Australian housing finance down from record highs in February

Australian housing finance commitments fell for the first time in four months in February, easing from record highs. Declines were seen in both major segments, with owner-occupiers -4.7%m/m and investors -1.8%m/m, likely reflecting a slowdown in activity during the Omicron wave and summer holiday period. Much of the weakness came in New South Wales after a strong rebound from the Delta lockdowns. 

Housing Finance — February | By the numbers

• Housing finance commitments ($ value, ex-refinancing) declined against expectations falling by 3.7% in February to $32.3bn vs a 1.5% rise expected and coming off a 2.5% m/m lift in January. Annual growth in commitments slowed from 17.7% to 12.6%. 
• Owner-occupier commitments were down by 4.7% on the month to $21.5bn to be 1% lower over the year. In the month prior, commitments to the segment lifted by 0.8%. 
• Investor commitments fell for the first time in 16 months, down 1.8%m/m in February to $10.8bn, but this followed a 6.1% surge in January and commitments are up almost 56% over the year. 
• Refinancing activity rebounded from the prior month's 9.4% fall to be up 8.6% in February at $15.3bn, for an annual gain of 14.7%.

Housing Finance — February | The details 

Australian housing finance commitments cooled in February (-3.7%) after surging to record highs in December and January. This result likely reflects some Omicron and holiday-related weakness early in the new year. A 4.7% decline in the owner-occupier segment drove the headline fall in commitments, though investor commitments were also lower on the month (-1.8%) and posted their first contraction since October 2020. 

The weakness in the owner-occupier segment centred on a 6.1% fall in commitments to upgraders while first home buyer commitments weakened by 9.7%m/m following January's 5% decline. Construction-related lending softened by 0.8%m/m. 

As the next chart highlights, there were large falls in owner-occupier commitments in New South Wales (-10.5%) and Victoria (-5.2%) in the month. This was after post-lockdown surges in these states, with the emergence of Omicron and summer holidays likely playing a part. Declines were also posted in South Australia (-7.6%) and Queensland (-3%). 

National declines in the volume of approvals in February in the upgrader (-7%) and first home buyer (-8.3%) categories appear consistent with the disruptions from Omicron and slower activity around the holiday period. 

The fall in investor commitments was a modest 1.8% after 15 consecutive months of expansion. New South Wales drove the decline posting a 5.5%m/m fall, with weakness also coming through in South Australia (-4.8%) and Queensland (-2.6%). Investor commitments in Victoria were flat on the month. According to CoreLogic data, rents are increasing at above-average rates and the higher-density segment is seeing an acceleration after being hit hard over the course of the pandemic, a positive for further investor activity.    

Refinancing activity found some support in February rising by 8.6% in the month after retracing by nearly 21% from their mid-2021 peak. Further strength in refinancing activity shapes as likely over the coming months given the increasing speculation around RBA rate increases. 

Housing Finance — February | Insights

Housing finance commitments weakened unexpectedly in February but remain very elevated sitting just off record highs. The disruptions from the Omicron wave and peak summer holiday period are likely showing through in today's report. Earlier this morning, CoreLogic's monthly house price data reported a divergence in conditions with the Sydney and Melbourne markets seeing declines in March against a faster pace of gains in several other capital cities. In the release, CoreLogic noted affordability concerns, increased listings, expectations for interest rate rises and higher inflation reducing disposable incomes as factors that point to a cooling housing market in 2022. 

Australian dwelling approvals rebound in February

Australian dwelling approvals rebounded sharply in February from a disrupted start to 2022 due to the combined effects of the Omicron wave and summer holiday period. Unit approvals more than doubled from the month prior to drive a 43.5% increase in headline approvals. 

Building Approvals — February | By the numbers

• National dwelling approvals (seasonally adjusted) rebounded by 43.5% to 18,675 in February (-7.8%yr) following January's 27.1% fall (revised from -27.9%). The median forecast was for a 5% rise in February approvals.

• House approvals lifted by 15.6%m/m to 10,344, reversing the 16.2% decline in January. Approvals in the segment are down 27.4% over the year.  

