Preview: CapEx Q3

Australia's private sector capital expenditure report for the September quarter is scheduled for release today (11:30am AEDT). Going into the Delta-affected Q3, the capex cycle was in a strong upturn rebounding from the 2020 COVID recession. The winter lockdowns are likely to have temporarily stalled this progress but the outlook beyond these disruptions looks to remain positive. 

As it stands | Capital Expenditure

The expansion in capex continued in the June quarter with a 4.4% rise. This lifted capex to $32.7bn, to be up 14.1% from the 2020 trough and 3% above its pre-pandemic level.   

Equipment spending has been driving this rebound with firms lifting expenditure to meet the rise in demand generated by the economic recovery. Tax incentives included and then expanded upon in recent federal budgets and low financing costs have supported this investment. Equipment capex was 4.3% higher in Q3 and up 17.3% over the year. Spending on buildings and structures increased to a 4.6% rise in the quarter following more modest gains in the previous two quarters; a result that turned annual growth positive (6.5%) for the first time in more than 3 years. 

By sector, a 6% rise in the non-mining sector lifted capex to almost 19% above the depths seen in 2020. Equipment investment (5.3%q/q) and spending on buildings and structures (6.9%q/q) was expanding at a fast pace. Mining sector capex was up modestly in Q2 (0.4%) and was 2.2% higher through the year. Despite elevated commodity prices, mining investment remained around its level from recent years.  

The previous survey included firms' 3rd estimate of capex spending intentions for 2021/22, a figure nominated at $127.7bn. This was a 12.5% upgrade on the 2nd estimate from 3 months earlier, while investment plans according to estimate 3 were running 17.5% ahead of the equivalent estimate taken in 2020 during the early stages of the reopening of the economy. 

Market expectations | Capital Expenditure

In the September quarter, the median estimate is for a 2.4% fall in capex. The band of estimates for the outcome sits between -5% on the low side to 1.5% on the upside. Today's survey will also include the 4th estimate of firms' capex plans for 2021/22. This figure is the big unknown given the lockdowns seen in Q3. Insights from the RBA's liaison program indicate that firms have largely delayed rather than cancelled investment plans in response to these latest disruptions. That may be reflective of the relative resilience seen in business confidence measures in the quarter compared to the large falls in 2020. A result consistent with that would be around $130bn on Estimate 4, however I think intentions could come in a bit higher than this as firms upgrade investment plans to catch up for the weakness in Q3 spending. 

What to watch | Capital Expenditure

Today's report is the intersection of the upswing in capex running into the Delta disruptions. Capex is expected to have been weak in Q3 as a result, but the key is how quickly the earlier momentum can be re-established. The investment plans component will be the best way to help inform whether the weakness is likely to be temporary or if the disruptions in Q3 may have a more prolonged effect. 

Australian construction activity -0.3% in Q3

Australian construction activity contracted by 0.3% in Q3, surprising to the upside on much more pessimistic expectations that were factoring in a larger hit from the Delta lockdowns. The temporary suspension of construction work in Sydney led to a large fall in the volume of work completed in NSW, though there was an offsetting rise in work done across the rest of the nation. Supply constraints continued to hold back activity in the residential sector. 

Construction Work Done — Q3 | By the numbers

• Construction work done was down 0.3% on the quarter to $53.9bn (chain volume estimate) against the market consensus for a significantly larger fall of -3%, to be 3.5% higher through the year. Activity in Q2 was revised materially higher to 2.2% from 0.8%. 

• Across the categories;
• Engineering work +0.4%q/q to $23.5bn (+4.0%Y/Y)

• Building work -0.9%q/q to $30.4bn (+3.2%Y/Y), which includes;

• Residential work 0.0% to $18.8bn (+7.0%Y/Y)

• Non-residential work -2.2%q/q to $11.7bn (-2.4%Y/Y) 

Construction Work Done — Q3 | The details 

The fall in Australian construction activity in Q3 was much more modest than anticipated. Work done was down by 0.3% in the quarter whereas the median estimate was for a 3% fall due to the disruptions to construction work during the winter lockdowns. The temporary shutdown of the construction sector in greater Sydney certainly had a material impact as the volume of work completed in NSW fell by 8.1% in the quarter, though outside of WA (-3.2%) there were broadly offsetting gains posted by the other states. This was led by Victoria (5.8%) with the statewide shutdown of the sector appearing to have occured too late in the quarter to be a factor in Q3's numbers. Meanwhile, work done in South Australia slowed to a 0.4% rise in Q3 after expanding by 21% through the first half. This may have been accentuated by the temporary suspension of construction work during the state's short lockdown.

