Macro (Re)view (28/2) | US growth concerns continue

Concerns over the health of the US consumer and ongoing uncertainty over tariffs remained the key macro themes in another broadly risk-off week in markets. Sentiment has soured towards to the Mag 7 names in the US, sending the Nasdaq to its largest weekly decline since September last year - even after a rebound in Friday's session. Asian equities were also hit hard, but Europe defied the weakness again. Growth worries have put Fed rate cuts back on the radar, driving Treasurys to rally across the curve; the 2-year trades at lows since last October and the 10-year sent back to early December levels. The overall backdrop was a tailwind to the USD. 

The recent softening in the US data flow was put firmly in the spotlight after the Atlanta Fed's tracking estimate of Q1 GDP was reported at -1.5%. This has put added focus on next week's payrolls report where a weak number could drive a further risk-off reaction across markets. With the Fed's preferred inflation measure - the core PCE deflator - softening from 2.9% to 2.6%yr in January and consumer spending falling in the month in nominal (-0.2%) and real terms (-0.5%) - despite a 0.9% rise in personal incomes - markets have repriced to discount almost 3 rate cuts through the remainder of 2025.  

In the euro area, the ECB is expected to cut rates at next week's meeting as focus in the meantime has remained on the neutral rate. The neutral rate - a theoretical concept for the level of rates that neither slows nor speeds up growth - has been in discussions at the ECB in recent times as the easing cycle has continued. A recent paper put out by the ECB estimated the neutral rate in the 1.75-2.25% range, implying that rates at the current 2.75% level remain restrictive. But as the account of the January meeting revealed, discussions are starting to stir that rates may be closer to a level that can no longer be assessed as restrictive. Executive Board member Schnabel - one of the leading voices in the discussion - outlined in a speech this week that structural factors are pushing up estimates of the neutral rate, a reverse of the pre-pandemic era where estimates were being persistently being lowered. 

Australia's CPI report for January had few implications for RBA rates pricing, with a second rate cut unlikely to occur before the Board's May meeting. According to the ABS's monthly CPI indicator, headline inflation was 2.5%yr in January, an unchanged pace from December against an expected rise to 2.6%yr (reviewed here). The measures of underlying inflation firmed slightly: trimmed mean up from 2.7% to 2.8%yr and CPI excluding volatile items and holiday travel now 2.9%yr from 2.8%. The monthly indicator gives only a partial update of prices within the CPI basket, with the RBA's policy decisions guided by the comprehensive quarterly report. Of the prices that were updated at the start of the year, electricity (8.9%m/m) could pose upside risk to quarterly inflation with government rebates winding down. 

The highlight in Australia next week is the Q4 National Accounts, which are expected to confirm that quarterly GDP growth remained subdued at around 0.3%. My preview of the National Accounts gives a detailed overview of the key themes to watch out for, most notably an uptick in consumer spending through the Black Friday sales, spurred on by fiscal support, and ongoing strength in public demand (see here). Partial indicators for GDP released this week were mixed. Construction activity rose 0.5% in Q4, a modest outcome but with signs that the long-running malaise in the residential sector (0.9%) may be abating (see here). Capital expenditure by private sector firms has plateaued over the past year and contracted slightly (-0.2%) in Q4 (see here). Weakness in non-residential construction and a slowing in equipment spending were the key dynamics. 

Preview: Australian Q4 GDP

The Australian National Accounts for the December quarter are due to be published by the ABS at 1130 (AEDT) today (5/3). Growth in the domestic economy has slowed materially over the past couple of years as headwinds from offshore, higher interest rates and cost-of-living pressures have all impacted. These themes were broadly evident again in the final quarter of 2024; however, some more encouraging signs around households are emerging. Estimates point to growth of around 0.7% in the quarter. 

A recap: Subdued growth continues 

The Australian economy remained subdued in the September quarter. Real GDP expanded by just 0.3% in the quarter, slowing from 1.0% to 0.8% through the year - its weakest pace in 3 decades. Meanwhile, growth in per capita terms remained weak contracting for the 7th quarter in succession (-0.3%). 

