Preview -- Labour Force Survey (April)

Australia's latest labour force update is due to be released by the ABS at 11:30am (AEST) today. In the decision statement following last week's Reserve Bank of Australia (RBA) Board meeting where the cash rate was left unchanged at 1.50%, Governor Philip Lowe made it clear that developments in the labour market would be the key consideration for the policy outlook in the months ahead.  

As it stands | Labour Force Survey 

In March, employment increased by a net 25,700 printing well above the median forecast for a 15,000 gain. As expected, the national unemployment rate lifted from 4.9% to 5.0%, reflecting a 0.1ppt increase in workforce participation to 65.7%. Both underemployment (from 8.1% to 8.2%) and underutilisation (from 13.0% to 13.2%) deteriorated slightly over the month. Lastly, total hours worked increased by 0.7% in the month and annual growth accelerated from 2.2% to 3.0%. For full details see March's review here.  

After a solid showing in 2018, the labour market remained robust over Q1 as employment increased by 71,000. As a result, annual employment growth increased to 2.4% from 2.2% in Q4, with Q1's outturn contributing 0.6ppt to the annual rate.

Market expectations | Labour Force Survey 

Today, the median forecast according to Bloomberg Australia is for employment to rise by a net 15,000 in April around a wide range from 1,000 to 29,000. The national unemployment rate is anticipated to hold at 5.0%, with estimates ranging between 4.9% and 5.1%. The workforce participation rate is seen remaining at 65.7% on a median basis between estimates from 65.5% to 65.8%.    

  

What to watch | Labour Force Survey

The second last line of the Governor's May decision statement noted "...there was still spare capacity in the economy and that a further improvement in the labour market was likely to be needed for inflation to be consistent with the target". With that being the case, look out for any deterioration in the unemployment rate and the in the broader measures of labour market slack including the underemployment and underutilisation in today's report. That scenario would follow on from increases in the previous month and take the Bank closer to its threshold for a rate cut. 

Australia's Wage Price Index growth still subdued in Q1

Australia's Wage Price Index increased slightly less than expected in the March quarter, though annual growth was broadly in line with expectations to continue on its gradual uptrend. Despite relatively strong conditions in the nation's labour market over the past couple of years and robust increases to the minimum wage, the pace of wages growth remains well contained.

Wage Price Index — Q1 | By the numbers

• The headline WPI (total hourly rates of pay ex-bonuses) increased by 0.54% in Q1, slightly missing the market forecast for +0.6% (prior: +0.54%).

• In annual terms, the WPI increased by 2.34%, as broadly expected at 2.3%. The pace lifted from 2.27% in the preceding quarter to its fastest since Q4 2014.

Wage Price Index — Q1 | The details 

The ABS Wage Price Index (WPI) measures the change in ordinary time hourly wage and salary rates associated with a fixed group of jobs unadjusted for compositional changes such as hours worked, tasks and responsibilities and qualification levels of workers. Changes in the WPI, therefore, reflect underlying factors such as shifts in individual and enterprise bargaining agreements and in minimum wage settings and awards. 

Growth in the headline WPI was steady in Q1 at 0.54% but the annual rate continued to lift gradually from 2.27% to 2.34%. Breaking this down further, the private sector WPI also remained unchanged at 0.54% in the quarter, while the annual pace increased from 2.29% to 2.35%. As with the headline index, this was its fastest pace since Q4 2014. Growth in the public sector WPI slowed to 0.45% from 0.6% in Q1, as the annual pace eased to 2.37% from 2.53%. The overall increase is inclusive of the 2018 decision by the Fair Work Commission to lift the national minimum wage to 3.5% from 3.3%.     

If bonuses are included, growth in the WPI slowed to 0.46% in the quarter from 0.69% and the annual pace eased to 2.64% from 2.81%. This reflected softer outcomes in both sectors; private sector 0.46%q/q and 2.66%Y/Y (from 0.69%q/q and 2.75%Y/Y) and the public sector 0.45%q/q and 2.37%Y/Y (from 0.6%q/q and 2.53%Y/Y).    

