Preview: Labour Force Survey — April

Australia's labour force survey for April is due to be released by the ABS at 11:30am (AEST) today. This will be the first report since the expiry of the Federal Government's JobKeeper wage subsidy scheme that helped maintain jobs and incomes through the lockdowns, though this not expected to derail the recovery with employment already back at pre-pandemic levels and job vacancies and other forward-looking indicators of labour demand elevated.    

As it stands | Labour Force Survey

Employment strongly outperformed market expectations for a second consecutive month in March rising by a further 70.7k against 35k forecast. At a total of 13.077m, employment is around 0.6% above its pre-pandemic level.

The part-time segment accounted for all of March's employment gain with a 91.5k rise after several months of soft outcomes. Coming against the run of play, full-time employment fell by 20.8k to post its weakest outcome since September. Part-time employment was harder hit by the pandemic than the full-time segment, though its recovery has been stronger and has occurred more quickly. 

Despite the national participation rate reaching a new record high in March after rising from 66.1% to 66.3%, the resulting 43.6k increase in the labour force was easily outpaced by employment (70.7k) in the month. This led to the unemployment rate falling from 5.8% to 5.6%, continuing the descent from its COVID peak of 7.5% but still above its pre-pandemic level of 5.2%. Broader rates of spare capacity also declined in the month with underutilisation -0.9ppt to 13.5% and underemployment -0.6ppt to 7.9%, with both measures now below pre-pandemic levels but still much higher than policymakers would like.

The easing of restrictions in Victoria and Western Australia after circuit-breaker lockdowns contributed to a robust 2.2% lift in hours worked in March. With the reopening broadening out and the economy rebounding strongly, hours worked in March stood 1.2% above their pre-pandemic level to be running ahead of employment in the recovery.  

Market Expectations | Labour Force Survey

Employment is expected to slow in April, pointing towards the impact of the withdrawal of the JobKeeper wage subsidy, with the median estimate at 20.0k. The range for the outcome is wide, from -40.0k on the low side to 60.0k on the high side. National unemployment is forecast to remain unchanged at 5.6% (range: 5.4% to 5.8%), based on the participation remain holding at 66.3%.  

What to watch | Labour Force Survey

All the interest today will be around the headline employment number for the month. Given employment has averaged a little over 80.ok/mth over the last 6 months, a slowing is to be expected the longer the recovery goes on, but the consensus estimate of just 20.0k points to some caution around the expiry of JobKeeper. Clearly, there is a large degree of uncertainty here. Consider that in March the number of employed people working zero hours had fallen to 59.6k to be around the levels from before the onset of the pandemic, while in the ABS's high-frequency payrolls data, payroll jobs growth had declined of late, though seasonal effects around Easter holidays have contributed to this (see below). Today's report should provide the market with more clarity on the early stages of the transition that is underway, but it will likely take several months before definitive conclusions can be drawn of the effects of the JobKeeper withdrawal on the recovery. 

Australian Q1 Wage Price Index 0.6%; 1.5%yr

Australia's Wage Price Index came in a little above market estimates rising by 0.6% in the March quarter, lifting the annual pace off record lows to 1.5%. Wages growth in the quarter was boosted by temporary factors, namely from the further removal of wage reductions and freezes implemented earlier on in the pandemic and from a delayed minimum wage rise taking effect pandemic-hit industries. Prior to the pandemic, annual wages growth in Australia was around 2.2% and the slowdown to 1.5% leaves the pace well short of the 3% level the RBA expects is required to meet the inflation target.     

Wage Price Index — Q1 | By the numbers

• The headline WPI (total hourly rates of pay ex-bonuses) came in a touch stronger than expected rising by 0.59% in the March quarter against the consensus estimate for a 0.5% lift. 
• Wages growth through the year to Q1 2021 ticked up to 1.49% from 1.42%, continuing the grind higher off the record lows in the September quarter (1.36%) in the fallout from the pandemic. 

Wage Price Index — Q1 | The details 

Today's report confirmed that wages are continuing to recalibrate to the reopening of the economy as firms unwind temporary wage cuts and freezes implemented during the depths of the pandemic. With economic conditions now rebounding strongly, many employers are now revisiting wage reviews for employees on individual contracts that had been postponed earlier in the crisis. In addition, the impact of the national minimum wage rise (1.75% in 2019/20) provided a further boost to quarterly WPI growth. Usually, increases in the minimu wage would take effect in the September quarter each year, but in these COVID times the Fair Work Commission determined that the 2019/20 increase would be phased in over three quarters, with increases to pay rates in the industries hardest hit by the pandemic being delayed until the March quarter to give struggling businesses more time to wait for restrictions to ease before facing higher wage costs. 

