Australian Capex -0.3% in Q2; 2022/23 investment plans $146.4bn

Australian private sector capital expenditure came in softer than expected falling by 0.3% in the June quarter. Capex stalled over the first half of 2022, but forward looking investment plans were upgraded and point to the momentum being regained. This investment will be needed to help resolve the capacity pressures firms report.  

CapEx — Q2 | By the numbers

• Private sector capex declined by 0.3% in the June quarter to $33.9bn (2.0%Y/Y), well below expectations for a 1% rise, though revisions saw capex in Q1 lifted to a 0.4% increase from -0.3% reported initially. 

• Equipment, plant and machinery capex lifted by 2.1%q/q to $16.7bn, to be up by 3.2% through the year. 

• Buildings and structures capex contracted by 2.5% in the quarter to $17.2bn, resulting in year-ended growth falling to 1% from 8.3% in Q1. 

• Firms' 3rd estimate of capex plans for 2022/23 was upgraded by 11.7% to $146.4bn, on track for a 14.7% rise compared to 2021/22.  
• Realised capex in 2021/22 came in at $142.4bn, an increase of 13.3% on capex in 2020/21.  

CapEx — Q2 | The details

June quarter capital expenditure (chain volume terms) was soft declining by 0.3% to be broadly flat (0.1%) over the first half of the year. The economic recovery from the pandemic generated an upswing in capex, but this momentum has stalled, potentially due to supply constraints and inflationary pressures while uncertainty around global developments such as the war in Ukraine and China's Covid response could also be contributing.  

Equipment spending advanced by 2.1%, its strongest quarterly rise since the start of 2021 on the back of increases in the non-mining (1.2%) and mining sectors (6.2%). This was offset by a 2.5% fall in building and structures capex, detail that is in line with the weak construction activity data reported yesterday (see here). Capacity pressures in the construction sector and wet weather likely drove this decline, with weakness coming through in both the non-mining (-2.2%)  and mining sectors (-2.9%). 

Capex by the non-mining sector has stalled over recent quarters after earlier recovering to pre-pandemic levels of investment. That recovery was driven by equipment spending, currently 6.9% higher than at Q4 2019, on the back of federal government tax concessions, accommodative financing conditions and the broader economic momentum. Lagging well behind has been building and structures investment (-6.9% vs Q4 2019). Projects that were deferred during the pandemic appear to remain on the backburner, not helped by the supply pressures and cost increases in the construction sector.    

Mining sector capex is around 10% higher than a year ago, though despite very elevated commodity prices, reporting suggests that much of this has been to sustain rather than increase output. 

Turning to investment intentions, firms lifted their 3rd estimate of capex plans for 2022/23 to $146.4bn from $131.1bn forecast 3 months ago. That represents an upgrade of 11.7%, a little stronger than the historical average increase between estimates 2 and 3. Compared to estimate 3 last year, the current figure implies capex is on track to rise by around 15% year to year, though note these are nominal estimates and hence include inflationary effects. Overall, the 3rd estimate was its highest since 2014/15.  

Non-mining sector capex plans were upgraded by 14.4% vs estimate 2 to $101.7bn, pointing to a 15.8% year-to-year rise. Spending intentions on equipment (18.9%) and buildings and structures (10.6%) have lifted from 3 months ago. A smaller upgrade of 5.9% was nominated by the mining sector for estimate 3 to $44.7bn, running 12.4% higher year-to-year. 

 

CapEx — Q2 | Insights

A disappointing outcome from quarterly capex confirming that momentum stalled over the first half of 2022. Firms are facing significant capacity pressures, not only from labour shortages but also following a period of underinvestment through the pandemic. Capex did rebound in line with the economic recovery, but more will be needed if these capacity pressures are to be remedied. Upgrades to forward-looking investment plans for 2022/23 are a positive in that respect, though the reported strength is partly boosted by inflation. The question is whether this intended (and needed) investment holds up given a deteriorating global economic outlook.  

