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.
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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.