Reflecting these developments, growth in private sector wages lifted by 0.6% in the March quarter outpacing the 0.36% lift in public sector wages, with widespread wage freezes restraining growth in the latter. Through-the-year growth in private wages ticked a little higher to 1.43% from 1.36%, though this compares with a pre-pandemic pace of around 2.2%. While growth in private sector wages is now starting to lift (albeit slowly) off record lows, public sector wages slowed to a new series low of 1.46%Y/Y. Prior to the pandemic, annual growth in public sector wages was slightly stronger than in the private sector.    

Looking across the industries, accommodation and food services saw the strongest quarterly increase (1.22%), reflecting the boost from the minimum wage increase. Similarly, this also helped lift wages growth in other pandemic-hit industries, though at more modest rates of increase: retail 0.61%q/q and other services (including tourism services) 0.67%q/q. Wages across business services was more contained in Q1 (0.37%) after recording a stronger increase in the December quarter (0.8%) as wages started to return to more normal levels with temporary cuts and freezes unwinding. The underlying moves reflected this with quarterly growth slowing in professional services (0.45% in Q1 from 1.21% in Q4), administration (0.15% from 0.86%), real estate services (0.08% from 0.39%) and information media (0.23% from 0.61%), though it advanced in finance and insurance (0.58% from 0.15%). Growth in wages in the health industry lifted by 0.71% in Q1, elevating the pace through the year to 1.73%. Education and training also posted a 0.71% rise in the quarter, with annual growth strongest of all industries at 2.16%. Aside from education and training, annual wages growth remains a long way from pre-pandemic levels in all other industries as the chart below shows (click to expand). 

For the states, annual wages growth is running around at around a 1.5% pace, though it is noticeably stronger in Tasmania at 2.0%. There, the key driver is the public sector, with annual wages growth of around 3.0% being the strongest in the nation for all sectors and states. 

Wage Price Index — Q1 | Insights

Slow wages growth remains in Australia. While the headline WPI index has moved off its record lows, it took a combination of firms unwinding wage restraints and legislated minimum wage increases to get there. All in all, the labour market needs to be considerably tighter to generate meaningful wages growth. While there are some concerns around labour shortages in certain industries and this may prompt wages to adjust higher, this is not widespread. Despite a strong recovery in the labour market and forward-looking indicators indicating it has further to run, official forecasts from both the RBA and Treasury point to wages growth only grinding higher over the next couple of years. 

Preview: Wage Price Index Q1

Australia's Wage Price Index for the March quarter is due to be published by the ABS later this morning (11:30am AEST). The data tracks changes in hourly rates of pay for a set group of jobs and is influenced by factors such as changes to minimum wage settings, award variations, enterprise agreements and contracts (or other informal agreements) between employees and employers. Wages are still recovering from the depths of the pandemic when many firms implemented temporary cuts and freezes, though underlying conditions in the labour market suggest more sustainable increases in wages are likely to be some way off.   

As it stands | Wage Price Index

To recap, the WPI surprised to the upside of expectations in the December quarter rising by 0.6% against a 0.3% lift expected. The key factor driving the positive surprise was the reversal of short-term wage cuts in higher paid senior executive jobs. Abstracting for this, the ABS's exclusion-based measure (which removes the impacts of pandemic restrictions and then their subsequent relaxation on wages) showed that 'underlying' wages growth was 0.3% in the quarter. In through-the-year terms, growth in the WPI advanced ever so slightly from 1.36% to 1.42%, leaving the pace around record lows. 

With the economy rebounding strongly since the reopening, the removal of wage cuts and freezes led to private sector wages lifting by 0.67% in the quarter, up sharply from a 0.08% pace in Q4. Annual growth in the index increased from 1.21% to 1.36%. Wages in the public sector remained contained at 0.29% in the quarter and 1.61% through the year, with widespread wage freezes holding down increases there.

The industries that saw the strongest growth in wages in the quarter were in professional services (1.21%q/q, 1.52%Y/Y) and administrative and support services (0.86%q/q, 0.83%Y/Y), with both rebounding from earlier falls associated with wages freezes and cuts. 

 

Market expectations | Wage Price Index

In the March quarter, markets expect the WPI to have risen by 0.5% (range: 0.4% to 0.7%); an outcome that would see the annual pace hold broadly steady around record lows of 1.4%. 

What to watch | Wage Price Index

The recent RBA May Statement on Monetary Policy reported that more firms in the Bank's liaison program had unwound temporary wage cuts since December. With the adjustment back to pre-pandemic levels still occurring, there is the potential for another upside surprise today in quarterly WPI growth. However, underlying wages growth is likely to remain subdued for some time as spare capacity in the labour market remains elevated. The measures in last week's Federal Budget and the RBA's policy settings are both calibrated around supporting a return to full employment.  

