Macro (Re)view (19/2) | Recovery is not enough

Australia's labour market was the focus of the past week with further headway in its recovery from the pandemic shock achieved early in 2021. Employment advanced by 29.1k in the month of January to broadly match the consensus estimate (30.0k) after December's 50.0k rise (reviewed here). Beneath the headline number was strength in full-time employment (59.0k); the 4th consecutive month in which the segment has led jobs growth on signs that the recovery is broadening out with economic activity moving through its gears. The onset of the pandemic saw employment fall by 872.1k over April and May, but by January 813.6k of these job losses had been recovered. Full-time employment has recovered to be within 0.6% of its pre-pandemic level, while the part-time segment slid back to 0.1% below its level in March after falling by 29.8k in January (see chart, below). Despite the lift in employment in January, hours worked were sent sharply lower (-4.5%mth) by a larger share of workers taking annual leave after holiday plans from earlier in the year were affected by shutdowns and border closures, while New South Wales saw a more pronounced fall (-8.7%mth), likely due to pandemic disruptions from a localised virus cluster in Sydney.     

Chart of the week 

With fiscal support from the Federal government's wage subsidy scheme due to expire at the end of March, some further dislocation in the labour market is expected by policymakers. However, the effectiveness of pandemic containment measures ahead of the upcoming vaccine roll-out and the extraordinary stimulus response has enabled the labour market to build up considerable momentum since the reopening and this should help the economy through this transitional phase. Further progress was made in reducing spare capacity in January, with the unemployment rate easing to 6.4% from 6.6% and underemployment (8.1%) and underutilisation (14.5%) also declined. But there is still a long way to go in achieving the sort of tight labour market conditions that will lead to faster wages growth, which the RBA has prescribed needs to be met before the prospect of higher rates comes on its radar. 

The minutes from February's RBA meeting released this week emphasised the Board's commitment to keeping policy settings very accommodative until spare capacity has reduced from its elevated levels. Most notably, the decision to expand its bond purchase program by a further $100bn was justified to ward off "unwelcome significant upward pressure on the exchange rate" that would have otherwise emerged if the RBA went against the trend of increased bond-buying by other major central banks. The main point of speculation in the markets is currently around the future of the 3-year yield target, with some segments speculating the Board may adjust or even remove the policy later on this year, though on the available evidence it would appear that conditions in the economy over the coming months would need to resolve considerably to the upside of expectations for this to occur. On the current outlook, the Board's expectation is that its employment and inflation objectives are some years away and on that basis, it considers that "it would be premature to consider withdrawing monetary stimulus". 

In other local news of note, Australia's flash PMI readings for February pointed to an economic recovery that has maintained its momentum early on in 2021. The composite index slowed slightly but was still robust in the month at 54.4 (readings > 50 signal expansion), with both the services (54.1) and manufacturing sectors (56.6) benefitting from strengthening new order flows, while employment growth was running at a 28-month high in response. Meanwhile, the preliminary estimate of retail sales came in at 0.6% in January, which was softer than anticipated due to a 1.5% decline in Queensland after the short shutdown in Brisbane early in the month. However, the annual pace of retail sales at 10.7% reflects the momentum in household spending.             

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Offshore this week there were some signs of concern that the reflation theme could be self-limiting as yield curves steepened sharply over the week. Whereas the recent rise in long-end yields has been driven by the expectation for higher inflation to build as vaccines enable more sustainable reopenings, this faded over the week leading to real rates, which are still deeply negative, moving a little higher. With the inflation outlook key for markets, communications from the major central banks pointed to a nuanced stance. The minutes from the US Federal Reserve's FOMC meeting in late January outlined that inflation would be moving gradually higher as the effects of the pandemic dissipate. However, in the near-term, some members foresaw price levels spiking higher to be above its 2% objective, largely reflecting temporary factors. In this context, the line from the FOMC is that it will be important to differentiate between "one-time changes in relative prices and changes in the underlying trend for inflation". While the Committee has moved to a less pessimistic view on conditions over the medium term, it still assesses that risks and uncertainties around the outlook for the economy are elevated amidst the pandemic and in light of this there are no clear signs that it is contemplating tapering its asset purchases from its current $120bn/mth rate. Indeed, not only does the FOMC want to see complete recovery from the pandemic shock, it is then aiming for conditions to strengthen substantially before policy accommodation will be removed. Fiscal support will also play a key role in helping the economy get back on track, as highlighted the effect of recent stimulus cheques driving retail sales sharply higher in January with a 5.3% rise. The result may have been overstated to some extent by weakness in recent months (sales fell in each of the past 3 months), but the stimulus cheques appeared the catalyst in turning the tide. Control group sales (a narrower measure of underlying demand) outperformed the headline increased with a 6.0% surge in the month. 