After declining in the previous quarter (-0.3%), household consumption only managed to stabilise in Q3 (0%), indicating that fiscal support measures had yet to provide a meaningful breakthrough to the malaise caused by higher interest rates and cost-of-living pressures.

Dwelling investment lifted by 1.2% in the quarter but had been weak over the past year (-0.5%) as the cumulative effects of rate hikes and capacity pressures weighed on activity. Meanwhile, weakness in non-dwelling construction drove business investment to its first quarterly decline in 4 years (-0.2%), reducing year-ended growth to 1.5% - down sharply from a 7.5% pace a year earlier.

Amid the overall weakness in private demand (0.1%q/q, 0.7%Y/Y), robust public sector demand (2.2%q/q, 4.1%Y/Y) had become an increasingly significant driver of GDP growth. Government expenditure lifted strongly (1.4%q/q, 4.7%Y/Y) on the back of cost-of-living support measures as well as spending across the health and aged care portfolios. Public investment (6.1%q/q, 2.0%Y/Y) was also contributing to growth via an elevated pipeline of infrastructure projects and spending on defence equipment. 

Q4 preview: Households find momentum  

Headwinds from offshore persisted into year-end as growth slowed and uncertainty increased in the lead up to the US election. Growth in the OECD eased from a 0.5% pace to 0.3% in the December quarter, with mixed outcomes across countries. While growth remained solid in the US and picked up in Japan, it was broadly flat in the UK and contracted in parts of Europe post the Paris Olympics. In China, growth accelerated in Q4 - due partly to earlier stimulus measures and a frontloading of export orders to avoid tariffs touted by an incoming Trump administration - dynamics that supported an uplift in commodity prices.

Domestically, momentum in household consumption lifted during the Black Friday and Cyber Monday sales events. Price discounting, rising real incomes - bolstered by slowing inflation and fiscal support - and continued strength in the labour market were key factors that drove a sharp increase in quarterly retail sales volumes. The ABS's gauge of household spending also indicated that services spending increased more strongly than in recent quarters. 

Improving signs of momentum were also seen in the residential construction sector. Dwelling approvals rose through the middle of the year, and this looked to translate into increased housing starts in Q4. By contrast, non-residential construction activity continued to decline, weighing heavily on business investment in the quarter. 

Public demand looks to have again remained the key driver of growth. Support measures to ease cost-of-living pressures as well as spending relating to the provision of government services continues to drive growth in public expenditure. Spending on infrastructure projects and defence are underpinning public investment.   

Summary of key dynamics in Q4

Household consumption — The Stage 3 tax cuts and electricity rebates appeared to be gaining traction as households turned out strongly for the Black Friday and Cyber Monday sales. Slowing inflation was also a key factor as retail sales volumes increased at their fastest quarterly pace since early 2022. 

Dwelling investment — Despite the headwinds from higher interest rates, momentum in residential construction activity improved throughout the course of 2024. In Q4, both new home building and alteration work lifted. 

Business investment — Possibly contracted in the quarter based on weak details from partial indicators. Private sector capital expenditure declined by 0.2% quarter-on-quarter, driven by a decline in investment spending (-0.8%). Non-residential construction activity remained weak (-5.4%).  

Public demand — Continued to support demand in Q4, albeit at a slower pace than in the previous quarter. Both public spending and investment advanced further.  

Inventories — Set to contribute 0.3ppt to quarterly growth, rebounding from a 0.4ppt deduction in Q3. Key contributors to the build in inventories in the latest quarter were the mining and retail industries.

Net exports — Estimated to have added 0.2ppt to GDP in Q4. Export volumes lifted by a modest 0.7% but outpaced a 0.1% rise from imports. 

Australian Capex -0.2% in Q4; 2024/25 investment plans $183bn

Australian private sector capital expenditure (capex) slipped 0.2% in the December quarter, a weak outcome against modest expectations (0.5%). Capex spending plateaued over 2024, reflected in year-ended growth slowing to 0.6% from a 7.9% pace a year earlier. Firms' latest estimates for capex spending were upgraded to $183bn in the current financial year.   

The capex report provides insights into business investment by Australian firms, which feeds into the quarterly GDP growth figures (to be published next week). Based on today's report and yesterday's figures on construction activity, business investment looks likely to have again weighed on economic growth following a 0.2% contraction in Q3.  