• Unit approvals came in at 8,331, more than twice their January total (104.8%m/m). Annual growth in approvals swung from -9.4% to 38.7%. 

Building Approvals — February | The details 

Seasonal effects and Omicron-related disruptions drove a large fall in building approvals at the start of 2022 that was subsequently reversed in February. Going back to December, approvals had accelerated by 9.6%m/m to close out the year. 

Smoothing out the volatility, the 3-month average for approvals over this period was around 16.5k. This is well down from the HomeBuilder-driven peak that averaged around 22k for the 3-month period to May last year but slightly above their average from just before the pandemic (15.2k). House approvals are still comfortably above their pre-pandemic average while unit approvals are close to their average from early 2020.

 

At the state level, 3-month average approvals have bounced in both New South Wales and Victoria, potentially reflecting some catch-up from the disruptions through the period of the Delta lockdowns. In particular, an uplift in unit approvals in Sydney and Melbourne has been key. In the other states, approvals have been retracing with the withdrawal of the HomeBuilder stimulus appearing to be the driving factor.

Alteration approvals remain at elevated levels, though they have declined in value by 16.8% since the end of 2021. Although there is a lot of volatility around seasonal effects and Covid disruptions, there could be some signs here that higher materials prices and labour costs and trade shortages may be starting to weaken demand for renovations.

Non-residential approvals bounced in February after declining over the back half of 2021 when uncertainty around the pandemic was weighing on business sentiment, potentially holding back the advancement of investment plans. The monthly result in February at $6.1bn was the highest since April 2021. 

Building Approvals — February | Insights  

February's rebound took monthly dwelling approvals to around 18.7k and close to their level at the end of Q3 2021. On top of underlying demand, some catch-up from a disrupted start to the year likely contributed to the strength of today's result. This is most evident in New South Wales and Victoria, particularly in the higher-density segment in the capital cities. The earlier surge in approvals from mid-2020 into 2021 on the back of the HomeBuilder stimulus has left a very large pipeline of residential construction work that is still far from being completed.

In review: Australian Budget 2022/23

The Australian Federal Budget 2022/23 capitalises on the resilience and pace of the economic recovery, with the government using a windfall in revenue to fund additional stimulus measures that are targeted at cost of living pressures in the near term and on boosting potential growth over the medium term in the lead up to this year's election.     

Federal Budget 2022/23 | Budget Position

Since the outset of the pandemic, Australia's economic recovery has outperformed expectations and this has driven an improved fiscal position over successive budgets. This trend has continued with the deficits forecast in the December MYEFO now expected to be smaller.

In the current financial year, the deficit has been revised from $99.2bn (4.5% of GDP) to $79.8bn (3.5% of GDP), and in 2022/23 the deficit has improved from $98.9bn (4.4% of GDP) to $78bn (3.4% of GDP). Over the 4 years from 2022/23 to 2025/26, the cumulative deficit has fallen from $309bn to $225bn.    

With the economy expanding to more than 3% above its pre-pandemic level of GDP and the unemployment rate at its lowest since 2008 and projected to keep declining to levels last seen in the 1970s, the recovery phase has been secured. The government's fiscal strategy now sees fiscal support gradually being withdrawn as the focus turns to medium-term objectives to boost growth and stabilise debt. This focus results in lower deficits across the out-years to $56.5bn in 2023/24 (from $84.5bn), $47.1bn 2024/25 (from $57.5bn) and $43.1bn in 2025/26 (from $68.1bn).   

In this pre-election budget, a stronger economy has provided the government with a windfall of $28.3bn over the remainder of 2021/22 and $38.1bn in 2022/23. The Treasurer has used this to fund new stimulus that costs the budget $26bn over this period, of which $8.9bn is in the remainder of 2021/22 and $17.2bn in 2022/23, centred on cost of living support, while the remainder is used to lower debt.          

Highlighting the change in the government's fiscal strategy, the cumulative effect on the budget from a stronger economy is $114.6bn between 2022/23 and 2025/26 while new stimulus costs $30.4bn over the period. 