Preview: CapEx Q2

Australia's June quarter capital expenditure survey is due to be published by the ABS at 11:30am (AEST) today. Following a soft first quarter, capex is expected to regain momentum and rise by 1% in the June quarter. Forward-looking investment plans for 2022/23 should be upgraded strongly as firms respond to capacity constraints after a period of deferred investment over the Covid period. 

As it stands | Capital Expenditure

The capex cycle is in an upswing phase that stalled somewhat in the March quarter following a 0.3% decline. This was due to weather-related disruptions with heavy rainfall and flooding experienced in parts of New South Wales and Queensland, which weighed on buildings and structures spending (-1.7%).   

Equipment spending lifted by 1.2% in the quarter to be more than 6% higher than pre-Covid levels, supported by Australia's robust economic recovery, accommodative financing conditions and tax incentives.  

Non-mining sector capex was 0.3% lower in the quarter and remained just below what were subdued pre-Covid levels (-0.5%). Although equipment spending has been strong in the rebound, spending on buildings and structures has lagged well behind. Mining sector capex also declined by 0.3%q/q but had risen by 9.7% over the past year, albeit from low levels.  

Firms' investment plans for 2021/22 lifted modestly (1.4%) to $142.8bn, up 15.5% on the comparable estimate a year earlier when the outlook coming out of the pandemic was highly uncertain. 

The 2nd estimate of investment intentions in 2022/23 saw a sharp upgrade of around 12% compared to estimate 1 to come in at $130.5bn, though some of this reflects an inflation component. There were upgrades to the outlook in the non-mining (13.3%) and mining sectors (8.7%).

Market expectations | Capital Expenditure

In today's report, the consensus estimate is for a 1% rise in quarterly capex, with the range of forecasts sitting between -1.3% and 4%. Regarding the intentions component, no consensus is put forward for the 3rd estimate of 2022/23 plans. The history of the series indicates investment plans rise by around 10-11% on average from estimates 2 to 3. That points to a figure of around $144bn, though I think investment plans could come in a little higher with many firms playing catch up after deferring projects over the past couple of years through the Covid period, particularly with capacity constraints becoming more pressing.  

What to watch | Capital Expenditure

Much of the focus will be drawn to the investment plans component for 2022/23. Many firms are running up against capacity constraints amid strong demand conditions. A period of deferred investment through the pandemic and labour market churn leaving staff shortages has accentuated the situation. The most recent NAB Business Survey showed capacity utilisation among firms hit a record level in July. Firms will need to expand capex to sustain production in this environment.  

NAB Economics chart

Australian construction activity down 3.8% in Q2

Australian construction activity disappointed expectations posting a 3.8% fall in the June quarter as an easing in La Nina was unable to generate a rebound. Capacity constraints remain pressing and are holding back the pace of work, particularly in the residential sector for detached homes.  

Construction Work Done — Q2 | By the numbers

• Construction work done contracted by 3.8% in the June quarter, a large miss on the consensus estimate for a 0.7% rise. The decline in Q1 was revised to -0.3% from -0.9% initially reported. Activity fell by 4.3% over the year.  

• Across the categories;
• Engineering work -2.7%q/q to -4.1%Y/Y 

• Building work -4.6%q/q and -4.4% through the year, which includes;

• Residential work -6.8%q/q and -7.6%Y/Y 

• Non-residential work -1.1%q/q and +0.6%Y/Y 

Construction Work Done — Q2 | The details 

Capacity constraints continue to pressure the construction sector leading to a sharp 3.8% fall in activity for the June quarter. A rebound was expected after heavy rainfall on the east coast restricted construction work in the March quarter. Building work was down by 4.6%q/q and engineering work by -2.7%q/q.    

In the March quarter, activity across New South Wales and Queensland fell by 1.6%, as both states experienced substantial rain and flooding. A rebound failed to materialise in Q2, activity falling by 2.1%. However, construction activity also fell in the other states including large declines in Western Australia (-5.8%) and Victoria (-4.8%), pointing to the headwinds from capacity constraints. 