Macro (Re)view (14/5) | AU Federal Budget extends support; inflation concerns weigh markets

The Australian Federal Budget for 2021/22 delivered this week signaled the intent from the government to keep spending to sustain the robust momentum of the economic recovery, supporting an eventual return to full employment. With the economy rebounding from the COVID recession more rapidly than expected at the time of the December mid-year update and with the iron ore price highly elevated above forecasts, the improved revenue outlook has given the government scope to fund new spending initiatives for essential services in aged care and child care and extend existing measures for business tax write-offs and low- and middle-income tax relief. For the period over the remainder of the current financial year through to the end of 2021/22, Treasurer Frydenberg announced around $22bn in new policy spending on budget night. The deficit for 2020/21 is now expected to be $161bn (7.8% of GDP), revised down from $197.7bn (9.9% of GDP) in December, though the size of the deficit in 2021/22 is broadly unchanged at around 5% of GDP. New policy spending then exceeds the windfall generated by stronger economic conditions over the remainder of the forward estimates. A full analysis of the Budget and the policy measures is available here. 

A key assumption within the Budget forecasts is that household consumption growth remains robust, supported by accumulated savings and an improving labour market. Retail sales data out this week came in slightly below estimates for the month of March with a 1.3% rebound after short state-based lockdowns, while Q1 volumes also missed on the downside contracting by 0.5% (reviewed here). Though soft on the surface, both nominal sales and real (inflation-adjusted) sales are still highly elevated above pre-pandemic levels at 10.5% and 5.2% respectively. Elements within the report pointed to a shift in patterns of household spending with fewer COVID restrictions now in place and the vaccine being rolled out, with sales volumes for cafes and restaurants (5.8%) rising fastest of all categories in the quarter as demand was either moderating or slowing in other areas that were boosted by the shutdowns, such as household goods and basic food. High-frequency card data from the major banks also suggest consumption patterns are rebalancing, with more spending on services as demand for goods-related areas moderates. Also this week, the NAB Business Survey reset record highs in April on both the confidence (+26) and conditions (+32) measures. With increasing signs of optimism amongst firms that this strength can prove longer-lasting than the reopening-generated boost, evidenced by new survey highs for forward orders and capacity utilisation, the decision by the government to announce the extension of the temporary full expensing allowances for a further year aims to capitalise on the momentum.

— — —

With the stronger-than-expected US CPI report dominating markets offshore, debate around the persistence of inflation pressures and the Fed's commitment to its policy settings is once again strong. In April, CPI came in well ahead of estimates rising from 2.6% to 4.2%yr on the headline measure (vs 3.6% expected) to a 12.5-year high, while the core rate hit its fastest pace since 1996 accelerating from 1.6% to 3.0%yr (vs 2.3% expected). Led by both Fed Governor Lael Brainard and Vice Chair Richard Clarida, the message remained the same from the central bank this week that high inflation readings are expected to prove transitory. The basis for that expectation is partly due to mechanical base effects, with rising prices in a vibrant reopening economy being compared back to the early stages of the pandemic where firms were cutting prices to generate cashflow, and also to the many supply-side constraints highlighted in high-frequency activity surveys, including production bottlenecks and product and labour shortages. There were signs of these effects in April's data, with the largest contributions to inflation in the month coming from used cars and trucks (10%mth), airfares (10.2%mth) and hotels (8.1%mth). Meanwhile, surging goods-related demand saw durables inflation soar to its highest since the early 1980s rising from 3.7% to 7.3%yr, though by comparison services inflation is relatively contained at 2.6% due to pandemic restrictions and precautionary behaviour (see chart below). Adding to the volatility in the data this week, US retail sales were softer than anticipated in April coming in flat on the month (vs 1.0% expected), while control group sales contracted by 1.5%m/m (vs -0.2% expected). However, the weakness in April was offset by upward revisions to the readings in March, with retail sales up to 10.7%mth from 9.8% and control group sales up 7.6%mth from 6.9%. 

Chart of the week

In the continent, the European Commission unveiled its spring 2021 forecasts in which its outlook for GDP growth was marked higher for 2021 to 4.3% from 3.8% previously and then in 2022 to 4.4% from 3.8%. A resurgence in the virus and the return of lockdowns led to the European recovery falling back over the past couple of quarters, but with the vaccine rollout gathering pace and restrictions set for a wider easing in the summer months the EU expects private consumption to rebound sharply, while order books for firms in the key manufacturing sector are likely to remain well-stocked from demand offshore as reopenings expand. The account from the ECB's April policy meeting hinted at this optimism, with the Governing Council generally assessing the risks to the outlook as "more balanced" over the medium term, though some members were of the view that they were now "marginally tilted to the upside". But with the reopening yet to take shape and more progress needed on the vaccine front, the risks over the near term continue to be assessed as being to the downside, and this dissuaded any discussion over potential tapering of ECB bond-buying at this meeting. In the UK, March quarter GDP growth declined by 1.5% (vs -1.6% expected) on the return to national lockdown, though the monthly data produced by the ONS indicates that the damage was done in January and that activity started rising again in February before lifting more sharply again in March as schools were gradually reopening. 