Federal Budget 2022/23 | Policy Measures

The major measures announced in the budget are summarised in the table below. The focus is around providing cost of living support as pandemic-related spending continues in the near term. The focus switches to infrastructure and skills in the later years. 

On the payments side, new measures announced will cost the budget $8.8bn in 2022/23 and $31.5bn out to 2025/26. The highlights are:

• In April 2022, welfare recipients will receive a once-off $250 payment to ease cost of living pressures. 
• An additional $2.1bn of health-related spending in response to Covid-19 in 2022/23 spread across the provision of Rapid Antigen Tests, hospital spending, Medicare and aged care. 
• A $1.2bn package in 2022/23 to support the recoveries of flooded communities in New South Wales and Queensland, centred on additional payments and support services for impacted residents. 
• New and expanded listings to the PBS will provide a $0.7bn subsidy for medicines in 2022/23 and $2.4bn out to 2025/26.
• State and territory infrastructure investment is boosted by a further $3.6bn over the forward estimates. 
• Investment of $2.7bn out to 2025/26 in a new National Skills Agreement that will aim to identify and develop key skills needed to drive economic growth.  
• A new 'Regional Accelerator Program' aims to boost investment in regional areas by $1.8bn over the next 5 years by enhancing infrastructure, manufacturing, skills and training and education.   
• A $1.5bn package supporting the government's wage subsidy scheme for new apprentices. 

Government receipts are lowered by $8.4bn in 2022/23 to provide cost of living support for Australians. The key measures are:   

• Cost of Living Tax Offset: The low and middle income tax offset will be increased by $420 for the 2021/22 income year. This increases the maximum tax offset available to individuals, from $1,080 to $1,500, and to couples, from $2,580 to $3,000. 
• Reduction in fuel excise: Starting from 30 March, the government will for a period of 6 months (ending 28 September 2022) cut the fuel excise from 44.2 cents per litre to 22.1 cents per litre.  
• Small business support: tax incentives to enhance spending on training and technology. 

Federal Budget 2022/23 | Payments and Receipts

The pandemic stimulus response saw government payments as a share of GDP rising from a pre-crisis level of around 24.5% to a peak of 31.6% in 2020/21. Payments then eased 27.8% of GDP in 2021/22 and are forecast to remain on a declining trajectory, from 27.2% in 2022/23 to 26.3% in 2025/26.  

A stronger-than-expected economy has driven an upward revision to government receipts since MYEFO. The measures in this Budget see receipts decline from 24.3% to 23.8% of GDP in 2022/23, though in MYEFO weaker economic conditions had pointed to a larger fall to 23.1% of GDP. In 2023/24, receipts are anticipated to rise to 24.7% of GDP (up from 23.6% in MYEFO) and remain around that level over the out-years. 

Government debt 

The profile for government net debt has improved further since the December MYEFO due to higher government revenues generated by a stronger economy. Net debt falls from 28.6% of GDP in 2020/21 to 27.6% in 2021/22, whereas it was forecast to rise in MYEFO to 30.6%. 

As a result of the new measures in this budget, net debt moves back up again in 2022/23 to 31.1% of GDP, though that is lower than the rise forecast in MYEFO to 34.7% of GDP. Accordingly, the government's borrowing requirement for 2022/23 is lower than earlier anticipated, with the AOFM announcing expected issuance of around $125bn for the financial year.   

Net debt then moves gradually higher to peak at 33.1% of GDP in 2025/26, revised down from 37.4% of GDP in 2024/25 in MYEFO. The trajectory of net debt is then lower across the projections compared to MYEFO. 

Federal Budget 2022/23 | Economic Outlook

Australia's economic recovery has outperformed expectations since the onset of the pandemic and this trend has continued. As result, the economic forecasts in the budget have been upgraded.  

For 2021/22, GDP growth has been revised up from 3.75% in MYEFO to 4.25%. Activity expands by 3.5% in 2022/23 (unchanged from MYEFO) and returns to its pre-pandemic trajectory in the process. Growth then moderates to an around trend pace over the out-years. 

