Australian Capex -0.6% in Q3; 2022/23 investment plans $155.7bn

Capital expenditure by Australian firms fell unexpectdly by 0.6% in the September quarter following a soft first half of 2022. Forward-looking investment plans continue to point to capex picking up over the back half of the current financial year, with capex in 2022/23 on track to rise to its highest level since 2014/15, despite headwinds to the domestic and global economic outlook and higher financing costs due to higher interest rates.  

CapEx — Q3 | By the numbers

• Private sector capex weakened by 0.6% in the September quarter to $33.9bn (in chain volume or real terms), disappointing expectations for a 1.5% rise. Growth eased from 2.2% to 1.7% through the year. Q2 capex was revised to a flat outcome from a 0.3% decline. 

• Equipment, plant and machinery capex pulled back by 1.6% to $16.3bn (2.2%Y/Y) following strength over the first half of the year.

• Buildings and structures capex partially rebounded from disruptions associated with wet weather and capacity constraints in the first half to rise by 0.5%q/q to $17.6bn (1.4%Y/Y). 

• Firms' 4th estimate of capex plans for 2022/23 was $155.7bn, representing an upgrade of 5.6% on the previous estimate from 3 months ago. 
• Estimate 4 implies capex is on track to rise by 12.4% compared to 2021/22. 

CapEx — Q3 | The details

Capital expenditure contracted by 0.6% in Q3 following a soft first half in 2022 (0.4%). Capex had strong momentum alongside the economic recovery from the pandemic but this has faded over recent quarters. Disruptions to supply chains and in the construction sector seem likely to be the key factors, but higher prices for imported goods could also be weighing on demand.  

The weakness in headline capex was driven by a 5.1% quarter-on-quarter fall in the mining sector, with declines in both equipment (-4.9%) and structures investment (-5.3%). 

Capex in the non-mining sector was up by 1.4%q/q, its strongest rise in more than a year. That was due to the buildings and structures component rebounding (4.3%) from recent disruptions, broadly consistent with yesterday's construction activity data. In contrast, equipment spending in the sector fell by 0.9%q/q, its weakest outturn since the pandemic in mid 2020. 

Forward-looking investment plans for the 2022/23 financial year were upgraded by 5.6% to $155.7 on the 4th estimate. The magnitude of that upgrade is in line with the average increase between estimates 3 and 4 over the history of the series dating back to the late 1980s. 

Overall, capex plans sit at their highest level since 2014/15; however, I had anticipated a more robust increase to around $165-170bn. That was based on indicators in business surveys that have reported capacity utilisation being stretched in many large industries, coming after a period of delayed or deferred investment through the pandemic. Note that the level of capex spending in Q3 was $33.9bn, which is broadly in line with the subdued levels seen prior to the onset of Covid. 

By sector, compared to estimate 3, investment plans for 2022/23 were upgraded by 6.8% in the non-mining sector to $108.9bn, and by 3.0% to $46.8bn in the mining sector. 

For non-mining investment, planned spending on equipment has incresed by 11.5% to $53.3bn, but the increase for buildings and structures was only 2.6% to $55.6bn. 

Plans for mining investment in equipment rose by 6% to $13.2bn while buildings and structures were upgraded by 1.9% to $33.7bn.   

CapEx — Q3 | Insights

Capex was disappointingly weak in Q3 as a fairly modest expected rebound failed to materialise. The decline in equipment spending (-1.6%) is a weak input to factor in ahead of next week's Q3 GDP release. Forward-looking investment plans remain upbeat overall, suggesting firms still plan to increase capex despite a weaker outlook for economic growth domestically and offshore and higher financing costs. 

Preview: Capex Q3

Australia's capital expenditure survey for the September quarter is scheduled for 11:30am (AEDT) today. Capex is expected to rise modestly following a soft first half of the year. Forward-looking capex plans are likely to remain upbeat despite headwinds to the global and domestic economic outlook intensifying.     