   

Following Q1's sharp slowing in inflation to 1.3% on a headline basis, 'real' growth in the WPI accelerated to 1.04% from 0.47% in annual terms. Adjusted for core inflation, real WPI growth increased from 0.47% to 0.74%. 

Across the industries, the chart (below) shows the growth recorded in Q1 and over the year. With headline annual growth in the WPI of 2.34%, wages growth is running above that level in 9 of the 18 industries surveyed.  

Wages growth across the states was led by Victoria over the past year at 2.7% followed by Tasmania at 2.5%. Growth in New South Wales and Queensland at 2.3% is in line with the national outcome, while it lagged in South Australia at 2.1% and Western Australia at 1.6%. 

Wage Price Index — Q1 | Insights 

Growth in the WPI continues to lift on a gradual uptrend, supported by the private sector and a strong increase to the national minimum wage. The nation's unemployment remains around 5% after declined noticeably over the past couple of years. Steady progress has been made in reducing excess capacity, though wages growth continues to remain well contained. As a result, the Reserve Bank of Australia has made it clear that it needs to see further progress on lowering excess capacity to help bring inflation back to target. 

Preview -- Wage Price Index (Q1)

Today at 11:30am (AEST) the ABS is scheduled to release its Wage Price Index (WPI) data for Q1. The WPI measures changes in wages and salaries paid by employers for a fixed basket of jobs, unaffected by compositional changes such as hours worked. Strengthening labour market conditions over the past year or so has helped to lift the pace of growth in the WPI, though it continues to remain low and has been a key factor in restraining growth in household disposable income. Q4's National Accounts showed growth in household consumption -- the largest component of the domestic economy -- slowed sharply over the second half of 2018 with slow income growth a major headwind.    

As it stands | Wage Price Index 

Headline growth in the WPI lifted by 0.54% in Q4, which came in a touch below the expected outcome of 0.6%. Annual growth was broadly unchanged at 2.27%. Growth in public sector wage costs continued to lead the headline index, increasing by 0.6% in the quarter and by 2.53% through the year. Positively, private sector wages lifted by 0.62% in Q4 to drive the annual pace to its highest in 4 years at 2.29%.  

Growth in the WPI including bonuses lifted from 2.67% to 2.81% in annual terms to Q4. Annual private sector wage growth inclusive of bonuses lifted from 2.69% to 2.75% in contrast with a slowing in the public sector from 2.63% to 2.53%. 

Market expectations | Wage Price Index

For today's release, the market expectation according to Bloomberg data implies a steady outcome of 0.6% in the quarter and 2.3% for the year. The pace of wages growth has been lifting -- albeit gradually -- as conditions in the labour market have tightened. Over the past 12 months, the unemployment rate has declined from 5.5% to 5.0%, while the underemployment (from 8.5% to 8.2%) and underutilisation rates (from 14.0% to 13.2%) have also moved lower. RBA analysis indicates that around 40% of workers are covered by individual agreements, which tend to be more responsive to changes in labour market conditions than other wage-setting methods, while the prevalence of wage freezes has also diminished relative to 12 months ago. The minimum wage rise of 3.5% for 2018 took effect from Q3 of that year so it will continue to provide a boost to today's numbers.  

What to watch | Wage Price Index

The trend is your friend. Policymakers at the RBA and in Canberra will be wanting to see WPI growth continuing on its upward trajectory to give confidence that spare capacity in the labour market is gradually eroding. The RBA in its Statement on Monetary Policy for May forecast wages growth to rise to 2.5% in 2019 and 2020, while April's Federal Budget contained forecasts for growth of 2.5% by mid-2019 rising to 2.75% by mid-2020. Also, after Q1's inflation data came in much slower than expected (see here), look for real growth in the WPI to receive a boost today. 

Australian housing finance resumes weakness in March

Australian housing finance commitments to owner-occupiers and investors weakened in March, reversing an unexpected gain in the previous month. Lending to both segments continued to decline sharply over the first quarter of 2019. 