In review: Australian Federal Budget 2021/22: Policy support extended

The Australian Federal Budget 2021/22 aims to sustain the faster-than-expected progress in the economic recovery from the pandemic crisis by extending fiscal stimulus to support a return to full employment. A stronger fiscal position with the economy rebounding sharply and commodity prices staying at elevated levels has provided the scope for additional stimulus to flow, including a further $21.5bn in new measures since the December Mid-Year update, ramping up in scale over the next couple of financial years. The key priorities are around increasing skills and participation in the labour force, extending incentives for firms to hire and invest, providing ongoing tax relief for low- and middle-income workers, and lifting spending on essential services. Since the onset of the pandemic, the Government's economic support measures total $291bn (14.7% of GDP) of announcements, with $186bn of this frontloaded to the period up to the end of the current financial year.   

Federal Budget 2021/22 | Budget Position

Progress in Australia's economic recovery from the pandemic crisis has occurred more rapidly than earlier expected by Treasury and commodity prices have continued to trade at elevated prices for longer than anticipated. These factors have led to the budget deficit for the current financial year (2020/21) being lowered sharply to $161bn (7.8% of GDP) from $197.7bn (9.9% of GDP) at the time of the December MYEFO update. However, reflecting the intent of the Government to provide continuing fiscal stimulus to support a return to full employment, the projected deficit for 2021/22 was little changed at $106.6bn (5.0% of GDP) from $108.5bn, while the deficits for the out-years are now larger. In 2022/23 the deficit is forecast to be $99.3bn (from $88.4bn previously); $79.5bn in 2023/24 (from $66.0bn); and $57.0bn in 2024/25 (from $55.2bn).

Budget reconciliations

The effects of the faster-than-expected progress in the recovery and new policy measures in the period since the December MYEFO are summarised in the table above. On Budget night, Treasurer Frydenberg announced a new spending package of $21.5bn, with $3.3bn of this coming through in the remainder of the current financial year and $18.2bn in 2021/22. Combined with the new spending measures planned in the out-years, a total of $95.8bn in policy stimulus (around 4.3% of GDP) was included in Budget 2021/22. This will be funded by $68.3bn in new payments, while the tax-take is lowered by $27.6bn to make up the balance.

The stronger economy has boosted the budget significantly, with the effect of parameter changes adding $104.3bn over the forward estimates. There is a $40.1bn boost for the remainder of the current financial year alone, mainly reflecting the tailwinds from elevated iron ore prices with the commodity currently trading above US$200/t on global exchanges. Overall, the cumulative boost to the Budget from the stronger economy is slightly larger than the cost of new stimulus, resulting in the projection for total deficits through to 2024/25 declining to $503.3bn from $511.7bn expected at the time of the December MYEFO.  

Government debt 

Government net debt tracks a lower profile than was expected in the previous Budget and then in the December update, due to smaller deficits and higher bond yields (which reduce the market value of debt securities) emanating from the global reflation trade. Net debt lifted from its pre-pandemic level of 19.1% to 24.7% of GDP in 2019/20. It is now expected to increase to 30% of GDP in 2020/21 compared to 34.5% forecast back in December. In 2021/22 net debt rises to 34.2% of GDP, down from 39.3% previously. The profile for the remaining years is lower than in MYEFO, though the scale of improvement moderates to 40.9% of GDP by 2024/25 from 42.6% forecast last December. By global standards, the size of the debt is relatively and the cost servicing the debt remains very low at 0.7% of GDP over the forward estimates. Following the budget announcements, the AOFM released its issuance update, with total issuance of $130bn expected to be required in 2021/22. While this is larger than markets had expected, the weekly requirement of around $2.0-2.5bn is lower than the current pace of RBA bond purchases in the secondary market ($4bn/wk). 

Federal Budget 2021/22 | Payments and Receipts 

Payments as a share of GDP are forecast to peak at 32.1% in the current financial year, up sharply from its pre-pandemic level of 24.5% reflecting the scale of support that has been provided to the economy. In 2021/22, payments lower to 27.6% of GDP before moderating thereafter to 26.2% by 2024/25.  

Government receipts as a share of GDP in 2020/21 have been revised higher since MYEFO, rising from 23.6% to 24.3% as a result of the stronger-than-expected economy. In line with the measures in this Budget, receipts lower to 22.6% of GDP in 2021/22 and are broadly unchanged the year after. By 2023/24, receipts begin lifting again to 23.4% of GDP and 23.9% in 2024/25. Receipts pre-pandemic were 24.9% of GDP.  