As it stands | Capital Expenditure

The capex cycle was in an upswing coming out of the pandemic but has lost momentum in recent quarters. In Q2, capex declined by -0.3%, slowing growth through the year to 2%. Equipment investment continued to rise (2.1%) but capacity constraints and adverse weather weighed on buildings and structures (-2.5%).  

Alongside the economic recovery, equipment spending was boosted by federal tax incentives and accommodative financing conditions. The easing of supply chain pressures may be supporting growth more recently. In contrast, the buildings and structures component contracted over the first half of 2022, with progress impacted by labour and materials shortages and wet weather during the La Niña event. 

By sector, non-mining capex (-0.3%q/q) has held around its current level for the past year after rebounding from the pandemic. Mining capex (-0.3%q/q) has been on an upward trajectory, though the level of investment remains subdued despite the tailwind of surging commodity prices. 

Firms lifted their 3rd estimate of 2022/23 investment plans to $146bn, an uplift of 11.7% compared to the previous survey. Based on that projection, capex is on track for its strongest result since 2014/15 - albeit keep in mind that some of the uplift is reflecting inflationary effects. Non-mining investment plans were increased by 14.4% to $101.7bn while the outlook for mining sector capex was raised by 5.9% to $44.7bn. 

Market expectations | Capital Expenditure

The median estimate for quarterly capex is for a 1.4% rise, with the range of forecasts spread between -0.5% to 4.0%. Today's survey will also include firms' 4th estimate of investment plans for 2022/23. Firms, on average, over the history of the survey have lifted investment plans by around 5% compared to estimate 3. That points to a figure of around $155bn, but a stronger projection looks likely based on the trajectory of the earlier estimates. My estimate is for a figure of between $165-170bn, equating to a robust uplift of between 12-16% from 3 months ago.  

What to watch | Capital Expenditure

The question is whether the optimistic outlook for capex plans can hold up amid expectations for weaker global and domestic growth in 2023. That and high inflation suggests there could be downside risk for capex; however, a period of deferred investment through the pandemic and capacity constraints firms face suggests capex plans could remain resilient. I think the latter case is more likely, with indicators in recent NAB business surveys for capex, forward orders and capacity utilisation consistent with resilient investment. 

Source: NAB Economics

Australian dwelling approvals down further in October

Australian dwelling approvals fell by a larger-than-expected 6% in October following sizeable declines in recent months. The interest sensitivity of the housing sector and capacity constraints in the construction sector are weighing on approvals. 

Building Approvals — October | By the numbers

• Dwelling approvals (seasonally adjusted) declined by 6.0% in October to 15,382 against -2% expected.  Approvals were revised to show a larger fall of 8.1% in September compared to -5.8% initially reported. Annual approvals growth is at -6.4% from -12.9%. 

• House approvals were 2.4% lower at 9,502 coming on the back of September's 8.2% fall. Annual growth slid to -11.6% from -9.9%. 

• Unit approvals declined sharply by 11.3% to 5,880 (prior: -8.0%), though annual growth lifted to 3.5% from -17%. 

Building Approvals — October | The details 

Building approvals weakened further falling by 6% month-on-month in October — their third decline in the past 4 months — as the RBA's rate hiking cycle gained further traction in the interest-sensitive housing sector. Approvals floored just below 13k during the pandemic in mid-2020 but went on to surge to a peak above 23k in March 2021 as stimulus measures boosted the construction pipeline. The retracement that has followed has left approvals averaging around 16k over the past 12 months.  

House (or detached) approvals had been trending gently upwards in 2022; however, that has given way following notable declines in September (-8.2%) and now October (-2.4%). The RBA's rate hiking cycle, housing prices falling from their Covid peaks and the substantial number of houses in the construction pipeline are all factors playing their part. 

Approvals in the unit (or higher-density segment) have been very volatile this year in the monthly reports. Averaging out the available data indicates approvals in the segment are tracking sideways amid diverging trends with high-rise approvals grinding back to pre-Covid levels as townhouse approvals have declined.  