Housing Finance — March | By the numbers

• Housing finance approvals to owner-occupiers (excluding refinancing) fell by 2.8% in March to 31,130, which was well down on the market forecast for -0.5% (prior rev: +0.5% from +0.8%). Approvals through the year declined by 13.8% (prior rev: -12.6%Y/Y from -12.5%).

• The total value of housing finance commitments (excluding refinancing) fell by 3.2% in the month to $A16.94bn (prior rev: +2.0% from +2.7%) to be down by 18.4% over the year (prior: -18.6%). 

Housing Finance — March | The details 

Lending fell notably to both of the major segments in March following increases in the previous month. For owner-occupiers, lending excluding re-financing slid by 3.4% in the month to $12.4bn after a 2.8% rise in February. That widened the annual decline to 15.2% from 14.0%. Commitments to investors (ex-refinancing) fell by 2.7% in March to $4.54bn, while the initially reported 0.9% rise in February was revised to show a 0.2% softening. Lending to the segment fell by 25.9% across the year. 

The total value of refinancing committed in March eased by 0.6% to $8.32bn, which is 9.1% down on a year earlier. Refinancing by owner-occupiers declined by 1.1% in the month to $5.9bn (-5.8%Y/Y), while there was a 0.8% rise from the investor segment to $2.42bn (-16.3%Y/Y). Commitments to owner-occupiers for renovations fell by 4.9% in March to $275m (-15.0%Y/Y). *Click on the charts to expand

The value of lending commitments excluding refinancing fell by 5.9% over the March quarter, led by a 9.1% deterioration from investors, while owner-occupiers recorded a 4.7% decline. 

Loan approvals made to owner-occupiers fell by 2.8% in March to 31,130.  Within that figure, construction-related approvals fell by 1.2% in the month to 7,617 to be down by 12.7% over the year. Approvals to purchase established dwellings fell by 3.3% in March to 23,513 and have fallen by 14.2% through the year.

Looking across the states, owner-occupier approvals fell across the board in March and over the first quarter; New South Wales -3.7% (Q1 -8.4%), Victoria -1.2% (-5.9%), Queensland -2.7% (-6.1%), South Australia -2.1% (-4.6%), Western Australia -2.4% (-6.4%) and Tasmania -8.4% (-2.6%). 

The ABS does not provide loan approval estimates for the investor segment, but it produces value details. For March, investment lending saw broad-based declines; New South Wales -3.5%, Victoria -4.9%, Queensland -2.8%, South Australia -4.2% and Tasmania -3.8%. Lending lifted in Western Australia by 11.3%. 

The table, below, provides the full breakdown of state-based detail across the segments and by buyer type.  

Housing Finance — March | Insights

The demand for housing finance demand continues to slide reflecting a range of contractionary forces including tight credit standards, declining property prices, reduced turnover and uncertainty over divergent policies held by the major parties ahead of this Saturday's Federal election. Recent data from auction clearances has improved somewhat, though there were few signs of stabilisation within today's update. 

Macro (Re)view (10/5) | RBA on hold; trade tensions escalate

The local focus this week centred on the Reserve Bank of Australia (RBA), with the Board holding the cash rate steady at 1.50% on Tuesday (reviewed here). The May meeting outcome was a finely balanced one considering that financial markets were priced just below 50/50 for a 25bps rate cut, while economists surveyed by Bloomberg Australia were also closely divided at 14 to 12 in favour of a cut. The Governor's statement made it clear that developments in the labour market would be the key determinant for policy considerations going forward. 

Expectations for a May rate cut had risen noticeably after Q1's inflation data came in much weaker than expected (see here). However, the RBA has been consistent this year in highlighting the importance of the labour market (as we covered here) and as per the Governor's statement, conditions therein remained robust enough to prevent the Board from moving this week. For that to remain the case, the unemployment rate will need to trend lower, with the Governor noting "...there was still spare capacity in the economy and that a further improvement in the labour market was likely to be needed for inflation to be consistent with the target".