Switching the focus to Europe, the account of the meeting by the ECB's Governing Council in January also contained key insights around inflation dynamics. The Governing Council discussed the possibility that inflation could rise more sharply than its projections implied in 2021 reflecting a combination of higher energy prices, the unwinding of the temporary VAT cut in Germany, and the return of pent-up demand once restrictions were eased. The key point communicated in January's account was that "a temporary boost to inflation should not be mistaken for a sustained increase". The major emphasis outlined by the Governing Council at its previous meeting was that it will aim to maintain "favourable financing conditions" throughout the recovery. In this global reflation environment, there are two main concerns for the ECB in this effort. Firstly, it was noted that monitoring the effect of upward pressure on bond yields on financing conditions "would be an important task", and secondly, a stronger currency via a weaker US dollar "might have negative implications for euro area financial conditions". As such, it is understandable that the Governing Council continues to note that "all instruments needed to remain on the table". The latest flash PMI readings for the bloc remained consistent with an economy still shuttered to a great extent as activity registered its 4th consecutive contractionary result coming in at 48.1 on the composite index in February. But while the services sector (44.7) remains severely hampered by the shutdowns, the manufacturing sector (57.7) is helping to attenuate its impact on the economy, reflecting shifts towards more goods-based consumption and strengthening demand offshore. 

Australian employment 29.1k in January; unemployment rate 6.4%

The recovery in the Australian labour market from the pandemic crisis continued into the turn of the year with a further 29.1k jobs added back to the economy in January. With more people than usual taking annual leave in the month and the disruptions associated with a cluster of virus cases in Sydney, hours worked and labour force participation declined. The national unemployment rate fell by more than expected to 6.4% and broader rates of underutilisation were eroded further. 

Labour Force Survey — January | By the numbers

• Employment (on net) increased by 29.1k in January, broadly matching the median estimate of 30.0k after rising by 50.0k in December.

• National unemployment declined from 6.6% to 6.4%, outperforming market expectations for a smaller fall to 6.5%, and is now more than 1ppt lower than its pandemic peak of 7.5% in July.   

• The participation rate eased from its record high of 66.2% to 66.1%.

• Total hours worked fell sharply by 4.9% in the month to 1.667bn hours, with full-time hours contracting by 5.7% and part-time hours down 1.3%, as the annual pace deteriorated to -5.7% from -1.5%. 

Labour Force Survey — January | The details

In another solid outcome, Australian employment broadly met consensus expectations rising by 29.1k in January after a 50.0k increase in the month prior. Over recent months we have been highlighting the improving momentum in the full-time segment as a sign of a broadening in the overall recovery and this trend remained intact in January with another 59.0k rise, while part-time employment fell (-29.8k). After January's outcomes, total employment was 0.5% down on its pre-pandemic level compared to its crisis trough of -6.7%. Full-time employment was 0.6% lower than its level in March, while part-time employment, which had earlier exceeded pre-pandemic levels, slipped back below that baseline on January's weak outturn (-0.1%).

In an unusual outcome, despite the rise in employment hours worked declined sharply with a 4.9% fall in the month (-5.7%yr). The ABS attributed this to more people taking annual leave than would usually be the case in January (ie having a much larger effect than the Bureau's seasonal adjustments could account for) after the disruptions of shutdowns and border closures earlier in the year. 

There are two points to highlight here. Firstly, full-time hours (-5.7%) fell much more sharply than part-time hours (-1.3%), which points to the effect of annual leave entitlements. 

And secondly, there was an outsized fall in hours worked in New South Wales of -7.8%, likely pointing to the disruptions associated with the cluster of virus cases and local shutdown in the Northern Beaches over the Christmas/new year period. Hours worked fell in the other states in January, but by smaller magnitudes; Victoria -2.9%, Queensland -4.5%, South Australia -4.6%, Western Australia -1.9% and Tasmania -4.9%.  

