Preview: Labour Force Survey — January

The first monthly update on the Australian labour market for 2020 is due to come through from the ABS at 11:30am (AEDT) today. November and December saw employment gains come in sharply above consensus, so markets and the Reserve Bank of Australia will be waiting to see if this trend continued into January.   

As it stands | Labour Force Survey

In December, the labour market surprised to the upside of market expectations for the second straight month as employment lifted by 28.9k; well clear of the median estimate for a 10.0k rise and following on from a 38.5k lift in November. The downside was that the profile was uneven, with part-time employment (+29.2k) accounting for all of December's increase as the full-time segment recorded a small decline (-0.3k). For 2019 as a whole, employment increased by 262.5k, broadly matching 2018's outturn of 269.6k, led by full-time employment (+152.7k) amid a more moderate contribution from the part-time segment (+109.9k). 

As was the case in November, the nation's unemployment rate again declined unexpectedly by 0.1ppt, falling from 5.2% to 5.1% in December to its lowest since March 2019. This came as the participation rate held steady at 66.0%, remaining close to its record high. The underutilisation also declined by 0.1ppt to a 6-month low of 13.4%, though the underemployment rate was unchanged at 8.3%. Rounding out the report, aggregate hours worked lifted by 0.5% in December, with the annual pace rising from 1.7% to 2.3%.    

For a full review of December's report see here 

         

Market expectations | Labour Force Survey

The median forecast according to Bloomberg's survey is for employment to rise by 7.5k in January, between a range of estimates from -16.0k to +15.0k. A rise in the unemployment rate from 5.1% to 5.2% is the consensus call from economists (range: 5.1% to 5.3%), even with the participation rate expected to remain at 66.0% (range: 65.9% to 66.1%).  

What to watch | Labour Force Survey

Employment gains in November (38.5k) and December (28.9k) were much stronger than expected so the key question is whether the momentum continued into the new year. The last time where employment outperformed expectations for 3 straight months was between March and May 2019. Employment outcomes in January can often be volatile coinciding with the summer holiday period, while there is added potential for bushfires to have some impact on today's reading. 

Australia Q4 Wage Price Index: 0.5%qtr, 2.2%yr

Australian wages growth remains well-contained rising by 0.5% in the December quarter and 2.2% through the year, in line with consensus forecasts. Wages growth in annual terms in the private sector eased to its slowest in more than a year at 2.16%, while public sector wages growth weakened to a 3-year low at 2.25%. Despite relatively robust employment growth through 2019, little progress was made in lowering spare capacity, thus keeping wage inflation in check.   

Wage Price Index — Q4 | By the numbers

• The headline WPI (total hourly rates of pay ex-bonuses) increased by 0.53% in Q4 meeting the consensus forecast of 0.5% and unchanged from the previous quarter.
• Annual growth held steady at 2.22% (prior: 2.23%), as expected.

Wage Price Index — Q4 | The details 

The ABS's WPI is a measure of wage inflation tracking changes in hourly rates of pay for a fixed group of jobs and is affected by minimum wage settings, variations in awards, enterprise and workplace agreements and individual contracts. The index adjusts for characteristics of employees, such as qualifications, hours worked and type of work performed.

For the third straight quarter, the WPI lifted by 0.53% as the annual pace remained subdued at around 2.2%. Private sector wages saw a 0.53% rise in Q4, though a base effect resulted in the annual pace easing from 2.25% to 2.16% to its softest since Q3 2018. The public sector recorded a 0.44% increase in Q4 — its weakest quarterly outcome since Q1 2000 — as annual growth pulled back from 2.49% to 2.25% to a 3-year low.

Adjusting for inflation (headline CPI was 0.7% in Q4), today's outcome implies that real wages growth fell in the December quarter, though it remains in slightly positive territory over the year. 

The WPI including bonuses measure was little more than flat in Q4 (0.07%) slowing annual growth from 2.83% to 2.21% to a 2-year low. Following a strong rise of 1.4% in Q3, private sector wages including bonuses saw no growth this quarter and as a result, the annual pace stepped down from its near 7-year high of 3.0% to 2.29%. In the public sector, wages including bonuses lifted by a modest 0.44% in the quarter; the through the year pace moderating from 2.41% to 2.25% to a 3-year low. 