Alteration approvals have been sustained at very elevated levels despite the HomeBuilder stimulus having concluded to new applicants well over a year ago. The desire of homeowners for more space is looking to be sticky even as the pandemic continues to dissipate and despite builders passing through higher materials and labour costs. 

Non-residential approvals have been showing encouraging trends, consistent with the rise in output seen in today's construction activity data (see here). Investment by firms in offices and facilities is rebounding after projects were shelved during the Covid period. 

Building Approvals — October | Insights  

The declines of recent months suggest the renewed weakness in dwelling approvals is coming in response to the headwinds from RBA rate hikes, falling housing prices and capacity constraints in the construction sector. Further declines remain in prospect as a record number of new homes remain under construction. 

Australian construction activity 2.2% in Q3

Australian construction activity rebounded in the September quarter and inflationary pressures in the sector softened slightly. Better weather and some improvement in supply constraints for materials and labour look to have driven today's result. 

Construction Work Done — Q3 | By the numbers

• Construction work done lifted by 2.2% in the September quarter, broadly in line with expectations and rebounding from a 2.0% fall in Q2 (revised from a larger 3.8% decline reported initially). Activity through the year swung from -2.6% to 1.1%.

• Category details were;
• Engineering work lifted 3.4%q/q (from -0.2% in Q2) to 4.9%Y/Y 
• Building work rebounded by 1.2% (following a 3.3% fall) to -1.7%Y/Y 
• Residential work expanded by 1.3% (from -5.7%) to -5.2%Y/Y 

• Non-residential work advanced by 1.1% (from 0.3%) to 3.9%Y/Y 

Construction Work Done — Q3 | The details 

Construction activity rose by 2.2% in the September quarter, reversing the decline in output seen over the first half of the year. Activity has been hampered by an extended La Niña event leading to well above average rainfall, and by shortages of materials and labour. An easing in those headwinds supported a rebound in activity for Q3, with engineering output advancing by 3.4% and building work up by 1.2%. The latter included rises in the residential (1.3%) and non-residential segments (1.1%). 

Driving the rise in construction activity was work done by the private sector on infrastructure (4.2%), reflecting the substantial pipeline of projects being rolled out by governments in Australia. 

Private sector residential construction work lifted by 1.3% in the quarter but has declined by almost 6% over the year; wet weather and capacity constraints have held back progress in working through a pipeline that has expanded to a record number of more than 100k homes under construction following the stimulus measures to support the sector through the pandemic. New home building lifted by 2.5% in the quarter, but alterations fell by 5%. The disparity is likely reflecting the unwind in renovations from their pandemic-driven surge as more of those projects have been completed.

Work in the non-residential space returned to pre-pandemic levels on the back of a 2.8% rise in Q3. Momentum in this segment has appeared to be more resilient to the headwinds that the residential segment has run up against. 

Public sector construction activity expanded by 0.9% in the quarter, a much weaker outcome than in the private sector (2.6%). Work on public infrastructure (2.4%) picked up after a lacklustre first half of the year; however, that was attenuated by a fall in public building (2.8%).

Construction Work Done — Q3 | Insights

The details in today's report are supportive for Q3 GDP in terms of the contribution to growth from residential construction following recent weakness. A second highlight is that quarterly inflation in the sector slowed for the first time in 2 years, down to 2.8% in the quarter from 3.2%, but the pace remains very elevated. 

Preview: Construction work done Q3

September quarter activity data for Australia's construction sector is due to be released by the ABS this morning (11:30am AEDT). A solid rebound in work done is expected after a weather-disrupted Q2; however, capacity constraints in the sector remain a headwind.  

   

As it stands | Construction Work Done

Construction work done slumped by 3.8% in the June quarter as activity was hampered by wet weather and ongoing shortages of materials and labour. All states recorded a contraction in activity in Q2. Building work (including the residential and non-residential segments) fell by 4.6% and engineering activity declined by 2.7%. 

