a net 70.7k in March. In a shift from what has been taking place over recent months, the composition of this gain came entirely from the part-time segment (91.5k) as full time employment recorded its first decline since September (-20.8k). Overall, total employment is 0.5% above its pre-pandemic level, with the part-time segment 1.9% higher and full-time broadly in line with this benchmark.  

Reopening effects, rolled back restrictions and the earlier stimulus measures have ramped employment growth up to a rapid pace, averaging 62.9k per month over the past 3 months. Forward-looking indicators of labour demand suggest that strong employment will be maintained beyond the reopening phase, even as fiscal support is withdrawn. Strength in employment conditions would have been a contributing factor to the participation rate reaching a record high in March at 66.3%, encouraging people back to the labour force.  

Strong employment growth at a time of very low growth in the working-age population (0.4%yr), due mostly to the closure of the international border, is helping policymakers to make inroads into spare capacity in the labour market. Unemployment fell to 5.6% in March, well down from the July 2020 peak of 7.5%, but still above where it was pre-pandemic (5.2%) and much higher than the RBA's full employment estimate (high 3s to low 4s). Broader rates of spare capacity have come down sharply, with underemployment falling to 7.9% from 8.5% and underutilisation printing at 13.5% from 14.4%. But all measures can be pushed much lower and this will remain the focus for the RBA.    

Hours worked increased by 2.2% in March to 1.8bn hours, which is 1.2% above its pre-pandemic level. But the recovery has been uneven with part-time hours (5.6%) rising much higher than full-time hours (0.3%) on their year-ago levels. Overall, total hours lifted by 0.4% in the quarter, though this most likely understates the pace of activity in the economy due to an unusually large decline in the month of January (-4.9%) associated with more workers taking annual leave then.     

For the states, employment is now either in line with or above pre-pandemic levels in all states outside of South Australia. However, unemployment rates are mostly higher than was the case a year earlier, particularly in Victoria (6.1% compared to 5.2%). South Australia at 6.3% has the same level of unemployment than it had prior to the pandemic, while in Western Australia unemployment is at a 7-year low of 4.8%; well down from 5.4% a year ago. In terms of hours worked, only Victoria (-1.2%) remains below its pre-pandemic level, still in recovery mode from its winter shutdown.

Labour Force Survey — March | Insights

As a final snapshot of conditions ahead of the withdrawal of fiscal support, the labour market appears well-positioned to weather the transitional effects, on aggregate. Notwithstanding this, there will still be significant impacts on the industries hardest hit by the pandemic as this occurs. The positive is that forward-looking indicators of labour demand are strong and this should help the transition. With this still to play out, and with measures of spare capacity still high, policy efforts by the RBA will remain focused on supporting the labour market. 

Preview: Labour Force Survey — March

Australia's latest report on labour market conditions for the month of March is due to be published by the ABS at 11:30am (AEST) this morning. Nine months after the reopening of the national economy, employment completed a v-shaped recovery to its pre-pandemic level after a much stronger-than-expected rise of 88.7k in February. Headline unemployment fell to its lowest level in the period, declining from 6.3% to 5.8% but remained well above its pre-pandemic rate of 5.2%. Today's report comes ahead of the withdrawal of the Federal Government's JobKeeper wage subsidy policy that maintained employer-employee connections and supported incomes through the earlier shutdowns.  

As it stands | Labour Force Survey

Employment posted its strongest outcome since the initial month of the reopening surging by 88.7k in February, printing well above the consensus estimate of 30.0k following on from a 29.5k rise in January. Full-time employment (89.1k) accounted for all of February's gain as the part-time segment declined slightly (-0.5k). 

When Covid restrictions were first eased, part-time employment snapped back sharply to start the recovery, but more recently the full-time segment has taken up the running rising by 359.6k since October compared to a 67.9k rise in part-time employment. Overall, total employment is now back to its pre-pandemic level of around 13.1 million 9 months after the reopening. The level of full-time employment is a touch higher (0.2%) than prior to the pandemic, while part-time employment is slightly lower (-0.4%).

With the national participation rate remaining around a record high in February at 66.1%, the strong employment outcome was able to drive the unemployment rate down sharply from 6.3% to 5.8%. Unemployment peaked at 7.5% in July, though it remains elevated on its pre-pandemic level (5.2%) and is well above the low 4s range estimated by the RBA to be the level of full employment. Broader measures of spare capacity have improved significantly from their shutdown highs but rates of underemployment (8.5%) and underutilisation (14.4%) are much higher than would be the case in a tight labour market. 

After a slow start to the year where a higher than usual number of workers were taking annual leave, hours worked rebounded from their 4.9% fall in January with a 6.1% rise in February. In contrast to employment, total hours worked remain lower (-0.7%) than their pre-pandemic level, pointing to the ongoing effects of activity restrictions and a higher level of spare capacity in the economy. 