At the national level, the 0.3% fall in quarterly activity centred on weakness in building work (-0.9%). This was driven by a large decline in public sector building (-9.7%) reflecting the disruptions in NSW. On the back of this, public sector work was down 2.7% overall in Q3. Private sector activity mostly offset this with a 0.5% rise in the quarter, with building (0.5%) and engineering work (0.4%) up by similar magnitudes. 

In the private sector, residential construction work was flat for the second consecutive quarter. The raft of stimulus measures to support housing construction led to a 7% surge in activity from the lows in 2020 during the period between Q3 last year and Q1 2021. However, the upswing has subsequently run into headwinds from the Delta lockdowns and capacity constraints as labour and materials have come in short supply, in turn driving up prices for builders.

On these effects, new home building posted its first quarterly fall in a year, down 0.8% in Q3. However, this was offset by the reacceleration in alteration work as the pipeline of renovations attracting the HomeBuilder grants was being worked through. Alterations were up 6%q/q after a weak Q2 (-3.3%). 

The COVID recession led to a protracted slowdown in private non-residential construction, only hitting the low point in Q1 of this year as firms either pushed back projects or cut them altogether. The cycle is starting to turn, albeit from a low base. Work done in this segment was up 1.4%q/q after rising by 1.7% in Q2. This emerging upswing is something to watch closely in 2022. Business surveys generally convey confidence and optimism going into next year and if the economy rebounds from the Delta disruptions as expected, the conditions may be right for business investment to help sustain the broader expansion as the effects of stimulus fades. More insights on this will come to hand in tomorrow's ABS quarterly capex survey.   

While activity from the public sector was weak in Q3 (-2.7%), there is a significant pipeline of major road and rail projects to come through over the coming years. Infrastructure development has been a key focus in many state government budgets since the pandemic.  

Construction Work Done — Q3 | Insights

Overall, the impact of the winter lockdowns on construction activity looks to have been less severe than would be factored in to most estimates of quarterly GDP. That said, those forecasts are also reflecting the construction shutdown in Victoria, which is a drag that today's report does not reflect. In the residential sector, the data indicates that the reported labour and materials shortages are a material constraint on output. The pace at which the now very elevated pipeline of work can be worked through in 2022 seems to largely hinge on how quickly these constraints can be alleviated. Meanwhile, the non-residential construction cycle is starting to turn and business investment could become a key factor in sustaining the economic expansion. Public sector investment remains supportive for the medium to long-term outlook. 

Preview: Construction work done Q3

Australian construction activity data for the September quarter are due to be published by the ABS today at 11:30am (AEDT). Construction activity is expected to have fallen sharply in Q3 due to the sector being heavily affected by restrictions following the winter outbreaks of the Delta variant. Meanwhile, shortages of labour and materials were an increasing constraint for the sector, in particular in the residential segment. 

    

As it stands | Construction Work Done

The uplift in construction activity over the first half of the year was a strong 2.4%, though the momentum faded in Q2 as output growth slowed to 0.8% from Q1's 2.4% increase. Activity was broadly level through the year (0.4%) but had more than recovered from 2020's pandemic-driven decline on the back of significant stimulus measures. 

The slowdown seen in Q2 was driven by the residential segment as the volume of private sector work completed was down 0.2% for the period after surging by 5.9% in Q1. New home building posted a 0.1% fall after lifting by 4.7% in Q2 while alterations were down 0.6% off a 12.8% rise in the prior quarter. 

The range of stimulus measures from the HomeBuilder grants, first home buyer incentives, low interest rates and the tailwinds from rising housing prices has led to a substantial rise in the residential construction pipeline. Strong demand was starting to run up against labour and materials shortages, slowing the pace at which projects were being worked through. 

