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.