While on the state theme, Victoria led the way in terms of employment in January (43.6k) in a continuation of what has occurred over recent months as it has reopened from its extended shutdown, while outcomes have been mixed in the other states. 

In terms of spare capacity, the unemployment rate declined from 6.60% to 6.35% in January, which matches its level from April when it spiked from 5.22% at the onset of the pandemic, but it is now well down from its crisis peak (7.48%). Underemployment fell from 8.54% to 8.15% to be at its lowest since February 2019, while underutilisation (combining unemployment and underemployment) declined from 15.14% to 14.5%, though it is still above pre-pandemic levels. 

Participation in the labour force was slightly weaker in January, falling from 66.16% to 66.11% but has fully recovered its pandemic collapse. However, reflecting that the recovery still has some way to go, the employment to population ratio is around 0.5ppt below where it was before the onset of the pandemic.   

Labour Force Survey — January | Insights

The labour market recovery continued into 2021 with employment keeping pace with expectations over the past two reports. While hours worked were down sharply in January, this should rebound next month given people would have returned to work after the summer holidays and with the virus concerns in New South Wales coming under control. The effect of Victoria's snap 5-day shutdown on hours worked will likely miss the February survey. Overall, while there are concerns about the tapering of fiscal support at the end of March, provided there are no significant and extended disruptions from shutdowns, there should be a level of confidence that enough momentum in the economy has been established to withstand this period. 

Preview: Labour force survey — January

Australia's first labour force survey for 2021 comes up later this morning, with data for the month of January due from the ABS at 11:30am (AEDT). The recovery in the nation's labour market in the wake of the pandemic has been stronger than expected, though it remains incomplete and the crisis has also brought about a shift in its compositional dynamics with full-time employment now making up a much lower share of the labour force. At the end of 2020, levels of spare capacity had declined significantly from their peaks around the middle of the year but the unemployment rate at 6.6% was still elevated highlighting the importance of sustaining robust employment over the year ahead.  

As it stands | Labour Force Survey

Employment matched consensus in lifting by a net 50.0k in December, adding to the gains from October (180.4k) and November (90.0k). While momentum in employment was strong over the second half of the year rising by 557.5k as the economy reopened and activity resumed, the job losses sustained through the peak of the crisis in Q2 (-645.1k) had not yet been fully restored.

Furthermore, the composition of the labour market was significantly different compared to before the pandemic. Part-time employment had collapsed in response to the shutdown and social distancing restrictions but over the reopening period, these losses had been more than fully reversed, rising by a further 14.9k in December to around 4.15 million to be 0.6% above its pre-pandemic level. However, full-time employment was still 1.3% down on its level before the crisis, though momentum in this segment had lifted sharply over Q4 (218.7k) and was driving the overall recovery. With the disruptions from restrictions easing and economic activity moving through its gears, total hours worked advanced by 3.2% over Q4, though its level was still 1.4% lower than pre-pandemic and 1.5% down through the year.   

Reflecting the rise in hours worked and employment, spare capacity is being gradually eroded while participation in the labour force has risen above pre-pandemic levels as restrictions have eased and conditions on receiving income support payments have tightened. The national unemployment rate declined from 6.8% to 6.6%—well down from July's peak at 7.5%—while rates of underutilisation also lowered further in December. Meanwhile, just 7 months after collapsing to its lowest levels in around two decades, the participation rate lifted to a record high in December (66.16%). For a full review of December's report see here

Market Expectations | Labour Force Survey

The median estimate on the employment number in January is for a rise of 30.0k between a range of forecasts from 10.0k to 67.5k. This outcome is expected to result in the unemployment rate ticking down from 6.6% to 6.5%, on the basis that participation holds steady at its level from December.   

What to watch | Labour Force Survey

Headline employment shapes as the key number with the participation rate sitting at a record high and spare capacity elevated. Momentum in employment growth was strong towards the end of last year, with the recovery broadening out more widely to the full-time segment after part-time employment had already been restored to pre-pandemic levels. 