Private sector construction activity was down by 4.5% in Q2, its fourth quarterly fall in succession. Residential work contracted by almost 7% as shortages of labour and materials and well above average rainfall associated with an extended La Niña event in Australia held back new home building (-7.7%) and weighed on alterations (-1.9%). Momentum in non-residential activity stalled over the first half of the year and was broadly flat in Q2 (-0.2%). Engineering activity fell by 4.1% to be down by 10.2% through the year. 

In the public sector, construction activity posted a 1.7%q/q fall as weakness came through in both building (-3.3%) and engineering work (-1.0%). The volume of work underway remains at elevated levels due to state governments boosting infrastructure spending coming out of the pandemic.    

Market expectations | Construction Work Done 

The market anticipates a rebound in construction activity of 2.0% following Q2's 3.8% fall. The range of individual forecasts in the Bloomberg survey is very wide from -1.8% on the low side to 5.0% on the top side. 

What to watch | Construction Work Done

Australia's residential construction pipeline remains substantial with a record number of homes under construction. This has been stretching the capacity of the sector for some time resulting in new home building costs rising very sharply, which has contributed significantly to higher inflation in Australia. Signs that activity in the segment is picking up will suggest that some of these strains are at least starting to ease.  

Australian retail sales down 0.2% in October

Australian retail sales declined in October and fell for the first time this year driven by weakness in discretionary spending. Households' resilience to cost-of-living pressures, weak sentiment and RBA rate hikes may be starting to fade, though spending on services likely remains strong and retail sales may bounce back in November due to Black Friday sales. 

Retail Sales — October | By the numbers 

• National retail sales declined by 0.2%m/m in October to $35.0bn, much weaker than expected (0.5%) and down from a 0.6% rise in September.  
• 12-month retail sales weakened from 17.9% to 12.5%; the base period coincided with reopenings from Delta wave lockdowns in Sydney and Melbourne.   

Retail Sales — October | The details  

The first signs of an outright weakening in consumer demand were reported in today's retail sales data for October. Headline sales fell by 0.2% in the month, but that was propped up by a 0.4% rise in basic food sales amid higher prices and stockpiling associated with floods in parts of Australia. Sales ex-food were down by a larger 0.6% in October, reflecting broad-based weakness in discretionary spending across department stores (-2.4%), clothing and footwear (-0.6%), household goods (-0.5%), cafes and restaurants (-0.4%) and other retail (-0.2%). 

Aside from cafes and restaurants, which saw their weakest result since the beginning of the year, the other discretionary categories have seen larger falls at different times over recent months. The key point in October was that the weakness in discretionary spending came across the board at the same time.     

From a state perspective, sales fell in 6 of the 8 jurisdictions. Although the largest month-on-month percentage falls were in the Northern Territory (-1.8%), Tasmania (-1.7%) and the Australian Capital Territory (-1.4%), sales in those jurisdictions make up less than 5% of national turnover. Around 75% of national retail sales are made down the east coast, so it was declines in New South Wales (-0.1%), Victoria (-0.1%) and Queensland (-0.4%) that drove the weakness in October. Sales were flat in South Australia and Western Australia. 

Retail Sales — October | Insights 

Household spending has proved resilient to headwinds from cost-of-living pressures, weak sentiment and rising interest rates, but October's report gave tangible signs of that fading. That said, the level of spending remains very elevated. Although the momentum in retail sales has been softening over recent months, spending on services (largely excluded in the retail data) has been picking up strongly as the effects of the pandemic and its restrictions have waned. The other key point to keep in mind is that spending patterns in Australia have changed over recent years as the prominence of Black Friday sales has risen. That could see retail sales rebound strongly in November as households bring forward Christmas spending to align with the Black Friday sales period. The full details for October retail sales will be published in the full release from the ABS on Friday.  

Macro (Re)view (25/11) | Inflation outlooks still hold the key

A holiday-shortened week in the US and limited data kept markets fairly quiet in recent days. In terms of news flow, support for a slowing in the pace of Fed rate hikes, the return of lockdowns in China, and a hawkish RBNZ stood out. In the markets, the rally in bonds continued, which kept the correction lower in the US dollar going. Upbeat risk sentiment sees equity markets well above their recent lows. 