The rise in the unemployment rate to 4.7% in Q4 following the reopening from the Delta lockdowns was much smaller than expected in MYEFO (5.25%) and a stronger-than-expected economy has then supported a faster tightening in the labour market. The unemployment rate is expected to average 4% by Q2 2022, down from 4.25% previously. Further progress is made over the following year to reach 3.75% by mid-2023 compared to 4.25% in MYEFO. 

Faster wages growth flows from a tighter labour market. Growth in the Wage Price Index has been revised up to 2.75% in 2021/22 from 2.25%. However, that is more than outpaced by the rise in inflation to 4.25%, upgraded substantially from 2.75% in MYEFO on the back of the spillover effects of the Ukraine war and global supply chain pressures. This highlights the intent of the government to provide near-term cost of living support. 

In 2022/23 and 2023/24, wages growth advances to 3.25% (up from 2.75% and 3% respectively) as inflation moderates to 3% in 2022/23 and to 2.75% in 2023/24. Wages growth firms to peak at 3.5% in 2024/25, up from 3.25% previously. 

National income is boosted by the stronger labour market, faster wages growth and elevated commodity prices. Nominal GDP growth is expected to rise by 10.75% in 2021/22 compared to 6.5% forecast in MYEFO. The terms of trade are up by 11% on this comparison. The key assumption on the iron ore price is that the current price of around US$130/t will decline to US$55/t by the end of the September quarter, one quarter later than earlier assumed, though given the Ukraine war this is a conservative outlook. As a result, nominal GDP slows to 0.5% in 2022/23, with the terms of trade unwinding by 21.25% over the year. 

In the global economy, the headwinds from the Ukraine war and high inflation have led to downgrades to the growth outlook in 2022. Global GDP growth has been revised from 4.5% at the time of MYEFO to 3.75% on the back of 0.75pp downgrades in the US (to 3.5%) and euro area (to 3.5%), while growth in China slows by 0.25pp to 4.75% this year.   

Federal Budget 2022/23 | Summary

The budget position has continued to be boosted by the strength of Australia's economic recovery. This has provided the government with scope for additional stimulus to keep the momentum rolling as headwinds from higher inflation and increased uncertainty offshore build. Notwithstanding these headwinds, Australia's economic outlook remains robust, with GDP growth forecast to rise at a well above trend pace this financial year and next and an unemployment rate anticipated to fall to 50-year lows. 

Macro (Re)view (25/3) | Fed to make its stand on inflation

Markets remain in tension with rates continuing to rise on the expectation that high inflation will require more aggressive tightening from central banks but the riskier parts of the market are largely unperturbed for now. Communication from Fed officials through the week points to a front-loaded hiking cycle in the US through the remainder of the year in an attempt to put the brakes on inflation. 

Fed underlines its hawkishness

If the message from last week's Federal Reserve meeting was that it was about to turn much more hawkish against high inflation, the point has since been amplified with larger rate hikes and a fed funds rate in restrictive territory under consideration. Uncertainty around the war in Ukraine held the start of the Fed's hiking cycle to a 25bps increase at last week's meeting but a speech from Chair Jerome Powell suggests the consensus on the FOMC is that more aggressive action is needed to restore price stability, including rate hikes of 50bps and raising the fed funds rate above the 2.4% neutral estimate. While acknowledging the challenges ahead, Chair Powell said that the strength of the economy gave the FOMC confidence it could achieve a soft landing, slowing inflation through tighter monetary policy while also avoiding a recession in the process. 

Many FOMC members spoke publicly this week giving their individual views on the necessary path ahead for policy settings. Unsurprisingly, there is a wide dispersion of views on the matter, but there is consistency in the expectation that rates will need to head much higher through the course of the year. At the more dovish end of expectations are the Minneapolis Fed's Kashkari and the Atlanta Fed's Bostic, with both seeing the fed funds rate peaking below neutral at around 2% or just above. Aligning with the median view on the Committee for rates to rise slightly above neutral are the likes of the Chicago Fed's Evans and Daly from the San Francisco Fed. The more hawkish voices are the Cleveland Fed's Mester in calling for 2.5% on the fed funds rate this year ahead of further hikes in 2023, while the St Louis Fed's Bullard is arguing for the policy rate to hit 3% by the end of the year and for immediate action in reducing the balance sheet. 