On Friday, the RBA published its quarterly Statement on Monetary Policy for May. As expected, the Bank lowered its 2019 forecasts for GDP growth (from 3.0% to 2.75%) and underlying inflation (from 2.0% to 1.75%). For 2020, the trend growth (2.75%) forecast was retained, while there were downward revisions for both underlying (2.25% to 2.0%) and headline (2.25% to 2.0%) inflation. The unemployment rate is still forecast to decline to 4.75%, though the timing was pushed out to mid-2021 from end-2020. These forecasts are prepared on the assumption of the cash rate responding to market pricing, which currently implies that 50bps of cuts will be required for trend GDP growth and for underlying inflation to reach the lower bound of the Bank's target over the next couple of years.    

From a data perspective this week, there were updates for international trade and retail sales. Australia posted another strong trade surplus for the month in March at $4.9bn. Net exports are likely to add modestly to GDP growth in Q1, while a healthy boost to national income will be delivered by surging commodity prices (read our review here). Retail turnover lifted by 0.3% in nominal terms in March, while growth over the year slowed to 3.2% from 3.5%. For Q1, retail turnover increased by 0.7%, though that was driven by a 0.8% rise in prices. As a result, retail sales volumes declined by 0.1% in Q1, slowing annual growth to 1.1% from 1.6% (see our full review here). As our chart of the week (below) shows, growth in household consumption, which is the largest component of the domestic economy, is likely to have eased further since the turn of the year, though retail sales only account for 30% of that component.  

Chart of the week

— — —

The global perspective this week was almost exclusively focused on the sharp escalation in US-China trade tensions, driving heavy declines on equity markets as implied volatility surged to multi-month highs and government bond yields tightened noticeably. Early in the week, US President Trump announced via Twitter that he intended to increase the 10% tariff imposed on a $200bn tranche of imports from China to 25% on Friday, citing that progress on reaching a trade deal had moved "too slowly". According to this Reuters article (here), it was the view of US trade officials that China had backtracked from earlier commitments around several key elements of the draft trade deal. 

The 10% tariff applied to this $200bn tranche of Chinese goods imported into the US took effect from 24 September last year and was due to rise to 25% from 1 January 2019. However, that increase had been on hold ever since conciliatory meetings between US and Chinese officials at last November's G20 Summit.

On Friday, the tariff increase was ultimately confirmed by President Trump, saying that China "broke the deal", with the possibility for more to follow given his earlier vow to impose a 25% tariff on a new $325bn tranche of Chinese goods "shortly". In response, China's Ministry of Commerce said that it "will have to take necessary countermeasures" though details have not yet been forthcoming. The People's Bank of China pledged further stimulus if required, after reducing reserve requirements for some small and medium-sized banks early in the week. Talks overnight on Friday were described by Chinese Vice Premier Liu as "honest" and "constructive". The sharp escalation in tensions this week came very much against the run of play expected by markets, which have run up over recent months in anticipation of a positive resolution scenario, helped also by a broad-based accommodative shift from global central banks.    

Europe's economic outlook is heavily exposed to external trade, particularly with Asia, so this week's escalation in trade tensions unsurprisingly dented equity markets across the continent. The European data flow was limited this week; retail sales volumes were flat in March (expected -0.1%) as growth through the year slowed to 1.9% from 3.0%, meanwhile the final read of Markit's Purchasing Managers' Index for the services sector in April was lifted to 52.8 from 52.5, with Germany's read also revised up to 55.7 from 55.6. 

Closer to home, the Reserve Bank of New Zealand (RBNZ) acted on its explicit easing bias by lowering its Official Cash Rate by 25bps to 1.50% at its policy meeting on Wednesday. The RBNZ's decision statement indicated the move was a proactive step, citing that while the labour market was operating near full capacity, the outlook for employment growth was "subdued". The Committee also referred to headwinds for output growth from weaker domestic household spending and slower growth in the economies of its major trading partners, including China and Australia. 

RBA's labour market focus

Tuesday's decision by the Reserve Bank of Australia (RBA) Board to hold the cash rate was a finely balanced one (see our review here). It was the most scrutinised meeting in around 3 years. In this note, we take a look back on the Bank's communication from 2019 that guided this decision. 