  

On an industry-wide basis, the table below provides the quarterly and year-on-year outcomes for the WPI (all sectors, excluding bonuses). 

Over the year ending Q4, wages growth outpaced the national average in just 4 industries; healthcare (3.06%), utilities (2.87%), transport (2.37%) and professional services (2.33%). That number is down from 5 industries over the year to Q3. 

If we look at wages growth across industries over the year to Q4 2019 compared their paces over the year to Q4 2018, we see that the pace of wages growth has risen from year to year in only 5 industries, which was led by mining (from 1.79% to 2.22%), healthcare (from 2.84% to 3.06%), professional services (from 2.14% to 2.33%), utilities (from 2.79% to 2.87%) and information media and telecommunications (from 1.59% to 1.65%). The largest pullbacks came from education and training (down from 2.59% to 1.93%), public administration and safety (down from 2.64% to 2.04%) and arts and recreation (down from 2.73% to 2.2%).      

   

Turning to the states, the cross-sector breakdown is provided in the table, below. Victoria retains the strongest overall pace of wages growth (2.66%yr) despite easing from the previous quarter (2.76%yr) and experiencing softer labour market conditions over the year compared to 2018. Private sector wages growth continues to be led by Tasmania (2.73%yr), while in the public sector Victoria remains well out in front (3.5%yr) reflecting earlier efforts by the state government to re-calibrate wages for healthcare workers. Wages growth in New South Wales remains moderate at best, as underutilisation in the state increased from 12.0% to 12.4% over 2019.  

The annual pace of wages growth for each state is shown in the chart, below. 

Wage Price Index — Q4 | Insights

There were few surprises in today's report. Overall, wages growth in Australia remains well-contained and is consistent with a labour market with an elevated level of spare capacity, which is despite relatively robust employment growth in 2019. We need to remember that today's outcome was also boosted by the Fair Work Commission's decision to lift the minimum wage by 3.0% through the year, effective from Q3 onwards. But, aside from that, the industry breakdown confirmed the weakness in underlying momentum. A much tighter labour market is clearly needed to lift the pace of wages growth to a level that is consistent with inflation returning to the Reserve Bank of Australia's 2-3% target. However, as the Bank has been commenting recently, it is now balancing the potential benefits of further monetary policy easing with the side effects of the risks posed to financial stability through additional borrowing. A deterioration in the labour market is the key to further easing and we receive the first update on conditions therein for 2020 tomorrow.

  

Preview: Wage Price Index Q4

The December quarter update of the Wage Price Index (WPI) is due to be released by the ABS at 11:30am (AEDT) today. The WPI is a measure of wage inflation reflecting changes in rates of pay linked to minimum wage settings, variations in awards, enterprise and workplace agreements and individual contracts. While employment growth was robust in 2019, strength in workforce participation meant that spare capacity persisted in the labour market, likely keeping wages growth contained.     

As it stands | Wage Price Index

Wage inflation remained contained in the September quarter with the WPI matching expectations in rising by 0.5%, which followed a downwardly revised increase of 0.5% in Q2. The annual pace slowed from 2.3% to 2.2%, as expected (for a complete review see here). 

Following a once-off recalibration for healthcare workers in Victoria in Q2, public sector wages growth eased in Q3 from a 0.8% pace to 0.5%, resulting in the annual pace moderating from 2.6% to 2.5%. Wage inflation in the private sector held steady at 0.5% in the quarter and 2.3% over the year.

In a sign that firms are looking to use bonuses as a means of retaining staff while keeping wages growth contained, the WPI including bonuses measure lifted by 1.3% in Q3, driving the annual pace up from 2.5% to 2.8%. Private sector wages including bonuses increased by 1.4% in the quarter as annual growth accelerated from 2.4% to 3.0% to its fastest in almost 7 years. The public sector saw a more moderate 0.7% rise in Q3, while annual growth eased from 2.5% to 2.4%. 