Macro (Re)view (12/2) | Inflationary concerns yet to show

In a relatively light-on week in terms of major events, markets were left to negotiate the tension between the reflation narrative, subdued US CPI data and comments from Federal Reserve Chair Jerome Powell that sustained inflationary pressures were unlikely to be forthcoming. Over recent days the Biden Administration's $1.9bn fiscal stimulus bill has come under criticism that it could spark higher inflation, most notably from their own side of the aisle from the former Treasury Secretary and head of the National Economic Council Lawrence Summers. Among a range of other concerns, the most pertinent issue raised by Summers was that the size of the stimulus could risk overheating the economy down the track as it opens up more widely once the pandemic dissipates. 

Current Treasury Secretary Janet Yellen has urged lawmakers to "act big" on relief spending measures arguing that the benefits would outweigh the risks and help prevent longer-term damage to the US economy's growth potential. Closely aligning with this were remarks by Fed Chair Powell in an address to the Economic Club of New York where the hit to the labour market from the pandemic crisis was the main area of discussion. Chair Powell outlined that with the effective unemployment rate in the US likely to be in the order of 10%—much higher than the 6.3% level reported last week—getting back to and maintaining full employment "will require more than supportive monetary policy" calling for a society-wide effort to address the situation akin to what occurred in the post-war period 75 years ago. Certainly, this week's soft CPI print in January means that repairing the labour market will continue to take pre-eminence over concerns of potential overheating in the economy. Headline CPI maintained its 1.4% annual rate while the core measure eased to 1.4% from 1.6%, both slower than expected (see chart). While the pace is likely to rise sharply in the months ahead when weak readings from the height of the crisis last year are replaced by stronger outturns from the reopening phase, Chair Powell said that the current weakness in the labour market meant that inflationary pressures were not expected to be "large nor sustained". While there are segments of the market that are of the view that strong inflation could prove more persistent, in the absence of those outcomes the Fed's commitment to its average inflation targeting regime remains clear.

Chart of the week

Over in Europe, the Commission's winter economic forecasts were upgraded reflecting a recovery that is expected to gather pace over the second half of the year as the vaccine is rolled out more widely, enabling the weight of the current shutdowns to be lifted. With the contraction in GDP in 2020 (-6.8%) now seen as less severe than previously anticipated (-7.8%), growth for 2021 is forecast to rise by 3.8% (from 4.2%) and then by a further 3.8% in 2022 (from 3.0%). At the Member State level on the updated outlook, GDP is on track to return to pre-pandemic levels by the end of the year or in early 2022, though some will see an even more protracted recovery, especially where tourism and leisure make up a larger share of the economy. The effect of a more robust rebound this year was reflected in an upgrade to the inflation forecast to 1.4% from 1.1%, though this still leaves it well short of the ECB's target and it is then projected to ease back to 1.3% in 2022 as elevated slack in the labour market weighs. In the UK, the first estimate of GDP growth in Q4 surprised to the upside of estimates coming in at 1.0%, reducing the annual decline to -7.8% from -8.6%. Given that UK GDP was crunched 21.4% through the first half of the year, activity was robust in the second half rising by 17.3%. But the net result was that the economy was still 7.8% smaller than it was prior to the onset of the pandemic, and there will be a degree of backsliding in Q1 due to the impact of the national shutdown with the Bank of England's updated forecasts out last week placing this in the order of a 4% contraction.

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From a local perspective, the announcement by the Victorian Government of a snap 5-day circuit breaker shutdown stemming from virus cases acquired through hotel quarantine rattled sentiment going into the weekend. The action is similar to what has occurred in a few other states over recent times where shutdowns have been enacted largely as a precautionary response to the emergence of cases rather than to curtail large outbreaks, proving to be effective in those instances with restrictions lifted either as planned or a little earlier. This week's data points provided a snapshot of conditions in the Australian economy in the absence of significant restrictions. Consumer sentiment according to the Westpac-Melbourne Institute Index lifted 1.9% for the month in February, with the level at 109.1 sitting just below decade highs. Driving the result was a 6.9% rise in the assessment of the economic outlook over the coming 12 months—unemployment expectations improving on the back of this—while perceptions around household finances looking to the year ahead firmed by 2.6%. The NAB's Business Survey for January reported a rise in the confidence index from +5 to an above-average reading of +10, with retailers and wholesalers remaining the most optimistic in response to the very strong pace of growth in household spending. While the conditions index pulled back to +7 from +16, it also sits above its long-term average. The slowing was driven mainly by the employment sub-component (+10 to +3), though it was still sending a positive signal for future hiring. Other points to highlight are that capacity utilisation has recovered to be around pre-pandemic levels after ticking higher in the month, while purchase and labour costs and retail prices pointed to a subdued inflationary pulse.