In the December quarter, capex (in chain volume or inflation-adjusted terms) declined by 0.2%. This was the second decline in the past 4 quarters but comes after a 1.6% rise in the September quarter (revised up from 1.1% in today release). After rising strongly coming out of the pandemic, capex has largely plateaued increasing by 0.6% over the past year. 

The decline in the latest quarter was driven by a 0.8% fall in equipment, plant and machinery investment (2.4%Y/Y), the construction industry (-8.1%q/q) a key contributor after an earlier run-up in vehicle spending on light trucks and utes. Buildings and structures increased by 0.2% in the quarter (-1.0%Y/Y). 

Non-mining sector capex was down 0.1% in the quarter, with a 1.1% rise in the buildings and structures component offset by a 1% decline in equipment investment. Capex spending by the sector has risen by 35% from its lows reached during the pandemic, with investment in data centres and renewable energy projects picking up. 

In the mining sector, capex declined modestly by 0.6% in the quarter following a 1.6% decline in Q3. A 1.1% fall in buildings and structures was partially moderated by a 0.6% rise in the equipment segment. Quarterly capex has remained in the $12-13bn range over the past couple of years, proving to be relatively stable amid swing in commodity prices through that period.  

In today's report, firms submitted their 5th estimates of capex plans for the current financial year. The figure put forward was $183bn, up 3.2% on estimate 4 and 4.1% above estimate 5 for 2023/24 - both fairly modest upgrades. Plans in the non-mining sector came in at $129bn, on track for 3.9% rise compared to the previous financial year; while mining sector plans rose to $55bn, pointing to a 4.8% year-to-year rise. 

In other news, the first estimate of capex plans in 2025/26 came in at $148bn, its highest since 2013/14 but only a modest 1.8% above estimate 1 for 2024/25. Non-mining sector capex was estimated at $101bn and $47bn in the mining sector. 

Australian construction work done 0.5% in Q4

Australian construction activity rose at a weaker than expected pace of 0.5% in the December quarter (vs 1.0% forecast), slowing from a 2% increase in the September quarter. It is a mixed picture across the construction sector: public sector infrastructure work is expanding strongly; the residential segment is climbing out of a long-running malaise caused by capacity pressures and higher interest rates; and private sector commercial activity is weak. 

Work on the expansive pipeline of public sector infrastructure projects across the nation drove construction activity to a 0.5% increase in the final quarter of 2024, up 1.8% through the year. The headline outcomes for Q4 included a 1.8% rise in engineering work (associated with infrastructure projects such as renewable energy and roads); the residential segment continuing its uptrend rising by 0.9%; and non-residential work contracting (-3.1%) for the 4th time in the past 6 quarters.   

The main theme over the past year in the construction sector has been the strength in public activity. Total construction activity rose by 1.8%Y/Y with that growth driven entirely by the public sector (6.7%Y/Y). Engineering work led the way expanding by 8.6%Y/Y with modest support from building work (1.0%Y/Y). By contrast, private sector construction work was broadly flat (-0.2%Y/Y) as gains in engineering (1.2%) and residential work (5.5%) were offset by weakness in the non-residential area (-13.5%).    

In the private sector, the residential segment found an uptick in momentum in 2024 putting together 4 consecutive quarterly rises, the latest being a 0.7% increase. New home building activity (0.7%q/q) was up 5.9% through the year to Q4 while alterations (0.9%q/q) advanced 3.3%Y/Y. These latest figures point to a positive contribution to quarterly GDP from dwelling investment in Q4.

Today's report, however, indicates that business investment was weak in Q4. Private non-residential construction was down 5.4% for the quarter falling by 13.5% through the year. More insights on business investment, particularly around equipment spending, will come to hand in tomorrow's capital expenditure report. 

Australian CPI 2.5% in January

Australian headline CPI remained at a 2.5%yr pace in January, holding steady against an expected rise to 2.6%. Meanwhile, the various measures of underlying inflation firmed slightly at the start of the year. Today's report is of little consequence for the local rates outlook. The RBA will need to see disinflationary progress sustained across the first quarter to lower rates again, unlikely to occur before the May meeting. 