Federal Budget 2021/22 | Policy Measures

   

Major measures announced in Budget 2021/22 are summarised in the table below. Key announcements support employment and strengthen the quality and availability of essential services. 

New payments announced since MYEFO cost the budget $18.2bn in 2021/22 and $64.9bn for the 4 years. Major announcements were; 

• $9.5bn has been allocated to support Australians looking for work, factoring in the $50 per fortnight increase to the base rate of working-age payments (including JobSeeker, Youth Allowance and Austudy) that became effective as of April 1. Additionally, eligibility for certain payments includes an income-free area, with this threshold rising to $150 per fortnight from $106 for single JobSeeker recipients. 

• Age care received a $17.7bn package in response to the findings of the Royal Commission into the sector. There is $7.8bn is directed towards improving existing services, and $7.5bn for an additional 80,000 Home Care packages. 

• Infrastructure received a further $15.2bn over the next 10 years for road, rail and community projects across the nation. New commitments for the states are as follows: New South Wales $3.8bn, Victoria $3.4bn, South Australia $3.4bn, Queensland $2bn, Western Australia $1.6bn and Tasmania $0.4bn. 

• A COVID-19 package of $3.4bn was announced, which includes $1.9bn to expand access to vaccines, and $1.2bn for the subsidy of domestic airfares to tourism regions. 

• Skills and training was granted $2.7bn of funding to uncap and extend the Government's wage subsidy scheme for new apprentices and trainees. This is expected to add an additional 170,000 apprentices and trainees (beyond the existing 100,000) by the end of March 2022. 

• A $2.3bn health package, with the bulk of this ($2bn) going towards expanding access to and availability of mental health services.  

• Child care received a $1.7bn package that will further reduce out-of-pocket costs for families for second and subsequent children through increases to the Child Care Subsidy. 

• For housing, the construction commencement requirement under the HomeBuilder scheme has been extended for all existing applicants from 6 months to 18 months at a cost of $0.8bn. Another 10,000 places have been advanced under the New Home Guarantees policy for 2021/22, enabling first home buyers to build a new home (or purchase a newly built home) with a deposit of as little as 5%. Meanwhile, under the First Home Super Saver scheme, eligible first home buyers can now access a maximum of $50,000 (up from $30,000) from their superannuation to enter the market. 

On the receipts side, policy changes lead to a reduction in the tax-take of $27.6bn over the 4 years. Major announcements were; 

• A 12-month extension of the temporary full expensing measure through to 30 June 2023 under the Government's JobMaker plan at a cost of $17.5bn. This allows firms with an annual turnover of less than $5bn to immediately deduct the full cost of depreciable assets (unlimited in value and number) acquired after October 6 2020. 

• The temporary loss carry-back provision has been extended by 12 months through to 30 June 2023, costing the budget $2.8bn. Under the extension, firms will now have until the 2022/23 financial year to carry-back tax losses against profits booked as far back as 2018/19.       

• Tax relief is provided through the retention of the low and middle income tax offset for the 2021/22 financial year. The measure reduces the tax-take by $7.8bn over the forward estimates. For another 12 months, a maximum tax offset of $1,080 will be available for taxpayers with taxable incomes between $48,000-$90,000, phasing out to zero at $126,000. Taxable incomes of $37,000 or less receive a $255 tax offset. For incomes between $37,000-$48,000, the base $255 offset increases by 7.5 cents per dollar until the maximum $1,080 offset is reached.  

Federal Budget 2021/22 | Economic Outlook  

Reflecting the economy making faster-than-expected progress in rebounding from the pandemic crisis, the forecasts in the Budget have been upgraded since the December MYEFO. Real GDP growth for 2020/21 is now expected to be 1.25% (from 0.75%) and then a very strong 4.25% in 2021/22 (from 3.5%). Contributing to the boost is the assumption of the vaccine being rolled out nationally by the end of the year, though on the other hand the outlook is weighed by the international borders remaining closed until at least mid-2022. Net overseas migration was 194,000 in 2019/20 but is projected by Treasury to contract by 97,000 in 2020/21 and fall by a further 77,000 in 2021/22. 

The Government's direct economic support measures since the onset of the pandemic stand at around $186bn (9.4% of GDP), and in conjunction with the monetary stimulus from the RBA with rates at the zero lower bound and large-scale bond purchases, domestic demand is expected to continue to drive the recovery. The outlook for household consumption growth has lifted to 1.25% in 2020/21 and to 5.5% in 2021/22, with spending remaining robust supported by accumulated savings and an improving labour market. The withdrawal of the JobKeeper wage subsidy is not expected to derail the recovery in the labour market. The outlook for the unemployment rate has been revised sharply lower, falling to 4.5% by 2023-24 from 5.25% previously. However, the outlook for wages growth, despite modest upward revisions, is still very subdued.  