Market expectations | Wage Price Index

The median forecast compiled by Bloomberg is for the WPI to rise by 0.5% in the December quarter, around a range of individual estimates from 0.5% to 0.6%. Thus, the annual pace is expected to be maintained at 2.2% (range: 2.1% to 2.3%). 

What to watch | Wage Price Index

Expect to see another subdued outcome in today's release. In 2019, employment growth was robust at 2.1% and clearly outpaced growth in the working-age population at around 1.6%. However, the workforce participation rate stepped up over the year from 65.7% to 66.0%, which meant that little headway was made in lowering spare capacity in the labour market, with the unemployment rate ending 2019 at 5.1% compared to 5.0% at the end of 2018, while underemployment and underutilisation were unchanged through the year at 8.3% and 13.4% respectively. Outside of Q3's minimum wage increase (3%), which can also affect workers on Enterprise Bargaining Agreements, underlying wage inflation looks to remain well contained. 

Macro (Re)view (14/2) | Markets upbeat despite the risks

As the coronavirus outbreak continues to disrupt activity across China, concerns are rising that this will spillover offshore and derail an anticipated stabilisation in the global economy. These concerns were heightened this week after the Hubei province reported an unnerving rise in contraction numbers on Thursday, though in a media release the World Health Organisation said this was due to a change in the diagnosis classification and "does not represent a significant change in the trajectory of the outbreak". Increasingly aware of the impact, Reuters reported that China's President Xi had warned bureaucrats against implementing "more restrictive measures" to contain the spread as the authorities in Beijing and the People's Bank of China work through plans to provide support to the economy. 

Over in the US, Federal Reserve Chair Jerome Powell told the Congress at its semi-annual testimony that following the three rate cuts delivered in 2019, its monetary policy stance was now well-calibrated to support the continuation of the 11-year-long economic expansion, strong labour market conditions and progress towards its inflation target. However, Chair Powell outlined that considerable uncertainty pertains to the outlook, most notably the coronavirus, and consequently, the Committee is prepared to respond should conditions deteriorate to the extent that it prompts a "material reassessment" of its baseline view for the US economy. Chair Powell also used the occasion to impress on lawmakers the need for fiscal policy to play a more active role in any forthcoming downturn given the relatively limited scope the Federal Reserve now has to respond through conventional monetary policy. On the US data front, CPI inflation lifted above expectations rising from 2.3% to 2.5% over the year to January reflecting increases in rents, healthcare, and apparel prices, though the core CPI reading held steady at 2.3%Y/Y. Meanwhile, retail sales matched consensus rising by 0.3% in January, while sales excluding autos and gas slightly outperformed expectations (0.3%) with a 0.4% rise in the month. However, the retail control group (more closely aligned with consumer spending in GDP calculations) provided a softer analysis coming in steady on the month to be down from a 0.2% rise in December.   

Moving to Europe, the German economy continues to lose momentum in the face of strong global headwinds as GDP growth flatlined in the December quarter reflecting weakness in exports, fixed investment and consumption spending and was just 0.4% higher through the year. The situation in Germany is broadly reflective of the euro area as a whole, where economic growth has weakened sharply over the past couple of years as trade tensions have impacted the export sector and weighed on business investment. As ECB President Christine Lagarde told the EU Parliament this week, fiscal and structural responses are required to support productivity and raise potential growth in the bloc, though on the surface there remains limited willingness from governments. In the European Commission's Winter Economic Forecasts released this week, GDP growth in the 19-nation euro area is forecast to remain subdued at 1.2% in 2020 and 2021, implying little improvement from its current 0.9% pace. Even those forecasts may prove optimistic given the risks remain "tilted to the downside", with the coronavirus outbreak threatening to derail that progress. Given the weak macro backdrop, as shown in chart of the week (below), the Euro-US dollar cross has declined to its lowest in nearly 3 years, though it is a different story in the equity market where Germany's DAX remains near record highs, while bonds in Europe have also seen a recent bid driving peripheral yields noticeably lower over the past couple of weeks. 