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Back on the 6th February, RBA Governor Philip Lowe gave a speech titled "The Year Ahead". At the time, this speech was notable because the Governor effectively shifted to a 'neutral' policy stance from its long-held mild tightening structure (as covered here). That understandably gained a lot of attention, though what was probably overlooked was the Governor's observation on what the Bank would be focused on in the months ahead;

"In the event of a sustained increase in the unemployment rate and a lack of further progress towards the inflation objective, lower interest rates might be appropriate at some point. We have the flexibility to do this if needed"

That statement highlighted the importance of developments in the labour market to policy considerations going foward. The Governor's assessment at that time was that labour market conditions were strong; "The national unemployment rate currently stands at 5 per cent, the lowest in over seven years", while the detail from the forward-looking indicators pointed to ongoing robust employment growth. 

While the GDP growth outlook was ultimately downgraded in February's Statement on Monetary Policy for 2019 (from 3.25% to 3.0%) and 2020 (from 3.0% to 2.75%), the Governor was unperturbed in forecasting a decline in the unemployment rate to 4.75% by 2020. In that situation the Governor noted; "Our expectation has been – and continues to be – that the tighter labour market and reduced spare capacity will see underlying inflation rise further towards the midpoint of the target range".   

Over the ensuing period, there were more speeches RBA officials; Christopher Kent (15/2), Philip Lowe (6/3), Luci Ellis (26/3) and Guy Debelle (19/4). Summarily, the comments on the labour market focused either on pointing out that conditions had been stronger than expected, or that the central scenario was for the unemployment rate to decline.

Given that GDP growth in Q1 was 2.3% through the year -- the Bank had expected it to come it at 2.75% -- it was not surprising to see that the minutes from April's Board meeting featured a quite detailed analysis of the labour market. Though to complicate matters, the Board had noted 'tension' between those indicators; "The labour market had continued to improve in early 2019, despite the slowing in growth recorded in the national accounts through 2018". The signals from the forward-looking indicators for employment growth were described by the Board as "mixed".

Given that uncertainty around the labour market, April's minutes revealed that the Board had the following discussion; 

"Members also discussed the scenario where inflation did not move any higher and unemployment trended up, noting that a decrease in the cash rate would likely be appropriate in these circumstances"  

That discussion is consistent with what the Governor outlined at his February speech. The earlier communication from the Bank indicated that developments in the labour market would take precedence.

Tuesday's decision statement, opted to focus on the positives regarding the labour market; "The Australian labour market remains strong. There has been a significant increase in employment, the vacancy rate remains high and there are reports of skills shortages in some areas". However, the Governor made the concession that "...there has been little further progress in reducing unemployment over the past six months". The Bank's clear focus on the labour market was summarised by the following line;

"...it recognised that there was still spare capacity in the economy and that a further improvement in the labour market was likely to be needed for inflation to be consistent with the target"

It appears from Tuesday's statement that the Bank still anticipates the unemployment rate to decline to 4.75%, though it looks like the timing will be pushed out to mid-2021 from 2020. The underlying inflation forecast appears to be lowered by 0.25% for 2019, reflecting Q1's much slower-than-expected outcome, before lifting back to 2.0% in 2020. That has certainly been a point of contention in markets, though it might be justified by the view that the unemployment rate is still expected to move lower over time, while transitory factors may have been weighing on Q1's inflation data. Note also that GDP growth appears to be forecast for trend (2.75%) in 2019 (downgrade of 0.25%) and 2020 (unchanged). None of this can be confirmed until tomorrow's quarterly Statement on Monetary Policy is released. 

Going forward, the Bank needs to see the unemployment rate trending lower as per its forecast or it will cut the cash rate on the basis of bringing inflation back towards the target.  

Australia posts a $4.9bn trade surplus in March

Australia posted another strong monthly trade surplus in March, though both exports and imports contracted. The ABS also reported that after seasonal adjustments, its preliminary estimate for the trade surplus in Q1 was $14.151bn, which is an escalation of around 65% on Q4's surplus.

