The key event in Australia this week disappointed markets as October's labour force data came in weaker than expected. Employment was down for a third consecutive month falling by 46.3k against a median estimate (+50.0k) that was factoring in a reopening boost. The unemployment rate pushed up from 4.6% to 5.2%, exceeding the most bearish of forecasts (see summary charts below). Much of this weakness can be attributed to the earlier timing of the survey reference period, coming ahead of the end of the lockdowns and also coinciding with school holidays in several states. As a result, the continuation of the lockdown in Victoria weighed heavily in October. But there were positive outcomes for employment, participation and hours worked in New South Wales ahead of the state's reopening and this should be the start of what is to come as the recovery broadens out. Notably, participation in NSW had started to rebound rising from 61.8% to 62.6% and this drove the first increase in the national participation rate (64.5% to 64.7%) since the Delta lockdowns. With indicators of labour demand very elevated, participation returning to the record highs seen earlier in the year is key to the recovery. For a full review of the October Labour Force Survey see here.
Survey data through the week were broadly supportive of a strong reopening rebound about to come through. Consumer sentiment on the Westpac-Melbourne Institute index lifted by 0.6% in November and remained at a strong level (105.3). The key outcomes were rising confidence in the economic outlook on both the 12-month (3.3%) and 5-year (2.6%) time horizons, supported by the now very high vaccination rates in the country. However, even more notable was the sharp fall in unemployment expectations to their best levels in around 25 years, with households sensing strong labour market conditions. All these indicators are clear positives for the household spending outlook. Meanwhile, the NAB Business Survey for October reported a reopening-driven surge in the confidence (+21 from +10) and conditions (+11 from +5) measures. However, price pressures for many businesses were on the rise, with input prices lifting to a decade high on the back of the constraints in global supply chains.
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Moving offshore where it was the sharp upside outcome on US CPI inflation that gained much of the focus given the Federal Reserve's expectation for price pressures to be transitory. 12-month headline CPI lifted from 5.4% to 6.2% (vs 5.9% exp), its fastest since November 1990, while the annual core rate is now running at a high dating back to August 1991 after increasing from 4.0% to 4.6% (vs 4.3% exp). Supply constraints associated with the pandemic are continuing to keep the heat on inflation, but there were signs in the report that these pressures were broadening out. This was evident in services where the 12-month pace increased from 3.2% to 3.7% (and from 2.9% to 3.3% for the index excluding energy services), and also in housing costs as rents advanced from 2.4% to 2.7% and owners' equivalent rent pushed up to 3.1% from 2.9%. Strong consumer demand saw inflation for durable goods reaccelerate in October (to 13.2%Y/Y) after easing in the past few months. Meanwhile, energy prices elevated further to 30.0%Y/Y responding to supply shortages. Looking ahead, with pipeline inflation remaining high at 8.6%Y/Y on the PPI, upward pressure on consumer prices is set to persist as the Fed awaits a broader recovery in the labour market.
In the UK, supply constraints and the rise of the Delta variant look to have been the contributing factors behind the slowing in the pace of the recovery. In Q3, GDP moderated to a 1.3%q/q rise after the reopening-boosted 5.2% lift in Q2. This brought UK GDP to within 2.1% of its pre-covid level; a threshold it is likely to return to by Q1 next year. In the most recent quarter, an easing in growth in household consumption, from 7.2%q/q to 2.0%q/q, drove the overall slowdown. There were signs of the Delta impact with spending growth in some areas such as restaurants and hotels and transport slowing, though overall the profile suggested the broader rebalancing away from goods into newly available services was continuing. Supply constraints may accelerate this shift, especially considering the inflationary pressures on goods.
In the continent, despite headwinds to the outlook from supply constraints and rising inflation, the latest forecasts prepared by the European Commission show the economy is on track to move from recovery to expansion. Forecast EU GDP growth for 2021 was lifted from 4.8% to 5.0% before moderating to 4.3% in 2022 and then to 2.5% in 2023. The inflation forecasts have been lifted sharply, now seen hitting 2.4% this year from 1.9% previously, while there is a 0.8ppt uplift expected in 2022 to 2.2% before cooling to 1.4% in 2023.