Chart of the week

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In Australia this week, the latest sentiment indicators remained weak in line with subdued economic conditions domestically and an uncertain global backdrop. The NAB's Business Survey for January indicated that weakness in private sector demand had persisted into the new year; a situation not helped by confidence tracking near its level weakest since mid-2013 at a reading of -1, though this was at least slightly improved from December (-2). Business conditions were unchanged at +3 in the month and remain well below average overall. Within this, the profitability sub-index firmed from +1 to +2, while trading conditions eased from +6 to +5, however it was the decline in employment from +4 to +1 that stood out most, with NAB Economics indicating this read was consistent with employment gains of around 16k per month over the next 6 months; a more moderate outcome than predicted in the previous month's survey of around 19k per month and well below the 20.8k average achieved in the hard data over the second half of 2019. Meanwhile, weakness in forward orders continued and capacity utilisation remained around average. 

Turning to households, the Westpac-Melbourne Institute Index of Consumer Sentiment lifted by 2.3% in February but remained firmly in pessimistic territory at 95.5. Westpac Economics attributed the improvement in sentiment in February to an easing in the nation's bushfires following widespread rainfall across many of the affected regions, while the coronavirus outbreak appeared only to have had a limited impact at this stage. Stronger perceptions of the economic outlook supported the overall rise in sentiment, with both the "next 12 months" (+5.4%) and "next 5 years" (+4.3%) indexes firming. A more subdued tone came through from views on family finances — a disappointing outcome considering the stimulus from rate cuts, tax refunds and an improving housing market — as the index tracking perceptions "vs 1 year ago" fell by 1.0% in February and remained broadly steady on the "next 12 months" horizon. Taking a closer look at the housing market, while house price expectations among consumers were essentially steady in February they have surged by almost 73% over the past 12 months, driven by the resumption of the RBA's easing cycle in 2019 and an easing in macroprudential controls by the banking regulator APRA. Accordingly, housing finance commitments are now in a sharp upswing and data this week confirmed a 4.4% acceleration in December that was well above consensus expectations and saw the annual pace quicken to its fastest in 33 months at 14.0% (reviewed here). Given the house price cycle is now on the rise and a sense from the RBA's recent communications that the hurdle to further rate cuts has risen, the "time to buy a dwelling" index in the Westpac-Melbourne Institute survey showed signs of deterioration with a 5.6% fall in February to 112.1 to be well down from the peak of 127 reached last year.  

Australian housing finance runs hot in December

Australian housing finance commitments increased at their fastest pace in 39 months with a 4.4% acceleration in December, driving the annual pace to a 33-month high of 14.0%. The Reserve Bank of Australia is increasingly mindful of the balance between the support an improving housing market will provide to the domestic economy and the potential medium-term risks posed to financial stability from increased borrowing.    

Housing Finance — December | By the numbers

• The total value of housing finance commitments (excluding refinancing) surged by 4.4% in December to $19.637bn to easily beat the median forecast for a 1.6% rise and follows a 1.9% increase in November (revised from 1.8%). In annual terms, commitments accelerated by 14.0% through the year; up from a 3.3% pace just one month earlier to now be running at their fastest pace in 33 months. 
• Owner-occupier housing finance commitments posted their sharpest increase in a single month since August 2015 rising by 5.1% in December to $14.196bn (prior rev: 1.6%), driving the annual pace from 5.7% to 17.9% — its fastest since August 2017.
• Investor commitments increased by 2.8% to $5.44bn (prior rev: 2.5%), which resulted in the annual pace swinging from -2.4% to 4.9% and is now expanding for the first time since August 2017.

• By number of approvals made to the owner-occupier segment nationally;
• Loans written to purchase established dwellings advanced by 2.9% to 20,619 (2.3%yr)
• Loans for the purchase of newly built dwellings were up by 5.6% to 3,692 (18.9%yr)
• Loans for construction lifted by 5.1% to 3,185 (-3.4%yr)

Housing Finance — December | The details 

December's 4.4% rise in housing finance commitments was the strongest month-to-month increase recorded since September 2016 that dates back to a time when the last upswing was about to take place after the Reserve Bank of Australia (RBA) had twice lowered the cash rate earlier that year. Fast forward to 2019, the key themes supporting this current upswing have been; 3 RBA rate cuts, an easing in macroprudential controls and the removal of uncertainty relating to changes in taxation policy following the federal election outcome.