A full review of February's report can be accessed here

Market Expectations | Labour Force Survey

The median estimate is for employment to rise by 35.0k in March, with forecasts ranging up to 65.0k on the high side and 10.0k on the low side. National unemployment is anticipated to tick lower to 5.7% from 5.8%; the range of estimates is between 5.6% and 5.9%. 

What to watch | Labour Force Survey

The key point to highlight is that the March survey will be the final snapshot of labour market conditions before the withdrawal of the JobKeeper policy and the coronavirus supplement payments. While this is not widely expected to materially derail the progress that has already been achieved, there will be some dislocation with Federal Treasury estimating the transitional effects could result in 100-150k job losses, though this would not necessarily amount to an equivalent rise in unemployment as that would depend on the activity of those affected workers in terms of their participation and ability to secure another job. There, the situation is encouraging with forward-looking indicators of labour demand, including job vacancies and components within the NAB Business Survey and PMIs at very elevated levels. Also, watch for the change in hours worked over Q1 as it will provide a good approximation of GDP growth prospects for the March quarter.  

ABS Household Impacts of Covid-19 Survey - March

The March ABS Household Impacts of Covid-19 Survey covered topics including wellbeing, precautionary behaviour and use of public transport. The survey was conducted between 12 and 21 March taking into account responses from around 3,900 people. 

Reflecting the easing of pandemic-related concerns, measures of emotional and mental wellbeing have improved over time. Since August, there have been large declines in measured levels of nervousness (46% to 27%), restlessness (41% to 22%) and that everything was an effort (41% to 24%). Feelings of hopelessness, sadness and worthlessness have also lessened over the period. 

Source: ABS 

Separately released data today showed that consumer sentiment according to the Westpac-Melbourne Institute Index in April had risen to an 11-year high. Since the most recent low of 79.5 in August, sentiment has improved by nearly 50%, with the lessening in emotional and mental stress over this time providing some important context. 

With very low virus case numbers being recorded in Australia over the past 6 months or so, precautionary behaviours tracked by the survey have declined. This is most clearly seen in rates of social distancing, which have fallen from 88% in September to 66% in March as restrictions have been wound back, while staying at home has fallen by around one-third over the past 5 months. However, regular hand hygiene appears to be one practice that has stuck. Use of facemasks rose in January due to mandates by state authorities where there were concerns around community transmission of the virus.   

Source: ABS

One area where the effects of the pandemic have continued to restrict activity is in public transport use. Prior to the pandemic, 22.5% of respondents said they used public transport one or more times a week—much higher than was the case in March (14.3%). Comfort in using public transport as a result of Covid has fallen from around 80% before the pandemic to 60% in March. 

Source: ABS

Low use of public transport is consistent with mobility indicators for transit stations, which remain sharply down on pre-pandemic levels.

However, as public transport use has declined sharply, spending on new vehicles has surged. This trend reflects a broader shift in consumption patterns, with spending diverted away from areas still restricted by the pandemic into goods-related areas, while also highlighting the strength of fiscal and monetary stimulus that has been supporting spending.      

Macro (Re)view (9/4) | US leads recovery; RBA reaffirms support

Summarising prospects for the post-pandemic rebound, the IMF this week in its April World Economic Outlook upgraded its forecasts for global growth in 2021 from 5.5% to 6.0% and in 2022 from 4.2% to 4.4%. Significant fiscal stimulus packages, most notably in the US, as well as wider reopening efforts due to vaccine rollouts are the key factors behind the upgrades, though the group emphasised that there will be a vast spread in the pace of recoveries from country to country and that overall uncertainty over the outlook remains elevated. The pandemic continues to be the main risk to the global recovery, with variant virus strains and operational issues around vaccine rollouts — highlighted this week with many countries (including Australia) now working through adjusting plans following concerns over side effects linked to the AstraZeneca vaccine — potential headwinds. 

The uplift to the growth outlook in the US was a sharp 1.3ppts to 6.4% in 2021 followed by a further 1.0ppt increase to 3.5% in 2022. This has GDP on track to return to its pre-pandemic level after the first half of this year, with the Biden Administration's direct support payments and accumulated savings set to drive a sharp rebound in household consumption spending. In past cycles, accelerating growth would have prompted tighter monetary policy settings, but the message from the Federal Reserve continues to be that it will be a very different story this time around. This week's FOMC minutes from the March meeting reaffirmed the Fed's commitment to its more patient reaction function, with policy to respond to actual rather than forecast outcomes. The indications are that the current pace of Fed purchases ($120bn/mth) will be maintained "until substantial further progress" is made towards reducing spare capacity in the economy. FOMC Chair Jerome Powell reiterated during an IMF seminar that while the reopening is anticipated to see inflation rise sharply, the increase is expected to be temporary rather than sustained, consistent with subdued price pressure dynamics that have persisted for the past 25 years or so. The main US data point to highlight was the ISM services index for March, which surged to a record high of 63.7, well clear of the 50 line that signals expansion and up from a read of 55.3 in February. Accelerating domestic activity was reflected in the internals with the new orders (+15.3pts) and production (+13.9pts) sub-indexes surging to their highest levels on record, while the index measuring price changes for materials and services lifted 2.2pts in the month with logistics delays a key factor.     