Private non-residential construction was still contracting in response to the COVID recession with firms cutting or delaying projects, though Q2's decline of 0.4% was much more modest than in the past few quarters. 

Public sector construction activity lifted strongly by 3.2% in Q2. This was supported by rises in both engineering (3.8%) and building work (2.1%) as state governments accelerated the rollout of projects to drive local recoveries. This was spilling over to the private sector, which had seen a 2.7% rise in engineering activity over the first half. 

Market expectations | Construction Work Done 

Construction work done is expected to have fallen by 3.0% for the quarter according to the market median, with the range of forecasts between -6% to 0.5%. During the quarter, temporary industry-wide shutdowns occured in Sydney and the surrounding areas, Victoria and South Australia.    

What to watch | Construction Work Done

Today's report will provide a strong lead on the expected hit taken by residential construction from the winter lockdowns ahead of next week's Q3 GDP data. Increasing capacity constraints from labour and materials shortages are also likely to have been headwinds. Non-residential work will have been hit hard by the restrictions placed on construction sites and the movement of workers between sites.

Macro (Re)view (19/11) | Keeping options open

With Australia's inflation outlook taking on increased uncertainty and upside risks, optionality is the name of the game for the RBA. An important speech from Bank Governor Philip Lowe during the week discussed the global and domestic inflation trends and led to the conclusion that the inflation trajectory would depend on the rebalancing of spending patterns and the recovery in the labour market. The central scenario for the RBA is that the current inflation pressures are temporary and will ease as spending patterns rotate back towards pre-pandemic shares of durable goods and services, and the labour market adjusts to the increase in demand for the latter as reopenings broaden out. But it is acknowledged by the RBA that the situation could turn out differently and inflation pressures may be more persistent. Markets are therefore keeping rate hikes priced into next year's profile despite further direct push back on that scenario from Governor Lowe this week. October's meeting minutes cited the "shifting upwards" in the distribution of possible inflation outcomes and the potential for rate hikes to come earlier than its 2024 guidance as reasons for the Board formally ending its 3-year yield target policy. Of course, that came after the RBA decided not to defend the 0.1% target against a severe market repricing in the days leading up to the meeting. The ungainly exit from the policy that ensued clearly sits with some unease as the minutes revealed a review of the yield target is set to take place next year.

Governor Lowe's contribution to the transitory inflation debate this week centred on wages growth. The Governor puts forward that prices and wages are likely to move together over time. As such, the RBA will be looking to wages growth as a "guidepost" in assessing the stickiness of inflation. Governor Lowe's estimation is that sustainably delivering on the 2-3% inflation mandate is consistent with wages growth at "3 point something", based on inflation hitting the midpoint of the target and productivity gains of around 1%. This week's update of the Wage Price Index for Q3 showed there is a long way to go in achieving this. Growth in the headline WPI was in line with market and RBA estimates at 0.6% in the quarter and 2.2% over the year (reviewed here). Despite forecasts for the labour market to tighten considerably, the RBA expects wages growth to rise only gradually, due in large part to the inertia embedded into wage-setting processes in Australia. Annual reviews of increases to the minimum wage, years-long enterprise agreements and caps to limit growth in public sector wages are likely mean slow progress in wages recalibrating to a tightening labour market. Skills shortages looked to be generating upward pressure on wages growth in only a couple of industries in Q3, mainly in construction and professional services.    

Moving offshore to the US where prospects for a speedier recovery in the labour market amid the high rate of inflation are opening up talk of an acceleration in the Federal Reserve's tapering process. Current guidance is that Fed asset purchases will slow by $15bn per month to be completed by mid-2022. However, the Vice Chair Richard Clarida and Governor Christoper Waller said on Friday that a more accelerated withdrawal of QE might be appropriate if the economy achieves faster progress towards the Fed's objectives. This aligns with comments made by the St. Louis Fed President James Bullard earlier in the week, though a couple of other Fed officials had been of the view that the current taper schedule need not be sped up. This all comes with markets still awaiting a call from President Biden on his nomination to chair the Federal Reserve, the decision understood to be between the incumbent Jerome Powell and Fed Board member Lael Brainard. US data through the week was generally upbeat, indicating that momentum in the economy was building up after Q3's slowdown. Industrial production strongly outperformed expectations with a 1.6% rise posted in October, for its best increase in 8 months restoring production to pre-pandemic levels. But it was a strong report on retail sales that was the highlight of the week. October sales beat consensus rising by 1.7% (vs 1.4%) while the control group — a proxy for household consumption in GDP accounting — advanced by 1.6% (vs 0.9%) to be up sharply from a modest gain in September (0.5%). While there is an inflation component to these gains, that is well understood so the comfortable beat on expectations is significant. These outcomes saw both headline and control group sales accelerating further above pre-Covid levels.  