Macro (Re)view (5/2) | RBA maintains supportive stance

Australia's central bank was the focus of proceedings domestically this week as the RBA outlined its thinking for 2021 and beyond. At Tuesday's policy meeting, Governor Philip Lowe's decision statement reported that the Board elected to expand its bond purchase program by $100bn, taking effect from April once the initial $100bn tranche of purchases is complete with the $5bn weekly run rate to be maintained (see chart), while its benchmark interest rates were left unchanged at 0.1% (reviewed here). The expansion announcement arrived earlier than markets had been anticipating, though it appears a prudent move in hindsight ending speculation over the path forward before it ever really got going, and with the outlook indicating the macro conditions are likely to remain well adrift from the Board's objectives "until 2024 at the earliest", providing more accommodation sooner rather than later is understandable. The following day, in his "Year Ahead" speech at the National Press Club, Governor Lowe provided further insight into this decision by noting that the bond purchases had resulted in lower rates and a weaker currency than otherwise, while it was also in keeping with the actions of central banks offshore that had recently committed to further bond-buying. Also of note was that the 0.1% targets for the cash rate and 3-year yield were expected to remain in place for some time yet, though on the latter a decision would need to be made later on in the year if the focus for the policy would shift from the April 2024 bond to the November 2024 bond. 

Chart of the week

While the RBA's quarterly Statement on Monetary Policy pointed to an improved outlook for the Australian economy, the key theme here and in Friday's parliamentary testimony was that very accommodative policy continues to remain necessary. In the Bank's set of updated forecasts, the path for GDP has lifted with the contraction in 2020 now expected to be much smaller at 2%, compared to 4.5% previously. Forecast growth of 3.5% in 2021 sees GDP return to its pre-pandemic level by the middle of this year, before advancing by a further 3.5% in 2022. One the key uncertainties to this outlook is the period of adjustment households and businesses face as fiscal support, most notably from the JobKeeper policy, is tapered back. While the withdrawal of stimulus is potentially a headwind, balance sheets were strengthened tremendously by these measures over the course of last year so there is plenty of ammunition available to help smooth this transition. Despite this upbeat outlook for activity, spare capacity is expected to remain substantial over the next few years. The unemployment rate is forecast to decline fairly moderately this year from 6.6% to 6.0%, then lower by 0.5ppt to 5.5% by the end of 2022. Consequently, underlying inflation is seen to remain low and steady, coming in short of the Bank's 2% lower target over the forecast period out to mid-2023. Overall, while the RBA's forecasts convey a sense of optimism around the outlook, the effects of the pandemic crisis are expected to persist well into the future. 

The week also saw a sweep of domestic macro data releases. The housing market continues to reflect the tailwind of policy support with the value of borrower-accepted housing finance commitments surging by 8.6% in December (31.2%yr) driven by very strong demand from the owner-occupier segment (see here), while the HomeBuilder policy boosted dwelling approvals by 10.9% in December (22.8%yr) ahead of the reduction in grants from the start of the new year as detached approvals hit a record high (see here). After surging in the month prior, retail sales softened in December falling by 4.1%, though the elevated annual growth rate (9.6%) speaks to the strength of household spending, while volumes came in stronger than expected at 2.5% in Q4 as demand in Victoria surged (12.8%) on the state's reopening (see here). Meanwhile, the nation's trade surplus widened to $6.8bn in December as exports advanced (2.8%mth) on higher commodity prices supported by improving economic activity offshore (see here).     

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Moving offshore where again it was the theme of reflation that came to the fore driving steeper yield curves, while the US dollar found strength on the back of the move higher. It was also a strong week for equities, with the cyclical sectors (led by banks) working well. This week's highlight in the US was January's nonfarm payrolls report in which employment lifted by 49k, coming in well short of the median estimate for a lift of 105k. Further, more jobs were lost in December than initially reported, with the contraction in that month deepening to -227k from -140k. While the unemployment rate outperformed consensus falling to 6.3% where it was expected to hold steady at 6.7%, this was accompanied by a tick down (-0.1ppt) in the participation rate to 61.4%. Perhaps the best news out of the report was another sharp decline in the underemployment rate, which fell 0.6ppt to 11.1%, and while the level is still much higher than it was before the onset of the pandemic (8.7%) the downward trend from last April's peak (22.8%) remains intact. The overall soft performance from the labour market in January was something of a surprise given the resilience that has been evident in the recent data flow. Emphasising the point was this week's ISM activity indicators. The services index lifted to a 23-month high in January at a reading of 58.7 driven by notable strength in the new orders component, while the manufacturing index also came in at 58.7—slightly slower than in the month prior at 60.5 but still strong. Gaining most of the focus in the manufacturing index was a sharp 4.5ppt rise in prices to 82.1, this component's highest reading since April 2011 on rising input costs.             