The combination of these factors began to take hold from the second half of the year (see chart, below). In Q3, the total value of commitments increased by 7.5%, which was its first quarterly rise in 2 years. In the quarter just completed, commitments lifted by another 6.7%, led by a 7.8% rise from the owner-occupier segment — its fastest quarterly increase since Q3 2015 — and a smaller 4.0% rise from investors. Further highlighting the remarkable pivot that occurred, total commitments were expanding at annualised pace of around 35% over the second half of 2019 compared to contracting by around a 6% annualised pace in the first half.  

Looking at the state-based details, owner-occupier commitments in December expanded in New South Wales 3.9% (22.5%yr), Victoria 7.5% (19.4%yr), Queensland 5.9% (22.0%yr), South Australia 2.4% (5.1%yr) and Western Australia 3.8% (9.3%yr). Tasmania is the only state in contraction, falling by 1.0% in the month and 8.7% lower through the year.

For Q4, New South Wales led the gains up by 10.9%, followed by Victoria (7.7%), Queensland (6.8%), South Australia (4.6%), and Western Australia (2.4%). Tasmania fell by 4.9%.   

In the investor segment, the details in the month were; New South Wales 2.6% (-3.3%yr), Victoria 2.4% (14.3%yr), Queensland 6.9% (14.6%yr), South Australia 3.0% (1.9%yr) and Western Australia 0.0% (6.3%yr), while Tasmania fell by 5.1% (3.5%yr). 

The quarterly rates were mixed, with increases for New South Wales (3.8%), Victoria (6.0%) and Queensland (8.0%), as South Australia (-3.3%), Western Australia (-0.5%) and Tasmania (-2.9%) contracted. 

Housing Finance — December | Insights

The upswing in housing finance commitments increased pace towards the end of 2019, driven mainly by the owner-occupier segment, though with signs of rising support from investors, and remains consistent with improving conditions in the established housing market. The RBA has taken this as a sign that its 2019 rate cuts are gaining traction, in turn providing it with confidence that it will support a lift in household consumption growth as it anticipates. However, while housing credit growth remains low at the moment, RBA Governor Philip Lowe highlighted last week (see here) that the Bank is now balancing that upside with the medium-term risks posed to financial stability through increased borrowing at a time when house prices are rising. Thus, the hurdle to any further rate cuts appears to have risen, with a deterioration of conditions in the labour market a necessary precondition.

Macro (Re)view (7/2) | RBA maintains constructive outlook

Events domestically this week were focused on the latest communication from the Reserve Bank of Australia (RBA), which was the first time markets have heard from the Bank in 2020. On Tuesday, the Board elected to hold the cash rate steady at 0.75%, as expected (see here), but the decision statement conveyed optimism over both the domestic and global economic outlook in spite of Australia's summer bushfires and the outbreak of the coronavirus. With data over the inter-meeting period showing a decline in the nation's unemployment rate from 5.3% to 5.1% and an underlying inflation print of 1.6%yr in Q4 that matched the Bank's forecasts, the Board received sufficient justification to continue its wait-and-see approach on policy settings, noting that the "long and variable lags" associated with last year's rate cuts (in June, July and October) meant that their transmission into the real economy was still ongoing, but identified a lower exchange rate and improvements in household balance sheets as signs easier monetary policy was gaining traction. However, with the unemployment rate expected to remain above the 4.5% level estimated by the RBA to be consistent with full employment over the next couple of years, the decision statement retained the Board's easing bias.   

On Wednesday, RBA Governor Philip Lowe gave an address to the National Press Club (titled: 'The Year Ahead') that appeared to indicate the threshold for the Board to act further on that easing bias had risen. Governor Lowe explained that while the cash rate could be lowered further in an attempt to speed up employment growth and inflation, there were now seen to be offsetting risks posed to financial stability through additional leverage at a time when house prices are in an upswing and for consumer confidence to deteriorate more rapidly from such an action. Where that balance would tilt in favour of more easing would be in the event that the "unemployment rate were to be trending higher and there was no further progress being made towards the inflation target" Governor Lowe said. That was a message reiterated by the governor during the Bank's semi-annual appearance before the House of Representatives' Standing Committee on Economics on Friday (Hansard here), as was the view that unconventional policies in the form of quantitative easing and negative rates were not expected to be required. 