Rising inflation intensifies the headwinds to the UK economy...

With stronger-than-expected outturns driving UK inflation up to 30-year highs, headwinds to the growth outlook are intensifying with real household income set to contract sharply through the year. February's CPI readings saw headline inflation pushing up from 5.5% to 6.2%yr with the core rate also advancing from 4.4% to 5.2%yr. Further rises are to come with the data yet to reflect the impact of rising fuel and household energy prices following the Ukraine war. In this week's Spring Statement, the OBR revised its forecast for inflation to peak two quarters later and sharply higher at 8.7% in Q4 from 4.4% previously. The increased pressure this generates on household spending led to the GDP growth outlook this year being cut from 6% to 3.8%.

...prompting more fiscal support for households

To lessen the drag on the economy from higher inflation and previously announced tax increases, Chancellor Sunak's Spring Statement included £17.6bn of measures to support household budgets including a temporary cut to the fuel duty, tax relief, and energy rebates. The combined effect of these measures moderates the contraction in real household income by a third to 2.2% in 2022/23, though that is still set to be the largest fall in a fiscal year on record. On a more positive note, an increased tax take due to economic conditions outperforming previous forecasts meant that the government's cash requirement has been over financed by around £47bn in the current fiscal year, leading to a reduction in anticipated Gilt issuance in 2022/23. 

Source: OBR 

Euro area economy is showing strains from the Ukraine war

The risks posed to the euro area economy of slower growth and higher inflation from the war in Ukraine were highlighted in March's key PMI readings. Although still posting in the expansionary range (above the 50 level), growth had slowed over the month and existing supply chain and inflation pressures had intensified. Eased pandemic restrictions kept the expansion in the composite (54.5) and services (54.8) PMIs going, albeit with the pace easing back to the rates seen at the start of the year. Growth in the manufacturing PMI pulled back to a 14-month low at a 57.0 reading as export orders weakened sharply and output was hindered by delays in the supply chain with delivery timeframes lengthening out. The surge in commodity and energy prices pushed up the increase in input prices to record rates.  

Source: S&P Global 

Fiscal position to improve on the back of Australia's economic recovery

Next week's federal budget is expected to confirm a sizeable improvement on the deficit for 2021/22 from $99.2bn anticipated in the mid-year update. The Australian economy has rebounded rapidly from the Delta lockdown impacted Q3 where GDP contracted by 1.9%, leading to a faster fall in the unemployment rate while commodity prices have surged on the spillover effects from the Ukraine war. Indications from Treasurer Frydenberg are that some of the windfall will be used to fund targeted cost of living support with the rest to be directed at lowering debt with the economy having recovered to be more than 3% above its pre-pandemic level of GDP. This week, RBA Governor Philip Lowe in a public Q&A appearance said the Board was closely watching for signs that the low inflation "psychology" that existed in Australia in the decade prior to the pandemic was on the move as a result of recent price pressures. 

Macro (Re)view (18/3) | Policy reappraisals

The adjustment of central bank policy outlooks to the inflation and growth risks accentuated by the Ukraine war has driven markets this week. Both the Fed and BoE announced rate hikes, while a strong labour market has taken the RBA closer to that point. 

Tightening in the Australian labour market resumed after a disrupted start to 2022...

After being held back by Omicron and summer holidays, progress towards meeting the RBA's full employment goal resumed its late 2021 momentum in February. A much stronger-than-expected rise in employment of 77.4k drove Australia's unemployment rate down from 4.2% to 4%, a new low dating back to mid-2008, and January's initially reported increase was revised up from 12.9k to 28.3k (full review here). 

   

Hours worked surged back by 8.9% in February, reversing the 8.6% collapse in January when Covid isolation requirements and annual leave left many firms short-staffed. These latest outcomes left employment (+2.9%) and hours worked (+2.7%) virtually in sync on a comparison with their pre-pandemic levels. As a result, both underemployment (6.6%) and overall underutilsation in the labor market (10.6%) are down at 13-year lows.   