International Trade — March | By the numbers

• March's trade surplus was $A4.949bn, coming in stronger than the market forecast for $4.5bn. February's surplus was revised up to $5.14bn from the initially reported figure of $4.801bn.
• Export earnings declined by -1.8% in March to $39.34bn, as annual growth eased to 11.9% (prior rev: +0.6%m/m, +13.8%Y/Y) 
• Import expenditure fell by -1.5% over the month to $34.391bn, resulting in annual growth decelerating to 0.9% (prior rev: -0.7%m/m, +4.1%Y/Y)

International Trade — March | The details 

On the export side, the nation's earnings declined by 1.8% in the month, or by -$703m in nominal terms to $39.34bn. That was mainly due to a sizeable fall of $626m from the often volatile non-monetary gold category. Earnings from non-rural goods also declined by $189m in March. Within this, iron-ore export earnings fell by a sharp $1.178bn in the month, due mainly to adverse weather conditions impacting shipments, while coal increased by $827m due to a strong rise in volumes after weakness in February. There was also some weakness from 'other mineral fuels' (mainly LNG) falling by $64m on lower prices. Meanwhile, services exports recorded a modest fall of $18m. Against those declines, rural goods lifted by $129m, driven mostly by meat. 

Turning to imports, total expenditure declined by 1.5% in March, or by -$512m to $34.391bn. This was weighed by capital goods falling by $344m, reflecting notable weakness in industrial transport and equipment. Consumption goods also fell by $294m, due mostly to non-industrial transport equipment (vehicles), and services imports declined by $90m. Intermediate goods increased by $197m, largely reflecting the impact of higher oil prices.

          

International Trade — March | Insights 

Australia's monthly trade surplus averaged a very strong $4.914bn over Q1, reflecting the tailwind from surging commodity prices, particularly in iron ore following the tailings dam disaster in Brazil. Based on the ABS' preliminary estimate, the trade surplus for Q1 lifted by $5.561bn to $14.151. This will provide a sizeable boost to national income and will flow through to higher government revenues. Looking towards next month's GDP data, net trade will likely add modestly to activity in Q1, driven by weakness from imports (declining import volumes add to real GDP growth). Exports lifted strongly over the quarter, though that is heavily driven by rising commodity prices. Net trade was a slight drag (-0.1ppt) on growth in Q4.  

Finely balanced but RBA remains on hold in May

The Reserve Bank of Australia (RBA) Board kept its benchmark cash rate on hold today at 1.50% for the 30th consecutive meeting. Today's meeting was very finely balanced; financial markets assessed the probability of a rate cut as close to 50/50, while 14 out of 26 economists surveyed by Bloomberg Australia were forecasting a rate cut. In the end, it was the Board's upbeat assessment of the labour market that prevented a move today.

As outlined in our preview, there were two key developments from the Board's previous meeting that set the scene for today's decision. Firstly, the Board signaled a shift to a data dependent approach for policy considerations. Secondly, April's meeting minutes outlined the specific scenario in which the Board would be prepared to cut; that being "where inflation did not move any higher and unemployment trended up".

Since April's meeting, we received updates on both the labour market (for March) and inflation (for Q1). The Governor in his Statement today described conditions in the labour market as remaining "strong", though it was noted that over the past 6 months, the unemployment rate had made "little further progress". On inflation, the assessment was that Q1's data was "noticeably lower than expected and suggest subdued inflationary pressures across much of the economy". It is clear that while inflation has decelerated, labour market conditions do not yet meet the threshold for the Board to cut.

As such, the last two lines of the Governor's statement focused specifically on the labour market by noting that the Board "... recognised that there was still spare capacity in the economy and that a further improvement in the labour market was likely to be needed for inflation to be consistent with the target. Given this assessment, the Board will be paying close attention to developments in the labour market at its upcoming meetings". Today's statement informed us that the Bank anticipates that the unemployment rate will remain around its existing level of 5.0% "over the next year or so, before declining a little to 4¾ per cent in 2021". At this stage, the indication appears to be that unless the unemployment rate moves lower from here, the Board will look to cut.