Over in Europe, the scale of the setback to the economy from the resurgence in the virus is shaping up to be much less severe than occurred at the onset of the pandemic, though it will now clearly mean that it will be a more protracted recovery while the outlook still remains highly uncertain with the vaccine roll-out there much slower to get going than in the UK and US. After surging by 12.5% on reopening in Q3, real GDP contracted by 0.7% in the December quarter widening the decline through the year back out to -5.1% from -4.3%. With the social distancing restrictions intensifying early in the new year, the slowdown in the economy may yet be sharper in Q1. Reflecting this, the eurozone composite PMI slid further into contraction at a reading of 47.8 in January from 49.1 in the month prior. With the service sector hit hardest by the restrictions the slowdown is becoming more acute (45.4 from 46.4), though attenuating this is strength in manufacturing with the sector posting its seventh consecutive expansionary reading at 54.8 in the month. Also of significance in the continent this week was a stronger-than-expected rebound in inflation, with the headline CPI in annual terms rising to 0.9% (vs 0.6% expected) from -0.3%, while the core CPI lifted to a 5-year high at 1.4% (vs 0.9% expected) from 0.2%. These rebounds largely reflect transitory factors such as the rise in the German VAT tax after a temporary 6-month period of reduction that was introduced as a pandemic stimulus measure and the delaying of usual discounting for winter sales with the retail sector largely shuttered, effectively creating a low-base effect. While there may be more temporary effects on inflation going forward, weakness in the underlying economy will be a restraining force. 

In the UK this week, the Bank of England kept its monetary policy settings (bank rate 0.1%, asset purchases £895bn) unchanged, with the MPC maintaining its forward guidance that "significant progress" towards eliminating spare capacity in the economy and inflation returning to the 2% target sustainably was required before tightening would be in prospect. Notably, the meeting minutes clarified that preparatory work by the banking regulator around the implementation of negative rates "had not been intended to send any signal about the likelihood or imminence of such a policy" and the rates markets have since priced out the chance of the bank rate going negative in response, with the UK 10-year yield rising sharply by 16 basis points this week. The updated forecasts in the BoE's Monetary Policy Report were conditioned on the basis of the effects of the pandemic dissipating over the course of this year in response to the roll-out of the vaccine leading to a strong rebound. While the impact of the shutdown and the new Brexit arrangement is expected to result in a 4% contraction in GDP in Q1, activity is forecast to start rising from Q2 and gather pace thereafter to expand by 14.2% through the year to Q1 2022, upgraded from 10% expected previously. As this occurs, the outlook for inflation is forecast to improve towards the target, though progress in lowering the unemployment rate is seen to be a more gradual process.

Australian retail sales -4.1% December; Q4 volumes +2.5%

Australian retail sales pulled back in December due to base effects as sales were unable to keep pace with their record high level in the month prior in which Victoria opened up more widely and strong demand came through over the Black Friday period, likely bringing forward some Christmas-related spending. For the December quarter, retail volumes (nominal sales adjusted for price changes) lifted by a stronger-than-expected 2.5% driven by a very sharp rebound in demand in Victoria.  

Retail Sales — December | By the numbers 

• Retail turnover (nominal) declined by 4.1% in December to $30.369bn, which was a touch better than the preliminary estimate of -4.2%.  
• Annual turnover growth eased from its 19-year high of 13.3% to 9.6%.  

• Retail volumes lifted by 2.5% nationally in Q4 (vs 1.9% expected) adding to Q3's 6.5% reopening-driven surge: this latest outturn accelerating annual growth to 6.4% from 4.2%. Retail prices were held flat in the quarter (3.3%Y/Y) with discounting for Black Friday a major weight. 