Seasonal factors saw January prices decline by 0.2% on falls across items including clothing and footwear, international holiday travel and household contents. Additionally, fuel prices declined by 1.4%. Prices in January fell by 0.3% in 2023 and 2024. The main item pushing up on inflation in early 2025 was electricity prices, measured to risen by 8.9% due largely to a state government rebate scheme in Queensland being used up by many households. 

Rents rose 0.3%m/m but the annual pace has slowed to 5.8% - its slowest since March 2023 - reflecting a softening in capital city vacancy rates. Meanwhile, new dwelling prices at 2%yr are at their slowest pace since mid-2021, with developers increasing incentives and promotions. 

Goods prices firmed 0.2% in January to rise from 1.4% to 1.8%yr on base effects (goods prices fell 0.2% in January 2024). Services prices were reported to have declined by 0.7% - their largest one-month fall since October 2023 - softening from 3.7% to 3.6%yr; however, being the front month for the full quarterly CPI release, the January report contains only a small range of service price updates. The key movement here was international holiday travel, down 16%m/m due to lower demand in the off-peak season in the northern hemisphere. 

Inflation in underlying terms ticked up in January from 2.7% to 2.8%yr on the trimmed mean measure and from 2.8% to 2.9%yr for CPI excluding volatile items and holiday travel. Today's report confirms that underlying inflation pressures remained more elevated than the headline CPI in early 2025. RBA Governor Bullock last week said the Board will be watching for more progress in underlying inflation as a key indicator for upcoming policy decisions.   

Macro (Re)view (21/2) | USD falters; RBA cuts

A broadly downbeat week across markets that saw US and European equities decline while currency pairs were offered on the US dollar side. A vacuum created by a thin calendar for top-tier data and other events left markets to speculate that the US exceptionalism story may be faltering - disappointing results from retail giant Walmart a key factor here - with uncertainty over tariffs also a headwind to the growth outlook. Recent data on US inflation and the labour market has cast doubt that the Fed will be able to resume its easing cycle after January's pause. The Japanese Yen has received the bulk of attention from traders, benefitting from safe-haven flows and strong inflation data that has boosted pricing for more BoJ tightening. Central bank news focused on events locally as the RBA (-25bps) and RBNZ (-50bps) cut policy rates, decisions that were discounted into market pricing ahead of those announcements. 

The post-meeting narrative to the RBA's 25bps cut to 4.10% on the cash rate (reviewed here) continues to focus on the Board's reluctance to endorse the 50bps of additional easing priced into the Australian rates curve. On decision day and at Friday's parliamentary testimony, Governor Bullock highlighted the risk that disinflationary progress could slow if rates are eased too quickly, leaving inflation above the midpoint of the 2-3% target band. That was the exact scenario the RBA's updated forecasts painted in the February Statement on Monetary Policy under an assumption that the cash rate is cut in line with market pricing to 3.6% by the end of the year. It may also be noteworthy that the RBA characterised this rate cut as reversing the final hike from late 2023, potentially implying that an easing cycle is not justified on disclosed form. 

Strength in the labour market largely explains the RBA's caution around further easing. January's Labour Force Survey confirmed employment momentum continued into 2025 with a 44k increase, above the 20k consensus (reviewed here). Although the unemployment rate moved up from 4.0% to 4.1%, seasonality was a factor, and it also came alongside a rise in labour force participation to 67.3%, a new record high. But while the labour market is in robust shape, wages pressures are cooling. In Q4, the Wage Price Index lifted by 0.7% - softer than the 0.8% pace expected - as the annual pace eased from 3.6% to 3.2%, a low since Q3 2022 (reviewed here).    

Following the Fed's decision to pause its easing cycle last month, the tone of the meeting minutes conveyed an FOMC firmly in wait-and-see mode. Risks to both sides of the mandate - 2% inflation and full employment - are formally judged to be 'roughly in balance' but in practice the FOMC is currently more concerned about higher inflation than weaker growth. Upside risks to the inflation outlook were the key discussion point around the policy table in Washington as the FOMC cast its mind forward to the potential impacts of the Trump administration's agenda on trade and immigration as well as supply disruptions that could occur if geopolitical developments offshore were to deteriorate. 