Fed downshift on the way  

The minutes from the November meeting of the Fed's policy-setting FOMC provided support for a slowing in the pace of rate hikes in the US. The Committee has hiked rates by 375bps so far this year, the past 4 hikes coming at the peak pace of 75bps. The view amongst a "substantial majority" of members was that a slowing in the pace of hikes is likely to "soon be appropriate", with officials increasingly mindful that the full effects of such a rapid tightening cycle are yet to impact the economy. 

But a more important message was conveyed by "various participants" that with inflation yet to come under control, rates would need to be raised to a "somewhat higher" level than previously thought. Ahead of the mid-December meeting, two key data points are coming up in nonfarm payrolls for November (due 2/12) and the CPI report also for November (13/12). Those two reports could yet prove the decisive factor but at this stage, a slowing to a 50bps hike looks likely. 

RBA Governor flags a regime change in inflation 

A quiet week domestically left the focus on a keynote speech from RBA Governor Philip Lowe at the CEDA Annual Dinner. On current policy actions, the governor reiterated that the Board expected further rates hikes would be required to lower inflation to the 2-3% target, leaving its options open on the pace of tightening; though, at the same time he acknowledged it could leave rates on hold. 

The central theme in the address focused on the path of inflation well beyond the immediate challenges. Here, Govenor Lowe flagged a regime change from the period of low and stable inflation that characterised much of the period since the early 1990s. Due to structural changes occurring in economies relating to deglobalisation, demographics, climate and the transition to renewable forms of energy, the governor anticipates supply shocks are likely to be more frequent and cause inflation to be more volatile. Governor Lowe said the current monetary policy framework would still be fit for purpose in that environment, but central banks are likely to be setting policy with the growth and inflation sides of their mandates more often in tension - as is the case now. 

ECB set for a finely balanced meeting in December

The account of the ECB's October meeting noted "a large majority" of the Governing Council supported the decision to hike rates by 75bps to remove accommodative policy settings in light of risks for high inflation to become more sustained than expected. Next month, the Council will recalibrate policy to revised economic and inflation forecasts. Those forecasts will determine the pace of the next hike. 

Markets sense the ECB will slow the pace back to a 50bps hike, though the account offered no direct support for that view, and remarks from key officials have varied. ECB Chief Economist Philip Lane said the amount of tightening already delivered removed one argument for the need to hike by 75bps again, though Executive Board member Isabel Schnable in a speech said the case to downshift "remains limited" based on the data. 

In that respect, the October account revealed that some Governing Council members were of the view that a "shallow or technical recession" would not sufficiently ease inflation pressures in the euro area. The data of note this week showed the euro area is sliding towards a recession as further weakness in activity was reported in November's preliminary PMI readings. The composite index (including manufacturing and services) posted another contractionary reading, in at 47.8 from 47.3 in October. Weakening activity is translating to easing price pressures as input costs for manufacturers fell to their slowest pace in 14 months. 

More work in front of the BoE

The Bank of England's Watchers' Conference saw Bank deputy governor Dave Ramsden give a recap of the key developments in the UK economy in 2022 highlighting the energy price shock, labour market tightness, rising inflation expectations, and volatile financial markets. Ramsden said that in a background of elevated uncertainty the BoE has been less confident in its economic forecasts, particularly over the medium-term horizon relevant for monetary policy decisions. 

To his own interpretation, Ramsden's assessment was that the BoE's tightening cycle had further to run due to domestic inflationary pressures having not yet abated. Although the government's fiscal support to cap energy prices had reduced some of the upside risk to inflation, more persistent price pressures could be building due to the strength of the labour market and with services sector inflation at a 30-year high.  

Macro (Re)view (18/11) | Relative calm descends

Markets were largely range bound this week, trading on familiar themes. Some Fed officials pushed back on the easing in financial conditions following last week's softer-than-expected US inflation data. St. Louis Fed President Bullard was the most notable of those voices, putting forward the view that Taylor-rule estimates suggested rates were still substantially below the restrictive settings needed to lower inflation. Those and comments from other Fed officials lifted yields at the front end of the curve, weighing modestly on US equities and putting some support back into the US dollar. 