Retail Sales — December | The details  

After soaring in November as restrictions in Victoria were wound back and Black Friday led to a spending splurge, retail sales understandably slowed in Decemeber falling by 4.1%. However, the pace over the year is still very high at 9.6%, and the level of turnover is 9.4% above where it was before the pandemic emerged. 

The breakdown of spending growth in December was reflective of the unwind from the aforementioned effects. Sales ex-food (measuring discretionary spending) declined 5.7% in the month after surging by 12.7% in November, with the pace over the year coming back to 9.6% from 15%. Household goods fell 8.3% after a 12.7% rise in November, clothing and footwear came back -9.4% from 26.7%, and department stores pulled back -12.5% from growth of 21.1% in the month prior.  

December's slowdown was broad based across the nation as the next chart shows. Victoria saw the steepest decline (-6.8%mth), more likely to be reflecting volatility associated with the pandemic rather than a faster deterioration in demand relative to the other states. Annual growth across the states was still elevated across the board: New South Wales 8.2%, Victoria 6.1%, Queensland 13.6%, South Australia 9.1%, Western Australia 14.3% and Tasmania 7.6%, and so too the level of spending relative to before the pandemic. 

Turning to volumes, the key theme to highlight overall was the contribution that came from Victoria. With the state opening up more than it had since early on in the year, volume growth there soared by 12.8% in Q4 turning the pace through the year positive at 1.6% from -9.8%. The rest of Australia saw demand moderate after their reopening rebounds came through in Q3. Note, however, that in level terms, volumes in Victoria now only just sit above their pre-pandemic benchmark (+1.6%) whereas they are still elevated across the rest of Australia (+8.1%) despite the softening in this most recent quarter. 

The volume breakdown across the quarters in 2020 highlight the shifts in demand that have occurred in the economy. Over the first half of the year, the "stay at home" areas in food and household goods saw strong demand as the restrictions saw discretionary demand collapse. Reopenings saw this broadly reverse over the second half of the year.   

The price data are more difficult to summarise due to varying effects across the sector. The large declines in Q4 (green bars in chart) in clothing and footwear and department stores reflects the impact of discounting for Black Friday sales. Meanwhile, prices in food and household goods have eased likely because the very strong demand seen by these categories brought on by shutdowns has since pared back on reopenings and supply chain constraints have resolved. The 0.8% rise for cafes and restaurants was the fastest quarterly lift in around 8 years, though this does follow a 0.3% decline in Q3.   

Retail Sales — December | Insights

While retail sales pulled back in December, high-frequency data published by the major banks have been indicating that spending will bounce back again in January. The rise in retail volumes over the second half of the year speaks to the strong momentum in household consumption that had accumulated as the economy reopened and stimulus measures took effect. 

Australia's trade surplus widens to $6.8bn in December

Australia's trade surplus widened out to $6.8bn in the month of December, with the export side rebounding sharply in the quarter indicative of improved global economic activity driven by reopenings as commodity prices elevated in response. Import spending remained solid in the quarter on strengthening demand conditions domestically. 

International Trade — December | By the numbers

• Australia's trade surplus advanced by $1.77bn in December to $6.785bn, though this was short of the median estimate of $8.75bn. November's trade surplus was revised from $5.022bn to $5.014bn. 

• Export earnings increased by 2.8% in the month to $37.268bn extending the 3.3% lift in the month prior, with the decline in annual terms coming in from -11.1% to -7.8%. 
• Import spending pared back in December falling 2.4% to $30.483bn: this after surging 9.3% in the month prior, with the contraction over the year widening to -13.1% from -9.8%.

International Trade — December | The details

The $1.77bn rise in the trade surplus in December more than reversed the pullback in the month prior (-$1.52bn) and added to the $0.79bn lift recorded in October. For the December quarter, the trade surplus rebounded sharply by $3.79bn (27.8%) according to the ABS's seasonally adjusted estimates. Overall, the key theme was that the nation's export sector benefitted from reopenings of economies offshore, and with this generating tailwinds for commodity prices, the rebound was further enhanced. Exports earnings lifted by 7.5% in Q4 after Q3's 5.7% fall. Meanwhile, strengthening domestic demand conditions since the reopening in Australia meant that import spending lifted by 3.1% to extend Q3's 3.3% rise. 