Residential construction activity is forecast to rise by 2.5% in 2020/21 and then flatline in 2021/22 before starting to roll over in 2022/23 (-1.5), suggesting that policy support from the HomeBuilder scheme will frontload demand. The extension in this Budget to temporary full expensing is expected to significantly boost non-mining business investment, with the Government looking to capitalise on the current strength in surveyed measures of business conditions and confidence. In 2020/21, non-mining business investment contracts by 6.5% before rising by 1.5% in 2021/22 ahead of a 12.5% surge in 2022/23.     

With commodity prices more elevated than previously assumed, the outlook for the terms of trade has jumped to expected growth of 10% in 2020/21 from just 0.75% forecast in December. This boosts nominal GDP growth to 3.75% in the current financial year from 1% previously. However, Treasury's assumption is that the iron ore price falls to US$55/t by the end of Q1 next year, resulting in a pullback in the terms of trade (-8.0%), slowing national income growth to 3.5%. 

Assisting the robust outlook in Australia is a global economic recovery that is now expected to be faster than at the time of the December MYEFO. Global GDP growth has been revised up to 6.0% in 2021 from 4.75% previously, and in 2022 growth was lifted by 0.75ppt to 4.5%. A more rapid expansion in China and a significant upward revision to growth prospects in the US following unprecedented levels of fiscal stimulus are the key factors.   

Federal Budget 2021/22 | Summary 

The Australian Federal Budget for 2021/22 highlighted a significantly improved fiscal position reflecting the economic recovery achieving faster-than-expected progress and commodity prices staying elevated above earlier forecasts. But with the focus on keeping fiscal stimulus flowing to support a return to full employment, new measures in the Budget add a further $21.5bn between the remainder of the current financial year and 2021/22. 

Australian retail sales up 1.3% in March; Q1 volumes -0.5%

Australian retail sales lifted by 1.3% in March, receiving a slightly softer-than-expected rebound after short state-based lockdowns. Retail volumes pulled back a little more than anticipated falling by 0.5% over the March quarter, with consumption patterns showing signs of rebalancing on a wider reopening of the services side of the economy.   

Retail Sales — March | By the numbers 

• Retail turnover (nominal) advanced by 1.3% in March to $30.7bn, coming in a touch below the preliminary and median estimate of 1.4%. Sales fell by 0.8% in February. 
• Annual turnover growth decelerated from 9.1% to 2.2% on base effects. 

• Retail volumes declined by 0.5% in Q1, weaker than the median estimate for a 0.4% fall. This, however, is coming from a 9% surge over the second half of last year as the economy reopened. Annual volume growth moderated from 6.4% to 4.7%. Retail prices lifted by 0.4% in Q1 to be 2.4% higher through the year. 

Retail Sales — March | The details  

Nominal retail sales lifted by 1.3% in March, helped by rebounds in spending in Victoria (3.5%) and Western Australia (5.5%) after short lockdowns in those states. This gave retail sales a boost into the end of the quarter after a weak start to 2021. Overall, retail sales were down 0.1% in the March quarter. There may be signs in today's report of spending rebalancing from the pandemic-induced shifts seen last year thanks to eased restrictions and more domestic travel. For example, growth in spending in cafes and restaurants was strongest of the categories in Q1 rising by 6.4%. Prominent during the more extended lockdowns of last year was very strong demand for food and household goods, but despite the many short state- or city-based lockdowns both categories saw declines in Q1.

Details for retail sales volumes reflected the effects outlined above, with cafes and restaurants surging up by 5.8% in Q1 with restrictions eased and concerns over the pandemic likely reduced due to low caseloads. Both food (-2.7%) and household goods (-1.6%) pulled back sharply in Q1: the reduced demand being consistent with less time being spent at home. Clothing and footwear fell 0.7% in Q1, though this was after the huge gains seen in the previous two quarters (34.3% in Q3 and 17.2% in Q4) driven by pent-up demand and Black Friday sales. Overall, retail volumes across most categories remained well above pre-pandemic levels, though the trajectories have either leveled out or are slowing. In particular, food is slowing sharply after it was boosted last year by households stockpiling for lockdowns. Still yet to see a return to pre-pandemic levels of demand is cafes and restaurants, which despite Q1's surge are still in recovery mode. 

Retail prices were firmer in Q1 rising by 0.4%, though base effects slowed the annual pace to 2.3% from 3.3%. The chart below illustrates how price rises for food and household goods have eased over the past couple of quarters as demand for those goods has moderated. Clothing and footwear prices are recorded to have rebounded by 2.3% in Q1, though this mainly reflects prices normalising after the broad-based discounting seen in Q4 around the Black Friday period. Through the year, clothing and footwear prices are only a little higher (0.4%). Increased demand and pandemic-related precautions saw cafes and restaurants lifting prices by 0.5% in Q1 after a 0.9% rise in Q4. However, the intensity of competition likely means that the ability to pass on higher prices to customers is somewhat limited.       