To round out the week, the Bank published its quarterly Statement on Monetary Policy and updated economic forecasts in which it maintained its constructive view on the outlook for domestic growth to pick from its below-trend pace of the past year or so (current pace is 1.7%Y/Y as of Q3 2019) to trend (2.75%) by the end of 2020 and then rise a little further to 3.0% in 2021 (see chart of the week, below). The bushfires and coronavirus are seen as having a short-term transitory impact on growth concentrated in the first half of the year, with the outlook downgraded from a 2.6% pace to 1.9% before recovering over the second half of the year through rebuilding efforts and activity returning to normal. Certainly, the market has viewed this outlook as optimistic, and while the RBA acknowledges the uncertainties both domestically and offshore are material, it contends the fundamentals are strong.

Chart of week 

The RBA's forecast for growth to pick up over 2020 is predicated on more a constructive global growth impulse in line with receding trade tensions and a stabilisation of the downturn in the manufacturing sector. Domestically, the key is consumption growth improving on household balance sheets bolstered by earlier rate cuts that have lowered debt servicing costs and boosted house prices, with data from CoreLogic this week confirming the upswing in national dwelling prices was running at its fastest pace in more than 2 years at 4.1% through the year to January. Accordingly, the RBA will have welcomed this week's data that showed retail sales volumes lifted by a stronger-than-expected 0.5% in the December quarter, though as discussed here this was likely was boosted by Black Friday sales.

While the ongoing downturn in residential construction activity has the Bank anticipating it to remain a drag on overall growth over coming quarters, improving dwelling approvals data, including this week's broadly stable update for December (see here), has prompted a shift to a more sanguine outlook where the cycle turns later this year. Meanwhile, a mining sector-led pick up in capital expenditure following 7 years of decline is expected to support a 9.3% rise in business investment through 2020. Based on this week's international trade data for December, indications are that net exports will contribute modestly to economic growth in Q4 (see here), though the RBA expects the export sector to be affected notably by the bushfires and coronavirus through reduced education-and holiday-related tourism.

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Switching the focus offshore, Chinese markets came back online this week after Lunar New Year holidays resulting in local equities catching down in response to the coronavirus outbreak, however liquidity-injecting measures from the People's Bank of China helped keep fears in global markets contained. Also in China, authorities announced a halving of imports tariffs on $75bn of US-produced goods, with levies to fall on February 14 from 10% to 5% and from 5% to 2.5% depending on the goods in question, in a response that reciprocates commitments made by the US under the phase one trade deal. The highlight of the week came on Friday where data confirmed the US labour market remained robust at the start of the year as non-farm payrolls advanced by 225k in January to outperform expectations for a 165k rise. The unemployment rate edged up from 3.5% to 3.6% and underemployment retraced its decline from December in rising from 6.7% to 6.9%, though that in part reflected a 0.2ppt lift in the participation rate to 62.4%, while annual revisions resulted in employment gains being lowered by 514k through the year to March 2019. Growth in average hourly earnings also surprised to the upside firming from 3.0% to 3.1% year on year. In another positive sign for the US economy, activity in the manufacturing sector expanded for the first time in 6 months in January as the ISM index improved by 3.1pts to 50.9, well clear of the 48.5 level expected. This was driven by positive swings in the month from new orders (+4.4pts) and production (+9.5pts), though this is yet to reflect coronavirus-related impacts. Meanwhile, conditions for services firms remained robust in January as the ISM non-manufacturing index recorded a 0.6pt lift to 55.5 completing a decade of continuous expansion of activity in the sector. 

