The sharp deterioration in the Australian economy since the middle of the year following the rise of the Delta variant and broad-based lockdowns was confirmed by this week's labour market data. Employment recorded its steepest decline since the 2020 national lockdown with 146.3k jobs lost in August. With caseloads surging and restrictions tightening New South Wales has seen a 210k fall in employment since the lockdown was called in June. Mobility restrictions and the current design of support payments have seen labour force participation fall away by 1ppt over the past couple of months to 65.2%; the decline in New South Wales a sobering 3.5ppts to be near the levels the state saw in the depths of 2020. Falling employment and a shrinking labour force saw hours worked crunched lower by 3.7% in August to be 2.9% below the level that prevailed before the pandemic emerged (see chart below). Hours worked in New South Wales have collapsed to be 11.1% below their pre-pandemic level, with the Delta hit proving to be a greater disruption than anything seen there in 2020. The fall in hours worked in Victoria and across the rest of the nation highlights the widespread hit to economic activity. For a full review of the August Labour Force Survey see here.
Chart of the week
Readings from this week's NAB Business Survey showed mild improvements in confidence and conditions in August. But, since June, both have deteriorated very sharply with confidence falling from +10 to -5 and conditions down from +24 to +14. The latter is still well above average in absolute terms, reflecting its strong pre-Delta position and more resilience to the current disruptions than seen in earlier lockdowns. Resilience was also a key theme in the latest consumer sentiment survey with the Westpac-Melbourne Institute Index rising by 2% in September. Westpac's Chief Economist Bill Evans attributed the result to confidence that the accelerating progress in vaccinations will bring the difficult times to an end. While the level of optimism has fallen by around 6% compared to pre-Delta, at a 106.2 reading the index remains strong. This is sending an important signal in that it supports the thesis that household spending will rebound sharply when the lockdowns have run their course. In the housing market, the survey highlighted renewed concerns over affordability following the strong rise in prices seen over the first half of the year. Data from the ABS this week showed a record quarterly increase in housing prices of 6.7% in Q2 (see here).
The speech from RBA Governor Philip Lowe to the Anika Foundation reiterated the key theme discussed from last week's Board meeting that the Delta disruptions had delayed, but not derailed, the recovery. A boost to already high accumulated savings from enhanced fiscal support was providing the RBA confidence that household spending will get the recovery back on track once vaccinations have hit their targets. Of note in the speech was the push back from Governor Lowe to current pricing in rates markets for the cash rate to start rising from late 2022. Outside of transitory effects, the low wage and inflation dynamics in place prior to the pandemic are expected by the RBA to persist, with the Board signaling it does not anticipate to be raising rates before 2024.
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Switching offshore, the transitory inflation narrative was in focus as was the slowdown in activity in response to Delta. Notably, tightened restrictions saw China retail sales slowing sharply from 8.5% to 2.5%Y/Y in August. That was against a consensus estimate for a moderation in growth to 7.0%Y/Y. Other activity data for industrial production (5.3%Y/Y) and fixed asset investment (8.9%ytd) also slowed by more than expected. Meanwhile, developments around the Evergrande situation have been a key factor driving sentiment in Asian equity markets in particular on reports of contagion risk.
In the US, inflation data slowed in August as price pressures associated with the reopening of the economy showed signs of cooling. Headline CPI posted its slowest month-on-month increase this year at 0.3% (vs 0.4% expected) as the annual rate matched consensus in easing 0.1ppt to 5.3%. A more pronounced slowing was seen in core CPI at 0.1%m/m (vs 0.3%) as 0.3ppt came off the annual rate to 4.0% (vs 4.2%). The main story was that price declines were recorded in many of the categories that have been boosting inflation of late where demand has surged on the reopening. Including in this was used cars (-1.5%m/m) and travel-related areas in airfares (-9.1%m/m), car rentals (-8.5%m/m) and hotels (-3.3%m/m). From a broader perspective, durables CPI — key in driving the inflation surge — saw its weakest month-on-month outcome (-0.2%) since January, while services CPI was little more than flat (0.1%m/m). Concerns that high inflation could be weighing on consumer spending look to be misplaced as retail sales came in above estimates in August, rebounding from the weakness seen in July. Headline sales lifted by 0.7%m/m, defying consensus for a -0.7% result. Strong beats also came through in core sales (ex-autos and gas) at 2%m/m and in the key control sales group at 2.5%m/m, both of which had been expected to come in flat in August. Given the underlying composition of sales, the Delta impact may have been evident with rises in the stay-at-home areas including nonstore (online) retail (5.3%m/m), food and beverage (1.8%m/m) and furniture (3.7%m/m). At the same time, spending at restaurants and bars pulled back to be flat in August after rising by 1.3% in July.
Across the Atlantic, reopening effects were playing through in surging inflation readings. In the UK, inflation printed above expectations in August, with the headline CPI rising from 2.0% to 3.2%Y/Y — a 10-year high — as core CPI elevated from 1.8% to 3.1%Y/Y. This takes both measures to more than 1ppt above the Bank of England's target ahead of next week's policy meeting. The rise predominantly reflected the downward impact on inflation associated with the government's discounted eating out scheme from last year falling out of the 12-month calculation. But there were also boosts coming from the reopening with strong rises in airfares (10.9%m/m), accommodation (5.9%m/m) and used cars (4.9%m/m). Similar dynamics are evident in the euro area where headline inflation was confirmed to have risen to its highest since 2011 at 3.0%Y/Y to August from 2.2%, while annual core inflation is at a 9-year high at 1.6%. ECB Executive Board member Isabel Schnabel addressed the matter in a speech this week, noting that a range of base effects, including from the reversal of the temporary cut in the German sales tax and from reopening distortions, were driving inflation higher. However, under the ECB's reformulated forward guidance, policy will not be reacting to short-term volatility in the data. As Ms. Schanbel outlined, the emphasis is on ensuring the inflation outlook is converging around the 2% target one and two years out before rate hikes will be considered to prevent the risk of tightening prematurely and slowing the recovery.