The contrast in the outlook for Europe compared to the US was underlined by both the IMF and ECB this week. The effects of renewed lockdowns across Europe will weigh heavily over the near term before the vaccine rollout enables the economy to rebound over the second half of the year. As a result, forecast growth in the bloc was upgraded by the IMF only modestly relative to the January update, lifting from 4.2% to 4.4% in 2021 and 3.8% in 2022 from 3.6% previously. These forecasts are similar to those recently published by the ECB for growth of 4% in 2021 and 4.1% in 2022, with GDP only being restored to pre-pandemic levels mid-way through next year — around 12 months later than is expected in the US. At the time of the ECB March policy meeting, short-term economic weakness and elevated uncertainty over the outlook further out together with the rise in global bond yields prompted a response from the Governing Council. The account of the meeting revealed that the decision to conduct PEPP purchases at a "significantly higher pace" than earlier in the year was taken to ward off a tightening in financing conditions as risks to the economic outlook were intensifying. Meanwhile, the March account attributed the rise in bond yields largely to a recalibration of inflation expectations, though if it were to be real rates on the rise, an intervention by the ECB would not necessarily follow if it reflected improving economic prospects. 

Turning to Australia, it was the RBA in focus this week with the Board leaving all policy settings unchanged at its April meeting (reviewed here), while the Bank also published its half-yearly Financial Stability Review (FSR). The main theme from the Board this week was that while the economic recovery was well underway and is expected to continue at a strong pace through this year and next, its commitment to its forward guidance on rates is clear. In his decision statement, Governor Philip Lowe noted that there was still "considerable spare capacity" in the economy and that the unemployment rate was elevated. The Board continues to expect that the macro conditions will not be consistent with its full employment and inflation objectives "until 2024 at the earliest". While it is not the consensus call by markets, my expectation remains that the Board will fully demonstrate its commitment to this guidance by extending the maturity of its 3-year yield target policy to the November 2024 bond from the April 2024 bond later on this year. The other key point was that the Board is prepared to further expand the $200bn envelope of the bond purchase program if it will assist in the recovery effort. Purchases under this program are now 50% complete having commenced in November (see chart below).

Chart of the week

Meanwhile, rising house prices at a time of low rates have certainly been a key point of discussion of late in Australia, though the week's communications from the RBA indicate no immediate concern. The April FSR notes that while house prices have lifted strongly over recent months, debt has not matched this pace of increase. For now, the emphasis is on maintaining the quality of lending standards to avoid excessive risk-taking.   

RBA reiterates commitment to 3-year policy

As was expected, the RBA Board left all of its monetary policy settings unchanged at today's April meeting. Governor Philip Lowe's decision statement maintained the 0.1% targets for the cash rate and 3-year Australian Government bond yield and made no adjustments to either the bond purchase program or Term Funding Facility. The key theme from today's meeting was the strength of the Board's commitment to keeping the 3-year segment of the yield curve anchored at the cash rate target (0.1%) as the recovery progresses, with growth forecast to run at an above-trend pace through 2021 and 2022.

While the recovery in the domestic economy from the pandemic crisis has exceeded the RBA's expectations to date, highlighted by the return to pre-covid levels of employment and output growth of 3.1% in the December quarter, the Board is not getting complacent. And this is for very good reason with Governor Lowe noting "the economy is operating with considerable spare capacity and unemployment is still too high". With the unemployment rate currently at 5.8%, there is considerable scope for it to decline to a level low enough to elevate wages growth (currently at a record low of 1.4%Y/Y) to a pace assessed as consistent with holding inflation within the 2-3% target range. The Board's forward guidance remains that the cash rate will not be increased until these conditions are met, which is not expected "until 2024 at the earliest". 

As regular readers will be aware, my expectation is that the upcoming decision the Board has on whether to extend the maturity of the yield target policy past the April 2024 bond will be upheld, with the RBA to demonstrate the credibility of its commitment to its forward guidance by shifting to the November 2024 bond. Additionally, today's statement noted further support to the recovery could be provided through more bond-buying beyond the $200bn already committed under the bond purchase program through to late August, based on the current $5bn weekly run rate. 

Also of note were comments on the housing market, with conditions acknowledged as having "strengthened further" with prices on the rise nationally. The strength is mainly attributed to the owner-occupier segment—in particular first home buyers—but credit growth to investors is seen as "subdued". Ahead of Friday's half-yearly Financial Stability Review, Governor Lowe stated that with house prices moving higher at a time of low rates, "it is important lending standards are maintained".