In Europe, rising Covid cases have put lockdowns and restrictions back on the table with winter approaching. On inflation, with euro area headline (4.1%yr) and core (2.0%yr) rates surging to highs dating back to 2008, a speech by ECB Executive Board member Isabel Schnabel set out the importance of taking a risk-management approach to monetary policy. The ECB's forward guidance is sending a strong signal that rates will not be lifted in response to inflation pressures seen as temporary, but it was appropriate to retain some optionality in the event that longer-term inflation expectations were to deviate from the target. In the UK, inflation for October came in hotter than expected as annual headline CPI lifted from 3.1% to 4.2% and the core rate elevated from 2.9% to 3.4% — both measures now at decade highs. The main contributor to the rise this month came from household energy prices following the increase to the price cap announced by the regulator. With the next reset due in April and given the surge in wholesale energy prices, inflation is expected to be pressing 5% by Q2 next year. Inflation pressures drove the Bank of England close to raising rates at its previous meeting, though it held back to await more data on the labour market as it transitioned off the furlough scheme. That data started coming to hand this week and with an upside surprise on employment pushing the unemployment rate down from 4.5% to 4.3%, a 15 basis point rate hike is priced in for the December meeting.

   

Australian Q3 Wage Price Index 0.6%; 2.2%yr

Australian wages growth returned to its pre-pandemic pace at a little above 2%Y/Y in the September quarter as the proportion of jobs receiving wage increases was more in line with historical patterns. However, the pace of wages growth remains slow and labour shortages look to be driving up wages in only a small number of industries, mainly construction and professional services. 

Wage Price Index — Q3 | By the numbers

• The headline WPI (total hourly rates of pay ex-bonuses) matched expectations in Q3 coming in at 0.6%q/q and 2.2% over the year. This was a rise in the pace from Q2 at 0.4%q/q and 1.7%Y/Y.  
• Private sector WPI increased by 0.6% in the quarter to be up 2.4% through the year; its fastest since Q1 2019. 
• Public sector WPI was stronger in Q3 rising by 0.5%, lifting annual growth off a record low to 1.7%.

Wage Price Index — Q3 | The details 

The Wage Price Index is the primary measure used to analyse wage inflation faced by employers in the Australian labour market. Importantly given the lockdowns seen in Q3, the WPI is not affected by changes in the quantity (or hours) of work done, nor by quality characteristics associated with an employee such as their qualifications or experience etc. In this way, the WPI is a reflection of the pure price change in labour from one quarter to the next using a sample of 18,000 matched jobs. It is therefore driven by changes in wage-setting behaviour, either through variations to awards, enterprise agreements or individual arrangements between employees and employers. Another important point is that the expenditure weightings used to construct the WPI are those from 2018, thus reflecting the composition of the labour market at that time. The pandemic delayed the ABS's reweighting process that was due to occur last year but this will now be incorporated into the next WPI report. Given the shifts in employment across industries caused by the pandemic, this is something to keep in mind in the analysis of today's report. 

In the September quarter, wage-setting patterns appeared to be returning towards pre-pandemic norms. ABS analysis finds that the proportion of jobs recording a pay rise in the quarter was in the historical range for this time of year (35-40%). The Covid shock had seen that figure fall to just 20% a year ago, reflecting the implementation of wage cuts and freezes as firms focused on making it to the other side of the lockdowns. In the quarters since, these measures have gradually been unwound leading to a recovery in wages growth. This remained a factor in Q3 as the low point for wages growth last year fell out of the annual calculation. As a result annual WPI growth lifted from 1.7% to 2.2%, to be around its pre-pandemic pace.