On the activity side, downside risks to growth would materialise if the very strong US labour market were to weaken unexpectedly. But growth could also be stronger than expected on the back the deregulation policies President Trump will pursue, while a continuation of the momentum in domestic spending was also cited by the FOMC. None of these discussions were new news to markets, but the minutes did reveal that some members raised the possibility of pausing the process of reducing the balance sheet amid uncertainty over the funding plans of the Treasury under the new administration. 

Inflation and labour market data out the UK surprised to the upside of expectations this week, but markets continue to see the BoE on an easing path of quarterly cuts taking rates to 4% by year-end (4.5% currently). Higher inflation was expected due to a number of technical factors within the dataset in January, but headline CPI still came in above expectations rising from 2.5% to 3.0%yr (vs 2.8% forecast). Of more significance to the BoE is signs of persistent inflation pressures in prices and wages. Key related measures firmed in January: core CPI lifted from 3.2% to 3.7%yr (as expected) and services inflation moved up from 4.4% to 5.0%yr. Meanwhile, in the labour market, wages growth (ex-bonuses) increased to be running at a 5.9%yr pace in January from 5.6% previously. However, speaking after the release BoE Governor Bailey said the pay growth figures did not raise the alarm about inflationary pressures in the labour market. 

Australian employment +44k in January; unemployment rate 4.1%

Strong momentum in Australia's labour market continued into the new year as employment increased by a further 44k in January, the 8th above-consensus outturn in the past 9 months. The unemployment rate ticked up from 4.0% to 4.1% but is some chance of reversing that move in February with seasonal effects likely to boost employment. Regardless, the labour market is tighter now than in the middle of last year; however, wage pressures are also cooling. Contributing to that dynamic is labour force participation, which after sitting on the highs for the cycle through the back half of 2024, has increased to a new record level (67.3%). After cutting the cash rate by 25bps on Tuesday to 4.1%, expect the RBA to reaffirm its caution on further easing on the back of today's report at its parliamentary testimony in the nation's capital tomorrow. 

By the numbers | January

• Employment exceeded expectations posting a 44k net increase in January (full time +54.1k/part time -10.1k) - more than double the median estimate (20k). Upward revisions boosted employment by 4.7k over November (+29.2k) and December (+60k).
• National unemployment lifted from 4.0% to 4.1%, rising in line with expectations to a 3-month high. With the underemployment rate holding at 6.0%, total underutilisation ticked up from 10.0% to 10.1%.  
• Labour force participation increased to a new record high of 67.3% in January, up from 67.2% in December. Australia's employment to population ratio also reset to a new record level lifting from 64.5% to 64.6%. 
• Hours worked declined by 0.4% on the month reflecting a rise in the number of workers on summer holidays through the survey period. Annual growth accelerated from 3.2% to 5.9% on base effects - a high back to April 2023 nonetheless. 

The details | January  

Coming off a 60k rise to close out 2024, employment started the new year rising by a further 44k. This was the strongest January employment outturn since 2022, well above the 20k rise expected by the market and a bit stronger than my 35k forecast (see here). Due to seasonal effects associated with the peak summer holiday period, January can often deliver a surprise. The fact employment remained strong speaks to the underlying momentum in the labour market. 

The full-time segment (54.1k) saw its strongest gain in 6 months to account for all of the headline increase in employment as the part-time segment declined (-10.1k) - a reversal of the composition seen in December (FT -23.7k/PT+83.7k). On the strength of January's outcome, the 3-month average for employment gains increased from 34k to 44.4k, the run rate elevating to its fastest pace since September last year. 

While the national unemployment rate ticked up from 4.0% to 4.1%, the ABS noted this was partly attributable to the seasonal effects touched on earlier. The Bureau reported that some 250k people were attached to a job (but not considered employed) who had yet to start work or were waiting to return to work when the January survey was taken. That figure is lower than in recent years but still significant and (going on the past experience) will likely boost employment in February.