Retail Sales — March | Insights

The onset of the pandemic and introduction of restrictions hit the services side of the economy hard last year, prompting a shift in consumption patterns towards goods-based spending and this benefitted the retail sector. But there are now signs that spending patterns are rebalancing due to the wider availability of consumption opportunities in services areas. But it should be noted that retail spending (+10.5%) and volumes (+5.2%) are still sharply above pre-pandemic levels, highlighting the strength of household demand that is driving the recovery. 

Macro (Re)view (7/5) | RBA upgrades forecasts; policy support to stay

A busy week of RBA communications led to a sizeable upgrade in Australia's economic outlook, but this has not shifted the Board's tone on policy settings. At its May meeting, the RBA Board left all policy settings as they were and maintained its forward guidance stating the conditions to prompt rate hikes were not expected "until 2024 at the earliest" (see here). But there are more pressing policy deliberations upcoming around the maturity of the 3-year yield target and bond purchase program, and Governor Philip Lowe outlined in his decision statement that announcements on the way forward with both tools will be made at the July meeting. The May Statement on Monetary Policy recalibrated the Bank's forecasts to the stronger-than-expected pace of the recovery that has ensued from the strong health and economic response to the pandemic. As a result, GDP growth in 2021 was revised up to 4.75% from 3.5% previously, reflecting stronger growth in household consumption, business investment and residential construction. For 2022, the pace of growth in the economy moderates but remains well above trend at 3.5% in an unchanged forecast. 

The much stronger growth forecast this year has largely attenuated concerns around the impact of the recent withdrawal of the JobKeeper wage subsidy on the labour market. Forecast unemployment in 2021 was lowered significantly to 5% from 6%, though improvement thereafter is much more gradual declining to 4.5% by mid-2023. But the key is the implications for wages growth and inflation. The RBA has repeatedly stated that full employment is needed to generate wages growth of around 3% so that inflation holds sustainably within its 2-3% target band. On these new forecasts, by mid-2023 wages growth is at 2.25% (2% previously) and underlying inflation at 2.0% (1.75% previously). Thus with the economy expected to fall short of meeting the RBA's full employment and inflation objectives, it remains my view that at the July meeting the Board will extend the maturity of the 3-year yield target policy from the April 2024 bond to the November 2024 bond, as well as announcing a further $100bn of bond purchases.  

Domestic data out this week remained consistent with the strong tape of releases seen throughout the recovery to date. Strength in conditions in the residential property market were again highlighted as housing finance commitments regained momentum rising by 5.5% in March after the upswing paused temporarily in the month prior (see here). Commitments to investors led in March and in Q1 overall, but activity in the owner-occupier segment remains very strong. With stimulatory policy driving demand, house prices continue to advance with CoreLogic's monthly index posting a 1.8% in April coming off the back of a record increase in March of 2.8%. Notable again was the outperformance of detached houses where price gains to date in 2021 are running at 8.6%, which is twice the pace of that for units (4.3%) reflecting a pandemic-related shift away from higher-density housing. Similarly, while the higher-density segment drove a much stronger-than-expected rise of 17.4% in total dwelling approvals in March, detached house approvals over Q1 (10.7%) were significantly stronger than for units (3.2%) with policy stimulus from the HomeBuilder scheme and state government subsidies a key factor (see here). Surprising to the downside this week and coming amid the surge in global commodity prices, the nation's trade surplus pulled back to $5.6bn in March from $7.6bn, defying expectations for it to widen to $8.2bn (see here). Driving the result was a 4.3% rise in imports in the month, indicative of the strength of domestic demand that is leading the recovery. 

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Switching to offshore where it was the large downside miss on expectations in the latest US employment data that was the main development of the week. In a result completely counter to the reports of strong labour demand — including in this week's ISM surveys — employment on non-farm payrolls came in at 266k in April missing the consensus estimate of 1 million (see chart, below). Hopes were that the very strong growth in payrolls seen in March would carry on, but some of the gloss was taken off that report as revisions cut the 916k rise in employment to 770k. Meanwhile, headline unemployment lifted to 6.1% from 6.0% whereas it was forecast to fall to 5.8%. Adding to the confusion was that labour supply lifted in the month, with participation edging up to 61.7%, and underemployment declined further to 10.4%. While the weakness in April's report may prove temporary, given the Federal Reserve's patient stance on policy, expectations for a potential near-term tapering of asset purchases have most certainly taken a hit. Despite inflation expectations moving higher, a flatter US yield curve through the week suggests markets may be closer to coming to terms with the Fed's reaction function. 