The broad-based expansion in the labour market is leading to an increased supply of workers, with the participation rate moving up to a record high of 66.4% in February. Although wage pressures have risen as the labour market has tightened, the overall supply/demand balance has been a key factor in keeping the pace measured relative to the acceleration in wage costs seen in economies offshore, notably in the US and UK. 

March's RBA meeting minutes published this week showed the Board was in agreement that with the labour market tightening, the outlook for wages growth was "skewed to the upside", giving further context to Governor Lowe's recent shift that a rise in the policy rate this year was plausible. The time for the Board to start normalising rates away from pandemic settings is clearly nearing (markets have the first hike coming in June), but the more important issues are the pace of tightening through the cycle and the level the cash rate ultimately reaches. 

Markets have more than 100bps of hikes priced in this year and see the cash rate peaking just below 2.5% by mid-2023. This continues to look too aggressive given Australia's wage-price dynamics, where it has taken the strains in global supply chains and an extraordinary recovery in the labour market to see inflation return to RBA's target for the first time in 7 years and wages growth at pre-pandemic rates.   

In the US, the Fed commenced its hiking cycle and turned more hawkish... 

True to recent guidance from Federal Reserve Chair Jerome Powell, the FOMC at this week's meeting announced the liftoff in its policy rate from its pandemic low and signalled a series of further hikes to come over 2022 and 2023. Meanwhile, the preparatory work on the plan for reducing the balance sheet continued and will be announced at "a coming meeting".  

The target for the fed funds rate was lifted by 25bps to 0.25% to 0.5% and, undeterred by an expected hit to economic growth this year due to the Ukraine war, the Committee revised significantly higher its median projection for rate hikes in 2022 to a total of 7 (i.e. 6 more) from 3 previously. The median dot then lifts to indicate a further 4 hikes in 2023, taking the fed funds rate to 2.8% (up from 1.6% in December) and held unchanged through 2024 (2.1% previously). Overall, the new projections serve as a signal of intent from the FOMC that it is prepared to move aggressively on rates to bring inflation under control. 

Source: Federal Reserve 

That comes about with price pressures having been amplified by the spillover effects from the Ukraine war, pushing up the inflation projections in 2022 from 2.6% to 4.3% for headline and from 2.7% to 4.1% on the core rate. An easing in supply chain pressures and lower energy prices sees inflation declining but still remaining above the Fed's target in 2023 (2.7% headline and 2.6% core) and 2024 (2.3% for both headline and core). 

In the post-meeting press conference, Chair Powell said the Committee's assessment was that the US economy was "very strong" and "well positioned" to handle a hiking cycle. Whether or not it can be as aggressive as a straight read of the dot plot implies remains to be seen. A cut in the growth outlook this year from 4% to 2.8% references the impact of the Ukraine war, but the projections for 2023 and 2024 were left unchanged at 2.2% and 2% respectively. The projection for the unemployment rate was also maintained at 3.5% this year and next but was a touch higher at 3.6% in 2024. The flattening in the yield curve (becoming inverted in some segments) indicates that markets are skeptical of the outlook that above-trend growth and a tightening labour market can be maintained as the fed funds rate moves into restrictive territory above the Committee's 2.5% longer-run estimate of the neutral level.  

In the UK, the BoE could be nearing a pause on rate hikes...

The Bank of England's MPC this week announced its third rate hike from as many meetings, taking Bank rate up 25bps to its pre-pandemic level of 0.75%, though the sense was a pause on further tightening could be nearing. The vote went 8-1 in the way of hiking by 25bps, with the one dissenting vote in favour of leaving rates unchanged. Compare this to the February meeting where the decision to hike was not only unanimous but the vote at 5-4 fell just short of a larger 50bps rate hike being the call.  