The main driver of wages growth in Q3 came from individual agreements, which is a reflection of the pockets of the labour market where shortages are driving upward pressure on wages. The contribution to wages growth from enterprise agreements was the strongest it has been for two years and is reflecting the end of wage freezes. The lift in the national minimum wage added only modestly to wages growth. This reflects the earlier decision by the Fair Work Commission to stagger the implementation of the increase in the industries hit hardest by the pandemic. 

Rather than turning to wage increases in an attempt to retain or attract new staff, many firms have been using other incentives such as sign-on or retention bonuses or offering more attractive conditions to workers. The increase in the WPI inclusive of bonuses measure was 0.8% in Q3, only a little stronger than the headline increase (0.6%).

At the industry level, the fastest pace of wages growth is being recorded in business services. This is being driven by strong demand for labour in professional services, with that industry recording the fastest rise in wages in the quarter (1.3%) and over the year (3.4%). Off the back of this, wages in admin and support have also rebounded to their pre-pandemic pace. Wages growth in rental, hiring and real estate services look to be rebounding on the strength of the residential property market.

In the goods-related sector, the main development is the acceleration seen in wages growth in the construction industry. Very strong demand for construction from stimulus measures and rising housing prices is creating competition for labour and this has pushed up wages growth in construction to a 7-year high at 2.6%Y/Y, though that is a modest pace in a historical context. Wages growth in manufacturing, retail and wholesale trade has recovered to around their pre-pandemic rates.

In the household services sector the effects of the pandemic are continuing to play out. Wages growth in health care, education and training and arts and recreation is yet to retrace their pandemic induced slowdown. This is to be expected given the widespread lockdowns that were in place in large parts of the nation in Q3 and the public sector wage policies that would be applying to health care and education industries in particular. On aggregate, wages growth in accommodation and food services is now a little above its pace in the years prior to the pandemic. This may be reflecting shortages for hospitality workers in the states that were not affected by lockdowns in Q3. 

Wage Price Index — Q3 | Insights

There are signs in today's report that wages growth in Australia is moving back towards pre-pandemic norms, but the pace remains low and is well short of what the RBA assesses would be consistent with an economy generating sustainable 2-3% inflation. There remains an absence of broad-based pressure on wages, though labour shortages look to be having a clear effect on wages growth in professional services and in construction. The "inertia" to which RBA Governor Philip Lowe referred to in yesterday's speech is likely to hold back wages growth stemming from enterprise agreements and changes in award rates. The area to watch is wages growth coming from individual agreements that can be more responsive to the labour market recovery. 

Preview: Wage Price Index Q3

Australia's Wage Price Index (WPI) for the September quarter is due to be released by the ABS at 11:30am (AEDT) today. The WPI measures wage inflation for employers in the Australian labour market. As RBA Governor Philip Lowe noted in his speech yesterday, with wages growth seen as "one of the guideposts" to meeting the target of sustainable 2-3% inflation this series carries a lot of weight going forward. The reversal of temporary wage cuts and freezes implemented early in the pandemic and the recovery in the labour market has seen wages growth rebound from the depths of 2020 over recent quarters. In today's report, annual growth in the WPI is expected to have returned to its pre-pandemic pace at a little above 2% despite the Delta lockdowns.  

As it stands | Wage Price Index

In the June quarter, the WPI printed below consensus estimates rising by 0.4%q/q to be 1.7% higher through the year. After slowing sharply in 2020 to a record low by Q3, annual growth in the WPI has lifted over recent quarters as temporary wage freezes and cuts implemented at the outset of the pandemic have been reversed. However, the WPI was still yet to recover to its pre-pandemic pace. 

The private sector WPI increased by 0.5% in Q3, moderating from the pace in the previous two quarters. Annual growth firmed from 1.4% to 1.8%. For the third consecutive quarter, growth in the public sector WPI was 0.4%q/q as existing wage caps and freezes were retained. A base effect established a new record low for annual growth as it eased from 1.5% to 1.3%. 

Before the recent Delta lockdowns, the strong recovery in the labour market had not generated broad-based wages pressure. Firms had generally responded by using non-wage strategies to retain or hire staff including sign-on or retention bonuses or offering more flexible working conditions to employees rather than raising base rates of pay. In the release, the ABS noted that there were only "a few isolated examples of skills shortages placing pressure on employers to meet expected market rates".  