Driving Q2's fall in building work was residential construction, in which private sector activity contracted by 6.9% quarter-on-quarter. New home building saw a 7.7% fall while alterations declined by 1.9%. Specifically, work done on building detached homes plunged by 13.9%q/q. Capacity constraints are slowing the progress in working through what is a very substantial pipeline.

Momentum in non-residential construction work stalled over the first half of the year (-0.6%), after the sector had put together a strong rebound in activity from the second quarter of last year. Labour shortages and weather disruptions have also affected commercial building. Relatedly, engineering work was down 4.1%q/q, its largest fall since the Covid onset. 

In the public sector, construction activity contracted by 1.7% in the June quarter on the back of declines in both building (-3.3%) and engineering works (-1%). Activity remains elevated notwithstanding, reflecting the bringing-forward of projects by state governments in support of the pandemic economic recovery.  

Construction Work Done — Q2 | Insights

A very weak report that points to residential construction subtracting from June quarter GDP. The weakness relates to capacity constraints. Australia's residential construction pipeline is substantial with record numbers of homes under construction, surging in response to Covid stimulus measures and coming after a downturn in home building before the pandemic. Because of the labour and materials shortages, the pace at which the pipeline can be worked through is uncertain. Rising building costs, the RBA hiking cycle and falling housing prices may see some of the work in the pipeline shelved. 

Preview: Construction work done Q2

Australian construction activity data for the June quarter is due to be published by the ABS this morning at 11:30am (AEST). A rebound in construction activity is expected after wet weather and ongoing supply constraints hampered work in the March quarter. 

   

As it stands | Construction Work Done

Construction activity declined by 0.9% in the March quarter (1.4%Y/Y) due to disruptions from wet weather on the east coast and ongoing capacity constraints amid materials and labour shortages. Covid-related absences were another headwind. The national decline was driven by a 2.7% fall in work done across New South Wales and Queensland following heaving rainfall and flooding in parts of those states.   

Private sector building work contracted for the second quarter in succession, down 1.5% in Q1. Output in the residential segment was down by a further 1% in the quarter to be 2.6% lower through the year. Supply constraints have slowed progress in working through what is a very substantial residential pipeline and the adverse weather caused further delays. Activity in the non-residential segment saw a sharp 2.4% fall in the quarter due to weather-related disruptions. Engineering work was little changed rising by 0.4%q/q.

Activity in the public sector declined by 1%q/q but was still elevated over the year (8.9%) with governments bringing forward infrastructure spending to support the pandemic recovery. In the quarter, engineering work was down by 1.4% while building work ticked up by 0.3%. 

Market expectations | Construction Work Done 

The market looks for a 0.7% rise in June quarter construction activity, rebounding from Q1's weak outcome. There is a very wide dispersion in the range of forecasts from -2% and +3%.

What to watch | Construction Work Done

The focus remains on the residential sector where capacity constraints and the ending of construction subsidies have seen new home building costs rise by 20.3% over the past year. The pipeline remains substantial and is expected to add to economic growth over the coming year; however, this will require capacity constraints to ease while the rising interest rate environment may see some projects shelved. 

Australian dwelling approvals down 17% in July

Australian dwelling approvals fell by 17.2% in July, a much larger fall than expected due to weakness in capital city high-rise approvals. Despite headwinds to home building from capacity constraints, rising interest rates and falling housing prices, detached approvals remain resilient. 

Building Approvals — July | By the numbers

• Dwelling approvals (seasonally adjusted) declined by 17.2% over the month in July (vs -3% expected, prior -0.6%m/m) to 13,595. Over the year, approvals have fallen by 25.9%. 

• House approvals lifted by 1%m/m to 10,044 but are 17.2% lower than a year ago

• Unit approvals declined sharply by 45.2% in the month to post at 3,551, its lowest monthly total since the start of 2012, and down 42.9% over the year.