Australian labour market tightens further; RBA unlikely to change course 

Assessing this week's labour market data through the lens of the RBA's November meeting minutes points strongly to another 25bps rate hike next month. Employment showed renewed strength - coming through a slowdown in Q3 - to rise by a stronger-than-expected 32.2k in October (reviewed here). That outcome drove the unemployment rate down from 3.5% to 3.4%, a new low in the post-pandemic period and its lowest level overall since late 1974. The disruptions to the workforce caused by Covid-related absences showed further signs of easing, with the number of Australians working reduced hours due to illness falling to its lowest level in nearly a year. That helped drive a 2.3% surge in hours worked in October, its strongest rise since February. Rising employment accompanied by increased hours saw the labour market tighten further. In addition to the fall in unemployment, the broader underemployment rate fell from 6.0% to 5.9%, driving total labour force underutilisation down from 9.6% to 9.3% - a 41-year low. 

Reflecting the tightening in the labour market, wages growth lifted from 2.6% to 3.1% over the year to Q3, running at its fastest pace since 2013 (reviewed here). Still, that pace is only at the bottom end of the range the RBA estimates to be consistent with sustainably delivering on its 2-3% inflation mandate - a point reiterated in the November minutes. The elevation in wages growth was also boosted by a strong quarterly rise of 1%, driven by a large round of annual wage reviews in the private sector, and increases to the national minimum wage and awards coming into effect. Compared to other advanced economies, wage pressures in Australia are on the more modest end of the scale, certainly relative to the US, UK and New Zealand. That in part can be attributed to Australia's rise in labour force participation to record highs coming out of the pandemic.  

For the RBA, the Board's guidance remains that it "expects to increase interest rates further" and it has left its options open for the "size and timing" of those hikes depending on the data. However, the Board again noted that the combination of accumulated tightening and the lags of monetary policy justified moving at the conventional pace of 25bps hikes. Notably, it also highlighted indicators from supply chains and commodity prices and an outlook for below-trend growth in advanced economies as pointing to a weakening in global inflation pressures. 

UK Chancellor outlines fiscal tightening

The UK government's Autumn Statement walked a fine line between supporting the economy through recessionary conditions over the coming year and stabilising debt over the longer term. Bank of England officials told the Treasury Committee this week that the risk premium priced into UK assets had largely unwound following the effective cancelling of the mini-Budget, giving Chancellor Hunt a relatively calm backdrop in the markets to map out the path for fiscal policy. 

As UK inflation rose above 11% in October, the OBR highlighted the extraordinary scale of the shock households face with real incomes expected to be crunched by 7.1% over the next couple of years. The OBR anticipates the UK economy has already entered into recession and forecasts GDP to fall by around 2% over the coming year. Government support to cap energy bills has attenuated what would be an even more severe downturn but comes at the cost of higher public spending; the uplift sees it rising above 47% of GDP for the next couple of years - at least 4ppts higher than previously forecast. 

The government's plans for austerity ramp up down the track from 2024/25 onwards, with spending pared back following the recession recovery. All up, £55bn in fiscal tightening measures have been set down by the Chancellor, with spending cuts and new taxes due to come roughly in equal measure. The effect of that tightening - together with an expanding economy - is projected to eventually put underlying government debt on a declining trajectory from 2026-27. The DMO published revised its revised outlook for debt issuance, estimating a reduction of around £24bn in gilt sales this year to £169.5bn; but net issuance in 2023/24 is expected to be higher at £188bn, and markets will also have to absorb sales of the BoE's gilt holdings in that period.     

ECB remains hawkish 

A Bloomberg article suggested the ECB could be set to ease the pace of its rate hiking cycle, with the report indicating support amongst the Governing Council for another outsized 75bps hike was lacking. That being said, euro area inflation is yet to peak, with October's readings finalised at 10.6%yr on a headline basis and 5.0%yr on the core rate. ECB President Christine Lagarde also delivered quite hawkish remarks in a speech on Friday, not only saying further rate hikes are on the table but also indicating monetary policy may need to be taken into restrictive territory. 