Market expectations | Wage Price Index

For the September quarter, the market consensus is for a 0.6% rise between a range from 0.4% to 0.8%. Such an outcome would lift annual growth from 1.7% to 2.2%, driven by base effects with the low point for wages growth in the pandemic falling out of the calculation.  

What to watch | Wage Price Index

The main point markets will be interested in from today's release is how wages growth is tracking relative to the RBA's expectations. The recent RBA Statement on Monetary Policy forecast wages growth to reach 2¼% by the end of the year and rise only gradually thereafter. This is predicated on the "inertia" Governor Lowe referred to yesterday when he spoke about the wage-setting process in Australia. The effects of annual resets on the minimum wage, the presence of multi-year enterprise bargaining agreements and the slow adjustments to public sector wages meant that an acceleration in wages pressure would be difficult to generate. 

Macro (Re)view (12/11) | Transitory put to the test

The key event in Australia this week disappointed markets as October's labour force data came in weaker than expected. Employment was down for a third consecutive month falling by 46.3k against a median estimate (+50.0k) that was factoring in a reopening boost. The unemployment rate pushed up from 4.6% to 5.2%, exceeding the most bearish of forecasts (see summary charts below). Much of this weakness can be attributed to the earlier timing of the survey reference period, coming ahead of the end of the lockdowns and also coinciding with school holidays in several states. As a result, the continuation of the lockdown in Victoria weighed heavily in October. But there were positive outcomes for employment, participation and hours worked in New South Wales ahead of the state's reopening and this should be the start of what is to come as the recovery broadens out. Notably, participation in NSW had started to rebound rising from 61.8% to 62.6% and this drove the first increase in the national participation rate (64.5% to 64.7%) since the Delta lockdowns. With indicators of labour demand very elevated, participation returning to the record highs seen earlier in the year is key to the recovery. For a full review of the October Labour Force Survey see here.   

Survey data through the week were broadly supportive of a strong reopening rebound about to come through. Consumer sentiment on the Westpac-Melbourne Institute index lifted by 0.6% in November and remained at a strong level (105.3). The key outcomes were rising confidence in the economic outlook on both the 12-month (3.3%) and 5-year (2.6%) time horizons, supported by the now very high vaccination rates in the country. However, even more notable was the sharp fall in unemployment expectations to their best levels in around 25 years, with households sensing strong labour market conditions. All these indicators are clear positives for the household spending outlook. Meanwhile, the NAB Business Survey for October reported a reopening-driven surge in the confidence (+21 from +10) and conditions (+11 from +5) measures. However, price pressures for many businesses were on the rise, with input prices lifting to a decade high on the back of the constraints in global supply chains. 

— — —   

Moving offshore where it was the sharp upside outcome on US CPI inflation that gained much of the focus given the Federal Reserve's expectation for price pressures to be transitory. 12-month headline CPI lifted from 5.4% to 6.2% (vs 5.9% exp), its fastest since November 1990, while the annual core rate is now running at a high dating back to August 1991 after increasing from 4.0% to 4.6% (vs 4.3% exp). Supply constraints associated with the pandemic are continuing to keep the heat on inflation, but there were signs in the report that these pressures were broadening out. This was evident in services where the 12-month pace increased from 3.2% to 3.7% (and from 2.9% to 3.3% for the index excluding energy services), and also in housing costs as rents advanced from 2.4% to 2.7% and owners' equivalent rent pushed up to 3.1% from 2.9%. Strong consumer demand saw inflation for durable goods reaccelerate in October (to 13.2%Y/Y) after easing in the past few months. Meanwhile, energy prices elevated further to 30.0%Y/Y responding to supply shortages. Looking ahead, with pipeline inflation remaining high at 8.6%Y/Y on the PPI, upward pressure on consumer prices is set to persist as the Fed awaits a broader recovery in the labour market. 