Building Approvals — July | The details 

National dwelling approvals saw an outsized fall of 17.2% in July as approvals in the higher-density segment declined to their lowest level since January 2012. House approvals posted consecutive monthly gains for the first time since February-March 2021 with a 1% rise in July coming on the back of June's 1.4% gain. So far in 2022, house approvals have been fairly stable averaging just below 10,000 per month, broadly in line with the peaks of the last cycle before the pandemic. 

The detailed data indicated the high-rise segment was the driver of the fall in unit approvals. The month-to-month volatility can be large, but using a 3-month total the chart below shows high-rise approvals (black line) have been on a downward trend since the end of 2021.

Much of that weakness can be attributed to declining approvals in Sydney and Melbourne. The 3-month total for Sydney unit approvals is at its lowest since late 2020 while Melbourne is at lows going back to early 2021. Constraints in the construction sector, falling property prices in these markets, rising interest rates and low migration flows could all be contributing factors. 

That said, all of the aforementioned factors are relevant yet house approvals in Sydney have held up and have been rising in Melbourne. The pandemic inspired a preference shift away from higher-density living to detached homes and the respective levels of approvals might suggest this is continuing to play out. 

The desire for more space—with this demand earlier boosted by the HomeBuilder stimulus—continues to support renovation activity. Approvals for alteration work to existing homes remains at very elevated levels, though the chart below is partly boosted by inflationary effects on labour and materials costs.  

Building Approvals — July | Insights  

House approvals have retraced from their peaks reached in early 2021, boosted by the effects from the HomeBuilder stimulus, low interest rates and rising housing prices. Despite significant constraints in home building and the reversal of stimulus, monthly approvals are still running well above the levels seen before the pandemic. Weakness in higher density approvals may be reflecting the preference shift towards detached housing by Australians. 

Macro (Re)view (26/8) | Raise and hold the way forward

A large repricing in US and European equities reflected the differing macro risks facing both economies from higher interest rates in the US and an energy crisis in the continent. The speech from Fed Chair Powell at the Jackson Hole symposium signaled a 'raise and hold' strategy will be the playbook from the FOMC as it looks to bring inflation back to target. A further surge in energy prices sees inflation risks in Europe rising while softer PMI readings showed weakening growth momentum. 

Fed pivot on the backburner 

The speech from Fed Chair Powell at Jackson Hole gave clear guidance that the FOMC will not be shirking the task in front of it to bring inflation back to its 2% target. Powell said the committee plans to raise rates to a "sufficiently restrictive" level and then keep them there until it is confident price stability has been restored, likely meaning a "sustained period" of weak growth and a softer labour market would follow. While that outlook is nothing new for markets, they have been reluctant to shift from the expectation that the Fed will pivot to rate cuts in 2023, though that will now need to come under review on the back of Powell's speech. The central argument from Powell was that the FOMC had taken lessons from previous periods of high inflation when monetary policy was eased prematurely and that it would place a high priority on repeating those missteps.

Being roughly half way through the inter-meeting period, Powell said there was still several key datapoints that would need to be taken into consideration when determining the size of the next rate hike. The door is ajar for a downshift to a 50bps hike following consecutive 75bps increases in June and July. Key to that is an easing in inflation pressures with its preferred core PCE deflator rising by 0.1% in July, its slowest month-on-month increase in 17 months, softening the year-on-year pace to 4.6% from 4.8%. Although one month doesn't make a trend it suggests September's hike will be a close call between 50bps and 75bps.  

Slow start to Q3 in Australia

A light on week domestically limited to the release of a few largely second-tier indicators. Those indicators suggested economic activity had made a slow start to the third quarter, highlighted by the first sub-expansionary reading on the composite PMI in August (49.8) in 7 months. The gauge of services sector activity slowed to a 49.6 reading, potentially indicating a softening in demand due to consumers facing higher inflation and rising rates, though a spike in Covid cases during the winter may have been a contributing factor. 