In Europe, the growth impulse showed signs of improvement at the start of the year, though the risk is that this recovery is derailed by the coronavirus given the bloc's high exposure to the global economy through its key export sector. For the moment, Markit's Composite Purchasing Managers' Index showed activity in the euro area economy improved to its strongest in 5 months rising from 50.9 to 51.3 in January. There were continued signs of stabilisation of the downturn in the manufacturing cycle, with activity in the sector still in contraction but on the rise from 46.3 to 47.9 in January according to the Markit Manufacturing PMI. Against the manufacturing rollover, Europe's services sector has remained resilient, though Markit reported activity softened a touch in January from 52.8 to 52.5 due to underperformance in France and Spain. On the consumer front, retail sales volumes pulled back by -1.6% in December after a 0.8% lift in November, slowing the annual pace from 2.3% to a subdued 1.3%. Meanwhile, Europe Central Bank President Christine Lagarde told a parliamtentary hearing this week that structural weakness in the bloc from slow productivity and ageing demographics had contributed in driving interest rates to their very low levels, in turn limiting its and other central banks' scope to respond to economic downturns through easier monetary policy settings. 

Australia's trade surplus $5.2bn in December

Australia's monthly trade surplus was below consensus at $5.2bn in December as export earnings were outpaced by spending on imports. Over the December quarter, the trade surplus contracted sharply on weakness in commodity prices, though net exports are still likely to contribute positively to GDP growth in Q4.

International Trade — December | By the numbers

• December's trade surplus was $A5.223bn missing to the downside of the consensus forecast of $5.5bn. November's trade surplus was revised down to $5.518bn from the $5.8bn figure intially reported by the ABS.   
• Export earnings lifted by 1.4% in the month to $41.293bn to broadly match the 1.3% increase in November (revised from 1.8%), as the annual pace accelerated from 5.1% (revised from 5.5%) to 8.3% driven by a base effect.     
• Import spending advanced by 2.4% in December to $36.070bn mostly retracing the 2.8% contraction in the month prior. The annual pace swung from -2.7% to 5.8%, which was also accentuated by base effects. 

• The trade surplus for Q4 was $14.706bn ($3.965bn in October, $5.518bn in November and $5.223bn in December) stepping down from a record high level in Q3 at $19.627bn. After seasonal adjustments, the trade surplus corrected sharply by $4.692bn or 25.5% over the quarter to $14.469bn the ABS estimates.

International Trade — December | The details 

Export earnings lifted by 1.4% (or $557m) in December to $41.293bn to be 8.3% higher through the year. However, softness hit in Q4 as earnings contracted by 3.5% to reflect the drag from weaker commodity prices. In December, exports were led by a 1.1% rise ($289m) from non-rural goods, most notably from metal ores and minerals (inc iron ore) ($348m) and other mineral fuels (inc LNG) ($137m). Volatile non-montary gold exports lifted by 14.0% ($266m) in the month, while rural goods increased by 1.6% ($63m) to more than offset November's 1.1% fall. Services exports fell by 0.7% in the month (-$62m) on weakness in tourism, though the ABS reported no discernible impact from the bushfires.

Import expenditure advanced by 2.4% in the month ($853m) to $36.070bn and was up by 5.8% on a year earlier. For the quarter, imports were broadly steady rising by a modest 0.5%. December's increase was driven by strong gains from capital goods (6.0%m/m) and consumption goods (3.6%m/m), while services saw their strongest monthly rise (2.4%) since March 2018, with a lower Australian dollar a key factor as these purchases become more expensive. Intermediate goods were up modestly overall (0.6%) despite a strong rise from fuels and lubricants on higher oil prices.   

International Trade — December | Insights

The decline in the trade surplus in Q4 appears mainly to be price related, with last week's international trade prices data implying the terms of trade fell in the order of 4.5% over the quarter as commodity prices retracted from highly elevated levels. In Q3, net exports contributed modestly to activity (0.2ppt) and indications are that it will be a similar outcome for the December quarter. 

Australian retail sales -0.5% in December; Q4 volumes +0.5%

Australian retail spending pulled back by 0.5% in December following the Black Friday-induced splurge in November where turnover advanced by its most in a single month in 2 years. However, real retail sales increased by more than expected in the December quarter.   

