While strong progress in the recovery has been achieved since the reopening, this week's data on the Australian labour market confirmed that the goal of the nation's fiscal and monetary authorities to return to full employment likely remains some way off. Employment posted its weakest outcome in 7 months falling by 30.6k in April against a 20.0k rise forecast (reviewed here). The end of March expiry of the Federal Government's JobKeeper wage subsidy may have been a factor behind the weakness, though for now, it is difficult to draw definitive conclusions due to the presence of seasonal factors in April associated with holidays around the Easter period, highlighted by a sharp 0.7% fall in hours worked in the month.
The end of the wage subsidy that proved highly effective in maintaining jobs and supporting household income through the lockdowns will have resulted in a range of different outcomes, with some people staying on in their current role; others may have switched to a new job; and some may have lost work altogether, but an aggregate level the impact is not yet clear. Even though employment declined in the month, an easing in the participation rate off March's record high of 66.3% to 66.0% equated to a larger fall in the labour force (-64.2k), leading to the unemployment rate declining from 5.7% to 5.5% (vs 5.6% expected). While significantly lower than its mid-2020 pandemic peak of 7.5%, unemployment is still higher than it was pre-COVID, and it is well above where most estimates for the level of full employment sit (around 4 to 4.5%). While there is still a great deal of uncertainty around the transitional effects of the expiry of JobKeeper on the recovery, the labour market is well placed with employment having already rebounded to above its pre-pandemic level and measures of labour demand at elevated levels.
Wages also remain in a period of recovery, with the widening reopening and improving economic conditions leading many businesses to revisit wage reviews that had been put on hold due to the pandemic. With temporary wage cuts and freezes continuing to unwind and with the delayed minimum wage increase for the industries hardest hit by the pandemic going through in the March quarter, growth in the Wage Price Index was a little stronger than expected in Q1 rising by 0.6% (vs 0.5% expected), lifting the annual pace off its record lows to 1.5% (reviewed here). These developments saw private sector wages continuing to recalibrate towards more normal patterns, though at 1.4%Y/Y the pace is considerably slower than prior to the pandemic (around 2.2%), while wage freezes are weighing on growth in public sector wages, which eased to a record low of 1.5%Y/Y (see chart, below).
Chart of the week
The minutes of the RBA's May meeting noted that the upcoming decisions to be made in July around the way forward with its yield target policy and quantitative easing program "would be based on close attention to the flow of economic data and conditions in financial markets in Australia". Here, developments in the labour market are key, and with the Board identifying full employment as "a high priority for monetary policy" and the need for "wages growth to be sustainably above 3%" to meet the inflation target, I continue to think the Board under its current framework that emphasises the importance of actual (rather than forecast) outcomes will come to the view that this is a time to continue with existing settings rather than making them less accommodative. As such, I expect an extension in the maturity of the 3-year yield target from the April 2024 bond to the November 2024 bond as well as a further $100bn of bond purchases to be announced in July. This would also be consistent with the strategy of the fiscal authority, described by Treasury Secretary Kennedy in a speech this week as being in its "first phase" in which the government is focused on boosting spending to secure the economic recovery and bring down unemployment to pre-pandemic levels.
While consumer sentiment on the Westpac-Melbourne Institute Index declined by 4.8% in May in response to last week's Federal Budget, the monthly reading was the second highest of the last 11 years. Overall, sentiment remains very strong, as do expectations around the economic outlook. Notably, the unemployment expectations index fell by 15.3% in the month, indicating more confidence in the labour market recovery rolling on. Meanwhile, retail sales posted a stronger-than-expected 1.1% rise for the preliminary estimate in April following on from the 1.3% lift in March. Highlighting the ongoing strength in household spending, retail sales in April were 11.8% higher than their level just before the onset of the pandemic.
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Moving offshore where in the US the minutes from the April meeting by Federal Reserve's FOMC gained plenty of attention with "a number of participants" making the case that a plan for tapering the pace of asset purchases from the current rate of $120bn/mth should be discussed at upcoming meetings. However, this was predicated on the economy making continued "rapid progress" towards its maximum employment and inflation objectives. But since this meeting, it is debatable whether rapid progress has been achieved given the large downside misses in April on non-farm payrolls (266k vs 1m expected) and retail sales (control group -1.5% vs -0.2% expected). Last week's inflation readings were clearly much higher than anticipated, with core CPI coming in at 3.0%yr (vs 2.3% expected), though the Committee's long-standing central view is that high inflation will prove temporary for a time due to a range of pandemic-related issues before sliding back towards 2% over the rest of the year as these effects pass. The April minutes said that the risks around the Committee's inflation outlook were "balanced". Inflation could stay higher for longer if supply-side bottlenecks and disruptions can not be quickly resolved, but the fact that longer-run inflation expectations were around the 2% target was suggesting to the FOMC that its transitory assessment was justified. Despite the more hawkish members of the Committee hinting at the tapering discussion in the minutes, the reaction in the bond markets was limited, perhaps a sign that this is still expected to be some way off from taking place.
Over to the UK and Europe where things are continuing to look on the up, with accelerating vaccine rollouts enabling those economies to reopen. Preliminary PMI readings for May showed that activity was surging at a faster pace than when lockdowns were first eased mid way through last year. The composite UK PMI advanced from 60.7 to 62.0 (readings > 50 signal expansion) to hit its highest level since 1998, while the gauge in the euro area lifted to a 39-month high at 56.9 from 53.8 in April. The upswing is driven by the manufacturing sector with new orders continuing to flow in at rapid rates from domestic and offshore clients and backlogs are building up. The easing of lockdowns is strongly boosting the services sector with activity in the UK rising at its fastest pace in 7 years, while the euro area is seeing its sharpest lift since 2018. As far as the consumer goes, UK retail sales soared by 9.2% in April (vs 4.5% expected) as the shops reopened, led by a near 70%m/m rise in clothing sales. With supply struggling to keep up with demand, and due to difficulties in rehiring at this stage, cost pressures are building, which is adding to input shortages and supply chain delays. But like the Fed, both the Bank of England and the European Central Bank expect that high inflation will fade as reopenings widen. Data this week showed annual CPI in the UK lifted from 0.7% to 1.5% in April (vs 1.4% expected), while euro area CPI was finalised at 1.6%yr.