The next key development comes on Friday (10/5) when the Bank is due to release its quarterly Statement on Monetary Policy, including its updated forecasts for growth and inflation. The Governor outlined today that GDP growth was expected to increase by around trend (2.75%) this year and next, which on that basis would imply a 0.25% downgrade for 2019. Regarding inflation, the guidance was that the underlying (or trimmed mean) measure was forecast for 1.75% this year and 2.0% in 2020, implying a downward revision of 0.25% for both years. In that situation where underlying inflation is forecast to be below target in 2019, it is likely that the Bank will shift to a formal easing bias, with the unemployment rate being the key indicator to watch. 

Australian retail sales; +0.3% in March, Q1 volumes -0.1%

Growth in Australian retail turnover in nominal terms lifted by more than expected in March, though after adjusting for price changes, volumes declined over the first quarter. Retail volumes feed through to the household consumption component within GDP growth calculations.  

Retail Sales — March | By the numbers

• Retail turnover increased by 0.3% in March to $A27.368bn, outpacing the median forecast for growth of 0.2%. Turnover growth in February was revised up to 0.9% from 0.8%.

• Growth in annual turnover lifted to 3.5% from 3.2%, while in trend terms the pace eased to 3.0% from 3.1%. 

• Retail volumes fell by 0.1% in Q1, which was a clear miss on the median expectation for +0.3%. Volumes were flat in Q4 after a downward revision from +0.1%. 
• On an annual basis, volume growth decelerated to 1.1% from 1.6%. 

Retail Sales — March | The details

From a nominal perspective, spending lifted in March for food (+0.4%), household goods (+0.2%), clothing and footwear (+1.2%) and cafes and restaurants (+1.4%). Those gains were pared by declines in department stores (-1.5%) and 'other' retailing (-0.4%). The headline increase of 0.3% in the month and 3.5% through the year remains stronger than sales ex-food (a proxy for discretionary spending), which posted a 0.3% rise in March and an annual increase of 2.9% (click on the charts to expand). 

For the quarter, turnover lifted by 0.7%, mostly reflected by a solid rise from food (+1.5%). Spending within cafes and restaurants also lifted (+1.5%), followed by modest increases from 'other' retailing (+0.3%) and clothing and footwear (+0.1%). Notable declines were recorded in department stores (-1.1%) and household goods (-0.6%). Turnover ex-food lifted by 0.2% in Q1. 

While retail spending increased by 0.7% in the quarter, sales volumes fell by 0.1%. That reflected a 0.8% quarterly increse in retail prices, taking the annual increase to 2.0% from 1.4%. 

Looking further into the details, food prices lifted by a sharp 1.4% in the quarter, likely in response to the impact from drought conditions, while cafe and restaurant prices escalated by 0.5% in Q1. Prices remained flat in household goods, department stores and 'other' retailing. Discounting still looks to remain a factor for clothing and footwear, with prices down by a further -0.2% in the quarter.   

The detail for retail volumes across the categories in Q1 was notably weak for the discretionary areas, with department stores -1.2% and household goods -0.6%. There were modest increases from clothing and footwear (+0.3%), 'other' retailing (+0.3%) and food (+0.1%). Consumption in cafes and restaurants increased by a solid 1.0%.  

Turning to the states, nominal spending lifted almost across the board in March; NSW +0.2%, VIC +0.7%, QLD +0.6%, SA +0.1% and TAS +0.4%, however; turnover in WA declined by 0.7%. 

For Q1, turnover was led by NSW (+1.1%), followed by QLD (+0.8%), VIC (+0.6%), SA (+0.4%) and WA (+0.2%), however TAS declined by 0.4%. Annual turnover growth in QLD (+5.3%), VIC (+4.7%) and TAS (+3.7%) is outpacing the national rate (+3.5%), though NSW is clearly lagging (-2.7%).      