Manufacturing activity slowed but remains comfortably in expansionary territory (54.5) on the back of continued growth in new orders and employment. Input cost pressures for manufacturers remained elevated reflecting rising prices for materials, transport and energy. Job vacancies tracked by the National Skills Commission posted their first decline in 2022, falling by 3.8%m/m in July. This was consistent with the softening seen broadly in the labour market data in July. The interpretation I side with is hiring slowed around the end of the financial year and due to school holiday periods and the latest Covid wave. Vacancies remain very elevated at more than 2 per cent of the labour force, indicating the labour market should quickly regain momentum. 

The data flow ramps up again next week with updates due for retail sales (29/8), building approvals (30/8), construction activity (31/8), private sector capex and housing finance (1/9). 

ECB monitoring wage-price dynamics 

The account of the ECB's July meeting detailed just how significantly the situation changed for the Governing Council in the space of a few weeks. The 25bps rate hike it had signaled at the June meeting became a 50bps hike by the time of the July meeting on the basis that a worsening inflation outlook warranted an accelerated exit from negative interest rates. According to a Reuters report, the more hawkish members now want a 75bps hike to be discussed at the September meeting. The move would be to counter second-round effects from high inflation feeding through to wage settings, though in the July account the Governing Council had seen little evidence of these risks emerging.   

Macro (Re)view (19/8) | Fed stays on message

Headwinds to risk sentiment from a hawkish set of minutes from the Fed and much weaker than expected data in China setback equity markets this week and saw renewed strength in the US dollar. Long-term yields steepened sharply in Europe and the UK as their inflation rates reached new highs. Next week's main event is the Fed's annual symposium at Jackson Hole, with Chair Powell speaking on Friday.  

Higher for longer in the US now the question  

The key message in the Federal Reserve's FOMC July meeting minutes was that it sees further work in front of it in tightening monetary policy to ensure the return of inflation to its target. Dampening expectations around a pivot to rate cuts in 2023, "some participations" noted that once rates had risen to a "sufficiently restrictive level" it was likely they would need to be kept there for "some time" to chart the course down to 2% inflation. Other members on the committee observed that as rates approached this restrictive level, it would be appropriate to slow the pace of hikes to allow it to assess the effect of tighter monetary policy on growth and inflation. Although it was early days in the transmission of rate hikes into the economy, "many participants" saw the risk that the rapid pace at which rates were being hiked ran the risk of the FOMC overtightening policy, in other words causing a recession.  

RBA on track to hike rate by 50bps in September   

The RBA's August meeting minutes noted the decision to hike rates by 50bps was taken to continue the Board's progress in "normalising monetary conditions". The Board said it was walking a narrow path in hiking rates to curb inflation amid an uncertain growth outlook. Because of upcoming rises in household energy prices, the RBA expects the peak for Australian inflation won't come until Q4, by which stage the pace is anticipated to be pressing 8%. Much of the work in lowering inflation will be seen in 2023, as tighter monetary policy moderates demand and a resolution of supply constraints sees inflation slowing to 3.8%. From there, however, the RBA asserts that the labour market will take over from pandemic-related supply/demand imbalances as the main driver of inflation. 

The RBA appears confident inflation will slow next year but stickier inflation pressures emerging from the strong labour market pose risks for a return to the 2-3% inflation target band further out. Given the lags in the transmission of monetary policy, the increasing inflation pressures and the rapidly tightening labour market to my interpretation have prompted this accelerated effort to normalise rates, leading also to the RBA elevating the volume in its commentary around keeping inflation expectations in the target range. 