Retail Sales — December  | By the numbers 

• Retail turnover fell by 0.5% in December to $27.765bn which was larger than the 0.2% contraction expected. However, turnover growth in November was revised up from 0.9% to 1.0%. Turnover growth in annual terms slowed from 3.3% (revised from 3.2%) to 2.7%.

• Retail volumes (nominal spending adjusted for price changes) increased by 0.5% in the December quarter; an upside surprise on the 0.3% rise expected and a sharp improvement on the 0.1% contraction from Q3. In annual terms, volume growth remains broadly flat, though it improved from -0.3% to +0.4%.  

Retail Sales — December | The details

December saw retail turnover contract by 0.5% after posting its strongest monthly gain in 2 years with a 1.0% rise in November. The most likely interpretation is that consumers front-loaded spending in the lead up to Christmas to take advantage of widespread discounting around the Black Friday period. Consistent with that assessment, discretionary spending (sales excluding food) fell by 0.7% in December after surging by 1.2% in November, and within this, there were sharp pull backs from clothing and footwear (-1.5% in December from +3.2% in November), department stores (-2.8% from +3.7%) and household goods (-0.3% from 1.3%). Overall, retail turnover was up by a moderate 0.9% in the December quarter, though the detail was positive with every category experiencing growth; food +0.8%, household goods +1.2%, clothing and footwear +1.5%, department store +1.3%, 'other' retail +0.2%, and cafes and restaurants +1.2%. The annual pace of turnover growth surged in November from 2.2% to 3.3%, though around half of this increase was retraced in December easing to 2.7% to be broadly in line with the 2.6% pace recorded for the year ending Q3. 

In Q4, retail prices lifted by 0.4%, the softest quarterly rise since Q3 2018, with annual growth slowing from 2.7% to 2.3%. This was driven mostly by a 1.1% rise in food prices, likely boosted by drought-related impacts. Aside from more modest rises from 'other' retail (0.8%) and cafes and restaurants (0.6%), prices weakened across the discretionary categories reflecting the impact of discounting for Black Friday sales. 

Adjusting nominal sales for these price changes, the breakdown of volume growth across the categories is presented in the chart, below. The impact of price discounting saw demand rise for household goods (+1.4%q/q), clothing and footwear (+1.5%q/q) and department stores (+2.1%q/q). As a result, discretionary volumes lifted by 1.0% in Q4 — twice the pace of growth for total retail (+0.5%).      

Bringing it all together, from this next chart, it can be seen that retail demand was boosted in Q4 by the impact of cheaper prices due to discounting and may have also been assisted by earlier RBA rate cuts and tax refunds to low-and middle-income earners. This saw annual growth improve from -0.3% — its weakest pace since 1991 — to +0.4%.  

Turning to the states, nominal turnover growth in the month was positive in only Tasmania (+1.1%), with flat outcomes in Victoria and Western Australia, while contractions were recorded in New South Wales (-1.2%), Queensland (-0.5%) and South Australia (-1.3%). The ABS reported that bushfires impacted spending in New South Wales in the month, most notably for food retailing and cafes and restaurants. For Q4, spending nationally rose by 0.9%, meaning that New South Wales (+0.4%), Victoria (+0.7%) and South Australia (+0.3%) lagged. Outperformance came from Queensland (+1.8%), Western Australia (+1.1%) and Tasmania (+3.3%). Annual growth in the majority of states is stronger than the national pace underscoring the weakness in New South Wales (+0.8%). State volume details are provided in the table in the 'By the numbers' section above. 

Retail Sales — December | Insights 

There were mixed details from today's report, with December seeing a sharper-than-expected pull back in nominal sales (-0.5%m/m vs -0.2% expected) after November's Black Friday-induced surge (1.0%), though the outcome from volume growth in the quarter was more constructive than anticipated (+0.5%q/q vs +0.3% expected). Weakness in discretionary spending has been weighing on household consumption growth over recent years, but in Q4 it was the discretionary categories that drove retail volume growth. Whether or not that is sustainable is debatable given the impact of Black Friday sales in the quarter and weakness in consumer sentiment. The RBA anticipates that improved household balance sheets, in part due to last year's rate cuts resulting in higher asset prices, will support consumption growth rising through the year.