A more cautious assessment of conditions has taken shape since the February meeting due to the Ukraine war adding upside risks to inflation in the near term, which is now seen peaking higher at around 8% by the middle of the year, and downside risks to growth through the squeeze on household incomes and spending. Beyond the near-term price rises in energy and goods, the MPC sees that inflation could eventually decline by more than previously expected as growth slows and earlier hikes take effect. Accordingly, the MPC's tone on the need for further rate hikes has softened from being "likely to be appropriate" to now "might be appropriate". Pricing in the forward curve for Bank rate to rise to around 2% by the end of the year looks challenged given this week's developments.  

... while the ECB is keeping its options open 

ECB President Christine Lagarde's address at the ECB Watchers conference reiterated the key messages from last week's policy meeting. The persistence of high inflation, now amplified by the Ukraine war, had convinced the Governing Council to outline its plan to dial back bond purchases, potentially ending in Q3 if the data allows it. Should the tapering process prove to be problematic, President Lagarde said the ECB could use "a wide range of instruments to address fragmentation".      

Australian unemployment rate falls to 4% in February

Conditions in the Australian labour market strengthened after coming through a disrupted start to 2022 from the Omicron wave over the summer holiday period. A stronger-than-expected employment outcome saw the unemployment rate falling to 4%, while a rebound in hours worked helped reduce overall spare capacity. Forward-looking indicators point to the momentum continuing, bringing the RBA closer to its full employment goal.   

Labour Force Survey — February | By the numbers

• Employment posted a net gain of 77.4k in February, well above the consensus estimate of 37k. January's increase was revised up, from 12.9k to 28.3k.

• National unemployment fell from 4.2% to 4.0% (vs 4.1% expected), its lowest since August 2008.  

• Labour force participation advanced to a record high of 66.4% from 66.2%.

• Hours worked surged by 8.9% in February, rebounding from January's 8.6% fall (revised from -8.8%). 

Labour Force Survey — February | The details

The tightening in the Australian labour market resumed in February after the surge of the Omicron wave and the peak summer holiday period paused progress towards full employment early in 2022. At 4%, the national unemployment rate has fallen to the lows seen prior to the financial crisis in 2008. A decline in underemployment, from 6.7% to 6.6%, leaves overall underutilisation in the labour market at 10.6%, down from 10.9% in January and at its lowest in more than 13 years. 

With the labour market tightening, the RBA is closely watching for the build-up of wages pressure as a guidepost for its medium-term forecasts of inflation. Wages pressures are rising and the minutes from the February meeting noted this week that the risks were now "skewed to the upside". However, unlike in many other economies, Australia's labour market has been tightening alongside rising participation, hitting a new record high in February at 66.4%. 

Strong employment is more than offsetting the increase in participation, making inroads into spare capacity. Employment increased by 77.4k in February, well above expectations, and was driven by a surge in full-time work (121.9k) as the part-time segment declined (-44.5k). Overall, employment is 2.9% above its pre-Covid level. 

  

Indications are that employment will continue to rise. Monthly job vacancies lifted to 1.9% of the labour force in February and survey data continues to report many businesses are faced with staff shortages, particularly in medium and large businesses.  

All this suggests the labour market will continue to tighten in the months ahead and should contribute to generating upward pressure on wages. But, overall, the supply/demand dynamics in Australia are in a much better balance than in the US and UK, with the implication being that wages growth domestically is likely to rise at a much more moderate pace than offshore. 

In January, a higher than usual number of Australians were on annual leave, while the surge of the Omicron wave saw many people falling ill or having to isolate due to being a close contact, with the combined effects crunching hours worked by 8.6% in the month. There was a reversal in February as hours worked rebounded by 8.9%, to be 2.7% above their pre-pandemic level.  

This was driven mainly by people returning to work from holidays, though the number of Australians working fewer hours than usual due to illness or sick leave was also well down from January's high. 

Labour Force Survey — February | Insights

The resumption of the tightening in the labour market after a temporary pause in January brings the RBA's progress towards full employment closer, with the prospect of more to come as forward-looking indicators of employment remain strong. The accumulation of data around the build-up of wages pressure is key to the timing of when the RBA raises rates. When the does occur, I see the hiking cycle as being more gradual and less agressive than the likes of the Fed, BoE and RBNZ, which are all faced with much higher inflation than the RBA is in Australia.