It was thus a pivotal week domestically as we received updates on the labour market and wages growth. Employment was unexpectedly weak falling by 40.9k in July, though that looked to be driven by temporary seasonal factors and Covid-related disruptions. A fall in the unemployment rate to a new half-century low at 3.4% and declines in broader underemployment (6%) and underutilisation (9.4%) reflect the underlying strength in the labour market (full review here). The headline Wage Price Index came in at 0.7% in the June quarter and 2.6% over the year, both a touch softer than consensus (full review here). Wages growth remains subdued relative to the strength of the labour market, though for the RBA the trajectory will matter more than Q2's update. By the end of the year, the RBA forecasts wages growth to be at 3%, rising to 3.6% in 2023 and firming further in 2024. Softer data this week could open the door to a downshift in the pace of RBA hikes, though I tend to think a 50bps hike in September looks more likely.     

Inflation pushes higher again in the UK and Europe 

UK and euro area inflation made new highs this week as the impact on energy and food prices from the war in Ukraine continues to flow through to both economies. Headline CPI inflation in the UK lifted to double digits coming in at 10.1% in July from 9.4% in June, while core CPI was 0.4ppt firmer at 6.2%. The euro area's inflation rates were squared away at 8.9% in headline terms and 4% on the core rate in July's final estimates. 

In both economies, roughly two-thirds of the annual inflation rate is accounted for by energy and food prices. However, inflation pressures are broader than from these sources, reflected in core inflation running well above the targets of the ECB and BoE. The ECB's Executive Board Member Isabel Schnabel in a Reuters interview spoke of the uncertainty that surrounds the inflation outlook and the difficulty its models have had in forecasting inflation. In that sense, Schnabel made the point it would be prudent for the Governing Council to give greater weight to the actual inflation data in its policy decisions. 

Reflective of the tightening in the UK labour market with the unemployment rate holding at 3.8% in June, nominal wages growth showed an uptick to 4.7%yr (5.1%yr ex-bonuses), though in real terms the fall has been very significant (-2.5%yr) and this is the basis for the BoE forecasting a recession to fall by the end of the year. Amplifying the headwinds, on the back of this week's labour market and inflation data, markets have firmed up their pricing for rate hikes of 50bps at each of the September and November meetings, while pricing for the peak in Bank rate has lifted to around 3.6% from around 3.3% a week ago.

Australian employment -40.9k in July; unemployment rate 3.4%

Australian employment fell for the first time since the 2021 Delta lockdowns with a surprise 40.9k fall coming through in July, likely reflecting temporary seasonal factors and Covid-related absences. Due to a lower participation rate, the unemployment rate continued to fall printing at 3.4%, establishing a new half-century low.    

Labour Force Survey — July | By the numbers

• Employment decreased on net by 40.9k in July, a large downside surprise on the consensus forecast of +25k coming after June's 88.4k rise.  

• Australia's unemployment rate fell from 3.5% to 3.4% (vs 3.5% expected), establishing a new low dating back to 1974. This was accompanied by declines in underemployment (from 6.1% to 6.0%) and underutilisation (from 9.6% to 9.4%), with the latter now at its lowest since 1982. 
• The participation rate came off record highs in July, easing to 66.4% from 66.8% in June.

• Hours worked declined by 0.8% month-on-month (3.4%yr) driven by seasonal factors and elevated Covid-related absences. 

Labour Force Survey — July | The details

Australian employment decreased by a net 40.9k in July, its first decline since the Delta wave lockdowns between winter and spring of 2021. The weakness was centred in full-time employment (-86.9k) as part-time employment increased (46.0k).

July's fall in employment may reflect a temporary slowdown in hiring around the end of the financial year, while in today's release the ABS cited Covid-related absences; a rise in annual leave coinciding with school holidays; and flooding in New South Wales as contributing factors. In July, 2.6 million Australians reported working fewer hours than usual, with those citing annual leave rising to 1.6 million from 1.0 million in June; absences due to illness and caregiving reasons remained elevated at 1.0 million, though that was down slightly from June.  

These factors led to a 0.8% fall in monthly hours worked, its sharpest decline since January, leaving hours in July 4.3% above pre-Covid levels. Full-time hours fell by 1.2%m/m and part-time hours lifted 1.1%m/m, broadly matching their employment outcomes (full-time -0.9%m/m and part-time 1.1%m/m). 