In the UK, supply constraints and the rise of the Delta variant look to have been the contributing factors behind the slowing in the pace of the recovery. In Q3, GDP moderated to a 1.3%q/q rise after the reopening-boosted 5.2% lift in Q2. This brought UK GDP to within 2.1% of its pre-covid level; a threshold it is likely to return to by Q1 next year. In the most recent quarter, an easing in growth in household consumption, from 7.2%q/q to 2.0%q/q, drove the overall slowdown. There were signs of the Delta impact with spending growth in some areas such as restaurants and hotels and transport slowing, though overall the profile suggested the broader rebalancing away from goods into newly available services was continuing. Supply constraints may accelerate this shift, especially considering the inflationary pressures on goods. 

In the continent, despite headwinds to the outlook from supply constraints and rising inflation, the latest forecasts prepared by the European Commission show the economy is on track to move from recovery to expansion. Forecast EU GDP growth for 2021 was lifted from 4.8% to 5.0% before moderating to 4.3% in 2022 and then to 2.5% in 2023. The inflation forecasts have been lifted sharply, now seen hitting 2.4% this year from 1.9% previously, while there is a 0.8ppt uplift expected in 2022 to 2.2% before cooling to 1.4% in 2023.  

Australian employment -46.3k in October; Hours worked -0.1%

Australian employment declined against market expectations falling by 46.3k in October, largely reflecting the effects of the lockdown in Victoria. North of the border, there were positive signs for the recovery in New South Wales where employment, participation and hours worked all lifted ahead of the reopening. With lockdowns now ended and indicators of labour demand elevated, the recovery should broaden out over the coming months. The speed of the rebound in participation back to pre-Delta levels is now the key factor for the recovery. 

Labour Force Survey — October | By the numbers

• Employment (on net) fell by 46.3k in October, disappointing the market consensus for a rise of 50.0k. September's fall was revised to show a larger decline of -141.1k from -138k previously.

• Headline unemployment lifted from 4.6% to 5.2% (vs 4.8% expected), reflecting rises in unemployment and in the labour force.  

• Labour force participation increased slightly, to 64.7% from 64.5%, driven by a return of workers in NSW (+0.8ppt to 62.6%).  

• Hours worked softened in October falling by 0.1%m/m (-0.4%yr). A 3.9% surge in NSW ahead of the reopening was offset by weakness associated with the Victoria lockdown and school holidays in the other states. 

Labour Force Survey — October | The details

A number of crosscurrents affected the outcomes in today's labour market update. As touched on in the preview, the ABS shifted the reference period for the October survey forward by a week relative to what would normally have been the case, due to 2021 being a Census year. This meant that the reference period ended on October 9, before NSW had reopened and around 2 weeks before restrictions started to be eased in Victoria. It also reflected the effects associated with school holidays in some of the other states, between late September into early October. Although the ABS's seasonal adjustments are applied to account for the earlier reference period, this was an especially unusual time when considering the lockdowns in the two most populous states.    

These factors help to explain the weakness in October's employment outcome of -46.3k relative to the 50k rise forecast by markets. Overall, this takes the fall in employment over the Delta lockdowns to -333.7k since July. This represents a contraction of 2.5% over the period, much smaller than the 6.6% fall seen at the outset of Covid. In October, the full time segment (-40.4k) drove the headline fall in employment, with part time employment down modestly (-5.9k). But over the Delta lockdowns, part time employment has fallen by 250.3k, substantially larger than the 83.4k fall in the full time segment.  

Across the states in October, preparations ahead of the reopening led to a 21.7k rise in employment in NSW. But with the lockdown continuing in Victoria employment there fell by another 49.6k. Declines were also seen in Queensland (-7.8k), Western Australia (-4.4k) and Tasmania, coinciding with school holiday periods. 

Nationally, hours worked were down 0.1% for the month, smaller than the decline in employment (-0.4%). This left total hours worked down 2.1% on pre-pandemic levels. The recovery in NSW continued in October with hours worked up 3.9% after the tide started to turn in September with a 2.7% rise. However, the gain in NSW was offset by the impact of the lockdown on hours worked in Victoria (-4%m/m), while hours worked across the other states and territories fell sharply (-6.8%m/m) reflecting people taking leave during school holidays. According to today's report, around 189k people worked zero hours in October due to 'economic reasons', including around 97k in Victoria rising substantially from the previous month (74.2k).   