With the broader underemployment rate unchanged in the latest month at 6.0%, the higher unemployment rate pushed up total labour underutilisation from 10.0% to 10.1% - in line with its average in the final quarter of 2024. The underutilisation rate averaging 10.1% in Q4 - down from the 10.5-10.6% levels seen through Q1 to Q3 - reflects the retightening that occurred in the labour market in late 2024. 

Although now deep into the post-pandemic cycle, developments on the supply side of the labour market remain encouraging. The participation rate lifted to a new record high of 67.3% in January, while the share of Australians in work (64.6%) has also never been higher. It has been my view that population growth - not only a boost to labour supply - would keep employment well supported even as economic momentum slowed post pandemic. That participation has remained on, and now extended, its highs for the cycle is, I think, positive for the employment outlook. Additionally, elevated labour supply is playing a role is containing wage pressures, consistent with yesterday's Q4 WPI update (see here).  

After rising solidly in December (0.6%), hours worked saw a pullback in January (-0.4%). That looks to be mostly attributable to the effects of the holiday period. The ABS reported 22.3% of employed people worked fewer hours than usual in January (16% worked zero hours) due to being on holidays. Those levels are down from recent years where accumulated leave that had built up during the pandemic saw much larger shares of workers taking holidays in January. Annual growth in hours worked is accelerating due to that base effect rising to 5.9%. 

In summary | January 

Employment momentum remains robust, showing signs of picking up in January to once again defy expectations to moderate in pace. Unemployment remains low despite the move higher to 4.1% and participation in the labour force is at record highs. Seasonal effects were at play in today's report, but the underlying conditions in the labour market are still clearly very strong.    

Preview: Labour Force Survey — January

In what has already been a heavy-duty week in Australia, January's Labour Force Survey is on the docket for 1130 (AEDT) today. On Tuesday, the RBA cut the cash rate by 25bps to 4.1% but expressed caution around easing further into a labour market showing signs of retightening. However, yesterday's update of the Wage Price Index for Q4 came in on the soft side of expectations, indicating inflationary pressures from the labour market have cooled. In today's report, employment strength is expected to moderate to a 20k increase, with the unemployment rate ticking up to 4.1%. 

January preview: Strong momentum to flow into 2025? 

The first Labour Force Survey for 2025 is expected to be a fairly subdued update. Employment is tipped to rise by 20k according to the median estimate in the Bloomberg survey, from a band of forecasts ranging between 5 to 40k. Alongside this, an uptick from 4.0% to 4.1% unemployment is expected (range: 4.0-4.1%), based on the participation rate remaining at record highs (67.1%).  

Throughout 2024, employment outcomes consistently outperformed coming in topside of consensus in 8 of the 12 monthly reports. Strength through the back half of the year was notable as employment increased by 250k. The question today is whether the existing momentum continued in early 2025. 

Employment gains are currently running at a 3-month average of around 32k - a run rate comfortably sustainable given the still-elevated levels of job vacancies. That the expectation is for a figure (20k) well below this pace points to caution around seasonality, with January traditionally a wildcard month. Looking back to last year, employment was soft in January, disappointing expectations on that occasion with a rise of just 2k (vs 28k forecast). I will side with the existing momentum and tip a 35k increase for January.  

December recap: Labour market retightens over the back half of 2024  

Employment surged by 56.3k in December, easily surpassing modest expectations for a 15k rise to close out 2024. While December's outcome was driven entirely by the part-time segment (80k) as full-time employment declined (-23.7k), the full-time segment led the way through 2024 accounting for two-thirds of the total increase in employment (444k). 

The unemployment rate came in at 4.0% as expected, partly reversing the decline seen in November to an 8-month low of 3.9%. That came alongside a rise in the participation rate, returning to record highs of 67.1% from 67.0%. Overall, the main theme confirmed in the December report was that the labour market was retightening. Underemployment declined from 6.1% to 6.0%, down from a high of 6.7% earlier in the year in May. Similarly, the labour force underutilisation rate at 10.0% in December (unchanged from November) ended the year well below its recent high in May of 10.7%.

Rounding out a strong report, hours worked posted a 0.5% lift in December - the strongest month-on-month gain in 9 months. For the quarter, total hours advanced by 0.6%. Meanwhile, base effects saw annual growth accelerate from 2.1% to 3.2%, a 16-month high.