Labour supply softened in the month, which is likely to be seasonally related more than anything given the recent trend. Participation in the labour force saw its largest month-to-month fall since last September during the Delta lockdowns, declining from 66.8% to 66.4%. Meanwhile, the weak employment outcome lowered the employment to population ratio from 64.4% to 64.2%. 

The labour force fell by 61.2k in July and because this was larger than the fall in employment (-40.9k), the measured unemployment rate declined from 3.5% to 3.4%. Underemployment (counting those wanting more hours) declined from 6.1% to 6.0%, supported by the rises in employment and hours worked in the part-time segment of the labour market. As a result, underutilisation (aggregate of unemployment and underemployment) was 0.2ppt lower in July at 9.4%, its lowest since April 1982. 

Labour Force Survey — July | Insights

July's update from the ABS's high frequency payrolls series proved to be a reliable indicator of weaker activity labour market activity. The commentary in that report and in today's release cited the effects of seasonality around the end of financial year and school holidays together with Covid-related absences as the main factors. Despite today's report, the labour market remains the strongest it has been in many years and forward-looking indicators from job vacancies suggests we will see employment quickly overrunning July's fall. What it could do, however, is ease pressure on the RBA to continue hiking at its current run rate of 50bps increments, particularly after yesterday's modest rise in Q2 wages growth (see here). 

Preview: Labour Force Survey — July

Australia's monthly Labour Force Survey for July is due from the ABS at 11:30am (AEST) this morning. The nation's labour market is in robust shape with the unemployment rate at half-century lows and participation at record highs. Employment and hours worked are now close to 5% above their pre-Covid levels, reflective of the underlying strength in economic activity and its resilience to headwinds from Omicron and the east coast floods earlier in the year.    

As it stands | Labour Force Survey

National employment increased by 88.4k in June, printing at a multiple of the expected outcome (30.0k). Full time employment continued to rise sharply (52.9k) and part time employment saw its strongest increase in 7 months (35.5k). 

By the spring of last year when large parts of the nation emerged from the Delta wave lockdowns, the unemployment rate stood at 5.2%. Since these reopenings, employment has surged by 750k, driving the unemployment rate down to 3.5% as of June, its lowest level in almost 50 years. Underemployment (6.1%) and total labour market underutilisation (9.6%) have also fallen sharply to historically low levels. 

The strength of labour demand has been met by increasing supply response. The participation rate reset to a new record high at 66.8% in June, up almost 1ppt on its pre-Covid level. Meanwhile, the share of the working age population in employment is at its highest level since those records commenced and 2ppts higher than prior to the pandemic.   

Growth in hours worked stalled in June (0%m/m) following strong increases in April (1.3%m/m) and May (0.9%m/m). Staff absenteeism remained elevated in the current Covid wave, seeing more than 1.1 million Australians working fewer hours than usual in June due to illness and caregiving reasons. 

Market expectations | Labour Force Survey

Consensus on the employment number for July is 25k; the range of estimates is very wide from -10k on the low side to +60k on the high side. The ABS's payrolls series softened in early July, though that is more likely to reflect seasonal factors than underlying labour market conditions. The unemployment rate is forecast to remain at 3.5% (range: 3.4% to 3.5%). 

What to watch | Labour Force Survey

Employment in the past two reports has strongly outperformed expectations, so the momentum in the data, together with the strength in indicators of labour demand (job vacancies and NAB Business Survey), point to another upside result coming through for July. The risks to that view look to be from hiring slowing over the end of the financial year period and due to the disruptions caused by the winter Covid wave, though the latter is more likely to have a larger effect on hours worked through absenteeism. The unemployment rate fell sharply from 3.9% in May to 3.5% in June and there is a decent chance of seeing a new low posted in July if another strong employment outcome is achieved.