The ECB announced €296.3bn of TLTRO III repayments had been made by banks under the first of three early repayment windows. That equates to 14% of the €2.1tn in liquidity taken up under the scheme. Retroactive changes were made to TLTRO III at the last ECB meeting that raise the interest rate payable on these loans, incentivising early repayments and contributing to a faster reduction in the size of the ECB's balance sheet - working in congruence with hiking rates. 

Australian employment 32.2k in October; unemployment rate 3.4%

Australia's unemployment rate fell to a new half-century low of 3.4% in October as employment rebounded from a recent slowdown. Hours worked saw their sharpest rise since early in the year with Covid-related disruptions continuing to dissipate. The further tightening in the labour market comes with participation remaining around record highs, helping to keep wages growth in check. Another 25bps rate hike from the RBA in December looks all but certain.  

Labour Force Survey — October | By the numbers

• Employment advanced by 32.2k in October - stronger than the 15k rise expected and rebounding from a 3.8k fall in September (revised down from +0.9k).

• The unemployment rate fell to 3.4% from 3.5% (markets expected no change), establishing a new low going back to 1974. Underemployment fell to 5.9% from 6.0%, lowering total underutilisation from 9.6% to 9.3%, a 41-year low. 
• The participation rate was little changed, reported at 66.6% and close to record highs. 

• Hours worked saw their sharpest rise in 8 months accelerating by 2.3% in October with Covid-related disruptions showing further indications of waning.

Labour Force Survey — October | The details

The national unemployment rate has fallen to a new-post pandemic low of 3.4% in October, its lowest level since late 1974, and spare capacity in the labour market declined further. Combined with a fall in the underemployment rate to 5.9%, total underutilisation (share of the labour force either unemployed or underemployed) was driven down to a 41-year low of 9.3%. 

Employment posted a 32.2k net increase in October - more than double the expected rise and the largest upside surprise relative to market expectations since June. Full time employment lifted by 47.1k while part time employment fell by 14.9k. The composition likely reflects many part-time workers working additional hours and crossing the threshold for being employed full-time (35 hours in the survey week) rather than losing employment. 

This was a solid start to Q4 for employment after a slight weakening in Q3 (-4k). The slowing in the pace of hiring reflected the tightening in the labour market and was also hampered by Covid-related and seasonal disruptions.    

Hours worked accelerated by 2.3% in October, its strongest rise since February, surging to 7.4% above pre-Covid levels. In October, full-time hours lifted by 2.9% while part-time hours fell by 0.6%. 

The very strong rise in hours worked came despite 4.2 million Australians working fewer hours than usual in the survey period, up from 3.3 million in the previous month. The bulk of that increase was due to annual leave, as this morning's preview suggested was likely. However, hours worked were still able to rise due to part-time workers working additional hours, and as the disruptions caused by Covid continued to wane. The number of Australians working fewer hours than usual due to illness fell markedly in October, to be at its lowest level since December last year - prior to the Omicron wave.  

Unlike other comparable countries - the US and UK of note - the supply side of the Australian labour market has not been damaged by the pandemic. In October, the participation rate (66.6%) and the share of Australians in work (64.3%) were broadly unchanged, both around record highs and materially above where they were prior to the pandemic. This has been a key factor that has contributed to the fairly measured rise in wages growth as the labour market has tightened. 

Labour Force Survey — October | Insights

Employment lifted more strongly than expected in the month, coming through a Q3 slowdown to confirm the signals from job vacancy data that underlying labour demand remains robust. That demand continues to see the labour market tighten, with the unemployment rate falling to a new low since 1974 and overall spare capacity at its lowest level since the early 1980s. On the back of this, wages growth has picked up to be running at its fastest since 2013, but at 3.1%Y/Y is hardly cause for alarm. All in all, this week's data points on the labour market will keep the RBA on its current course, with the cash rate to rise by another 25bps in December.