These dynamics also affected participation in the month. Nationally, the participation rate lifted slightly, from 64.5% to 64.7%, recording its first rise since May. NSW drove this increase as people started returning to the labour market ahead of the reopening; participation in the state lifted from 61.8% to 62.6% but was still well down on pre-Delta levels. However, the lockdown drove a further fall in Victoria (64.6% from 64.9%). Participation across the other states fell in Queensland, Western Australia and Tasmania but lifted in the other regions, including a 0.2ppt rise in the ACT (68.4%) as its lockdown came to an end. 

The configuration of rising participation into falling employment drove a sharp increase in the unemployment rate, from 4.6% to 5.2%, to its highest level since April. As more people return to the labour force in the coming months, the unemployment rate could drift higher, but the very elevated level of job vacancies, including the 7.8% rise reported by the federal government for October this week (see here), highlights labour demand is very strong. Reflecting the disruptions from lockdowns through the hit to hours worked, broader measures of spare capacity have been on the rise since mid year and this continued in October. The underutilisation rate has risen to 14.7% and the underemployment rate is now at 9.5%, with both backing up to their highest levels since late 2020.   

 

Labour Force Survey — October | Insights

A weak report today but this is one that more reflects statistical volatility than the underlying conditions in my interpretation. With lockdowns having run their course after vaccination rates reached key thresholds, the consensus can now form around a larger rebound in November than previously expected. Labour demand is clearly elevated in many industries and will support hiring. The key to the recovery now is the extent and pace at which participation rebounds.

Preview: Labour Force Survey — October

With the end of the Delta lockdowns in sight, today's Australian Labour Force Survey (due at 11:30am AEDT) is expected to show the recovery getting underway in October. Participation and employment are likely to have increased as preparations for reopening ramped up, while the rebound in hours worked should also continue after rising in September.    

As it stands | Labour Force Survey

In September, Australian employment fell to its lowest level since the start of the year as the Delta lockdowns continued. Following on from August's 146.3k decline, employment was down by a further 138k in September (vs -110k expected). In this latest outturn, the weakness came entirely in the part-time segment (-164.7k), extending its fall from August (-78.2k). Full-time employment posted a 26.7k rise in September, partially rebounding from the month prior (-68k).  

With large parts of the nation in lockdown, many workers had been stood down or were on reduced hours in recent months. For the period between May and August, hours worked had declined by 5.6%. September saw the early signs of recovery as hours worked lifted by 0.9%m/m, driven by rebounds in Queensland (5.4%) and New South Wales (2.7%).

The labour force participation rate was around record highs prior to the Delta lockdowns but had subsequently fallen to a 15-month low at 65.4% by September. This reflects the effects of the stay-at-home restrictions and the relaxation of income support requirements. In NSW, the fall had exceeded the depths seen at the outset of the pandemic, with participation in the state crunched to a 17-year low (61.8%). 

Nationally, the fall in participation has been larger than the decline in employment; a configuration that has seen the unemployment rate moving lower over recent months, from 5.1% in May to 4.5% in August before ticking up to 4.6% in September. A more reliable guide to conditions has come from underutilisation and underemployment, which factor in the loss of hours worked and these measures have backed up sharply over the lockdown period as a result.  

Market expectations | Labour Force Survey

The market expects the recovery to have gained traction in October, with the consensus for employment at 50.0k. However, the range of estimates around today's outcome is wide, sitting between -50k to 120k. Australia's unemployment rate is forecast to move up to 4.8% from 4.6% (range: 4.5% to 4.9%), driven by increasing participation. The extent to which upcoming reopenings were able to draw workers back to the labour force is the major uncertainty.  

What to watch | Labour Force Survey

One point to highlight is that the ABS has advised that the reference period for today's survey shifts forward by a week relative to what would normally be the case, due to 2021 being a Census year. In this case, today's survey will be reflecting hiring done in preparation for the reopening, before the lockdowns had ended. Yesterday's high-frequency payrolls data suggests this will mainly be coming from NSW and the ACT, with Victoria's initial reopening not occurring until later in the month. The weakness in the other states is likely associated with school holidays. Overall, the change in hours worked and participation rate will be the key indicators of the state of labour market activity.