Chart of the week

Over in the UK, the Bank of England left all monetary policy settings unchanged at this week's meeting amid a much-improved outlook for the economy due to the fast vaccine rollout curbing transmissions and generating optimism for a wider reopening in the summer. As outlined in the Bank's May Monetary Policy Report, the return to national lockdown at the turn of the year is thought to have led to the economic recovery backsliding in the order of 1.5% over Q1, leaving GDP around 9% below its pre-pandemic level. But with restrictions easing a stronger rebound is now expected. Growth is forecast to rise by around 4.25% in the current quarter and with the momentum sustained, GDP returns to pre-pandemic levels by the end of this year, occurring some 3 months earlier than previously expected. Relatedly, and with the cover of the extension in the government's furlough scheme through September, unemployment is now seen peaking much lower around the middle of the year at just under 5.5% compared with 7.75% forecast back in February. On inflation, the Bank's central scenario is that near-term inflation pressures will prove transitory with CPI peaking at around 2.5%, mainly reflecting a rebound in energy prices, before easing back towards the 2% target in 2022 and 2023. 

At this stage, the policy implications appear limited. While an announcement was made that the weekly pace of asset purchases in the current program would slow from £4.4bn to £3.4bn, Governor Andrew Bailey emphasised in the post-meeting press conference that this should not be seen as tapering, as neither the stock of purchases (£150bn) or its specified end date (end 2021) had changed. In any case, 10-year Gilt yields ended the week much lower at 0.77%. At the higher pace, purchases had been frontloaded to quell market volatility arising from an earlier upsurge in virus infections and were on track to conclude ahead of its end date. The Bank's Monetary Policy Committee voted for this week's decisions in an 8-1 analysis, with the one dissenting voice, Chief Economist Andy Haldane, arguing the improved economic outlook justified an earlier finish to asset purchases in August, lowering the targeted stock of the program by £50bn. In Europe, there was a notable upside result on retail sales in March, rising by 2.7% against expectations of 1.6%, while sales in February were revised higher to 4.2% from 3.0%. This outturn helped to reaffirm optimism building in markets for the strength of the rebound in Europe likely to be coming over the summer as restrictions are eased more widely. 

Australian dwelling approvals jump 17.4% in March

Australian dwelling approvals posted a much stronger-than-expected rise of 17.4% in March, driven by rebounding in higher-density approvals in New South Wales and Victoria. House approvals hit a new record high level in the month, as did alteration approvals, with stimulus measures to frontload residential construction activity over the next year or so, providing key support to the economic recovery. 

Building Approvals — March | By the numbers

• Dwelling approvals (seasonally adjusted) advanced by 17.4% in the month following on from a 20.1% rise in February, with March's total of 23,176 coming in just below the record high for a single month as annual growth accelerated to 47.4% from 22.1%.

• House approvals added to the previous month's 13.6% rise with a 1.2% lift in March to a new record high of 14,404, firming growth over the year to 62.2% from 59.7%.  

• Unit approvals spiked higher by 59.4% in March to 8,772; the outturn swinging annual growth to +28.1% from -24.2%. 

Building Approvals — March | The details 

March's 17.4% rise in dwelling approvals extended the 20.1% increase in February, coming after a slow start to the year of -17.1% in January. Through the March quarter, dwelling approvals advanced by a strong 8.3%, led by a 10.7% boost from houses as the higher-density segment posted a more modest increase of 3.2%. 

In level terms, house approvals surged to a record high quarterly total of 41,179 amid the ongoing boost from the HomeBuilder scheme and very low rates. Despite also rising, the quarterly total on unit approvals of 18,177 was low by historical standards, with this segment much more affected by the headwinds to demand associated with the pandemic. 

With the HomeBuilder scheme winding down in March, alteration approvals made a final push higher, rising by 7.3%m/m to a record level of $1.07bn (46.7%yr). In the non-residential space, approvals have gathered momentum, albeit from a low base, with March's 59.4% rise coming after a 28.0% lift in February. 

  

Across the states, New South Wales (26.9%) and Victoria (24.7%) outperformed in March on the back of strength in the higher-density segment. Evident over Q1 was the broad-based strength in Victoria, with house approvals rising by 13.7% and higher-density approvals up 20.0%; the rebound in the state was more delayed than elsewhere due to the second lockdown. Gains in the quarter were also strong in South Australia (24.9%) and Western Australia (10.9%), centred on strength in house approvals on the support of the HomeBuilder scheme. The chart (below) shows the flow of house approvals over the duration of the HomeBuilder scheme, with the largest gains coming from Western Australia, Queensland and Victoria. 

Building Approvals — March | Insights 

Dwelling approvals maintained their strength in March, led by the higher-density segment in New South Wales and Victoria. House approvals advanced to a new record high level in the month and for the quarter before the HomeBuilder scheme wound down at the end of March. Assuming all (or most of this) flows through to construction, there is now a very significant amount of residential work, including alterations, in the pipeline that will boost the domestic economy over the next year or so.