Lastly, the volume data for the states was unequivocally weak. NSW led with a 0.6% rise in Q1, but annual growth is subdued at 0.9%. Volumes fell across the remaining states; VIC -0.3%, QLD -0.1%, SA -0.4%, WA -0.6% and TAS -0.9%. 

Retail Sales — March | Insights

The key takeaway from today's report is the 0.1% decline in sales volumes in Q1. This outturn follows a flat (0.0%) result in Q4 of last year. Clearly, retail consumption has been weak over the past 6 months, which is likely the response to concerns around a household wealth effect from declining property prices, low wages growth and a focus on paying down debt. Retail volumes account for around 30% of total household consumption within GDP calculations, with the remainder made up from spending on services. Q4's National Accounts showed household consumption growth slowed to a 2.0% annual pace from 2.6%, with today's report indicating that trend likely continued into Q1.

Preview: RBA's May meeting

The Reserve Bank Australia's (RBA) latest monthly Board meeting will take place in Sydney today, with the decision to be announced via the Governor's Statement at 2:30PM (AEST). The RBA's benchmark cash rate has been unchanged at 1.50% since August 2016. Today, financial markets are pricing in around a 40% chance of a 0.25% cut, while economists surveyed by Bloomberg Australia are closely divided at 14 (cut) to 12 (no change). While today's outcome is finely balanced, both the markets and economists are in alignment that a rate cut is coming, it's just a question of timing.  

As it stands | RBA's May meeting preview  

Last month, the Board held the cash rate steady at 1.50% for the 29th consecutive meeting, though there were two key developments. Firstly, the final line of the Governor's Statement was tweaked for the first time in around 2 years, noting that "The Board will continue to monitor developments and set monetary policy to support sustainable growth in the economy and achieve the inflation target over time", whereas it had previously said that maintaining its stance "...would be consistent with sustainable growth in the economy and achieving the inflation target over time". That subtle shift pointed to a 'data dependent' approach going forward. Secondly, while the meeting minutes (released two weeks later) continued with the guidance that "there was not a strong case for a near-term adjustment in monetary policy", it mentioned the specific scenario in which the Board would be prepared to cut the cash rate; that being "where inflation did not move any higher and unemployment trended up".


Since then | RBA's May meeting preview

Given the shift to data dependency, there have been two main developments since the Board last met. Firstly, March's employment report indicated that labour market conditions remained robust (see here), with employment increasing by a net 25,700 in the month (expected +15,000). Annual employment growth lifted from 2.3% to 2.4% and continues to remain well in front of growth in the labour force. The unemployment rate lifted from 4.9% to 5.0% as expected, though the participation rate also increased by 0.1ppt to 65.7%. Hours worked lifted sharply in the month by 0.7%, as annual growth accelerated to 3.2%.

Secondly, Q1's inflation data was much weaker than expected on both a headline and core basis (see here). Headline inflation slowed to 1.3%Y/Y from 1.8%Y/Y (expected 1.5%), while the core measure (average of trimmed mean and weighted median) decelerated to 1.42% from 1.73% (expected 1.65%) and moved further away from the RBA's 2-3% target. However, it is important to isolate the trimmed mean measure, which slowed to 1.60%Y/Y from 1.82%Y/Y. The RBA's forecasts for core inflation refer to the trimmed mean (as per February's Statement on Monetary Policy). The Bank expects this measure to reach 1.75% by mid-year and 2.0% by the end of the year, so in that context, the deceleration was not as severe.    


Today | RBA's May meeting preview

It appears the key consideration for the Board will be around robust labour market conditions and a deceleration in inflation further away from the 2-3% target. On balance, given the labour market data has yet to deteriorate, it appears likely the Board will remain on hold today. The deceleration in inflation could be used to argue for a cut today, though the Bank has been consistent throughout recent communications in highlighting the importance of the labour market data, and in particular waiting to see how the 'tension' with slowing GDP growth resolves. With a resolution to that situation not yet clear and given the Bank is without an explicit easing bias, it may be a bit too early to see a move today.