Looking at December's details, exports lifted by 2.8% to $37.27bn. Driving this was a strong result for rural goods (18.4%mth) with the category seeing a very sharp rebound in Q4 as a whole (18.6%) after falling by 14.7% in Q3. Non-rural goods contributed a 2.2% rise in the month to be up by 7.5% in Q4 rebounding from Q3's 5.9% decline. Driving this was a 3% lift in iron ore exports due to elevated prices, though this impact is much more pronounced when looking at Q4 with earnings surging in the order of 14% for the period. Both non-monetary gold (2.7%) and services (-1.7%) weighed in December—the latter restricted by the closure of Australia's borders to the rest of the world. 

Import spending was softer in December (-2.4%) after the surge that came through in November (9.3%) but was solid over Q4 (3.1%) and built on the rebound in Q3 (3.3%) that was generated by the reopening of the Australian economy. Driving the pullback was a 16.1% fall in spending on capital goods, but even factoring this result in the category still increased by 10.5% in Q4. And this followed an 8.1% reopening-driven rebound in Q3. Even on a year-on-year basis, capital goods spending is up by 2.2%, which comes 7 months after crashing to -19.8% at the height of the shutdown. Strengthening domestic demand conditions since the reopening, the expansion in asset write-offs included in last October's Federal budget, and improved business conditions and confidence appear likely factors behind this momentum. Also reflecting reopening effects, pent-up demand and stimulus measures has been consumption goods. This spending was up a further 2.5% for the month in December and was 6.1% higher over the quarter, this was after it rebounded 9.8% in Q3. Intermediate goods posted a 2.2%m/m rise, though it was flat in Q4 (0.4%) and remains well down on a year earlier (-11.1%). Services imports were little changed in December (0.5%) having been crunched by the impact of the pandemic restrictions (-55.7%yr), most notably on overseas travel (-98.3%yr). The effect of this has been to drive a substitution in the mix of spending by Australian households, with spending usually directed towards overseas travel going into consumption goods instead.  

International Trade — December | Insights

Today's report was reflective of the ongoing effects of the pandemic, with reopenings across the globe helping Australia's export sector and elevating commidity prices as a result. The import side continued to convey optimism around Australia's recovery with consumption spending going strong and momentum in capital goods investment building nicely. 

Australian house approvals hit record high in December

Australian house approvals reached a record high level in December as policy stimulus continues to boost the outlook for residential construction activity, though the effects of the pandemic are still weighing heavily on the higher-density segment.  

Building Approvals — December | By the numbers

• Dwelling approvals (seasonally adjusted) came in much stronger than expected rising by 10.9% in December (vs 3.0% forecast, prior rev 4.6%) to 19,537, elevating annual growth to 22.8% from 17.7%.  
• House approvals lifted for a 6th consecutive month soaring by 14.9%m/m to a record high of 13,785 (55.4%yr)

• Unit approvals increased by 2.5% in December to 5,752 but remain well down through the year at -18.4%.

Building Approvals — December | The details 

December saw the upswing in dwelling approvals rising at an accelerated pace of 10.9% in the month. This may have been driven by higher volumes of approvals going through before the tapering of the Federal government's HomeBuilder scheme (from $25k to $15k) from the start of 2021. In the December quarter, dwelling approvals soared by 22.5% to 54,191 driven by surging house approvals that lifted by 26.7% to 37,063 as approvals for units posted a smaller 14.4% rise to 17,128. 

The other area seeing an upswing due to the support of the HomeBuilder scheme is residential alterations with the value of these approvals granted in December pushing up by another 8.1% in the month to establish a new record high at $0.94bn (37.1%yr). In contrast, non-residential approvals (commercial work) have been hit hard since the onset of the pandemic with firms reluctant to commit to new projects, with the value of these approvals 17.2% lower over the year at $3.77bn.     

Turning to the states, house approvals are surging across the nation reflecting the broad-based nature of the fiscal and monetary stimulus measures enacted. The elevation has been strongest over in Western Australia (117%yr) which has occurred on additional support from the state government there. However, high-density approvals are being weighed down by the impact of the closure of the international border that is limiting population growth and keeping supply higher than otherwise.   

Building Approvals — December | Insights 

The sharp and sustained rise in dwelling approvals in response to the range of stimulus measures enancted points to a very strong upswing in detached residential construction activity which, allowing for lags, will likely be starting to take effect from the second half of this year.