Preview: Labour Force Survey — April

Australia's Labour Force Survey for April is due at 11:30am (AEST) today. Seasonality has led to a run of volatile employment outcomes in recent months, and this could continue today with the April survey coinciding with the Easter holiday period. Amid this uncertainty, the consensus forecast is for employment to rebound by around 22k in the month but for the unemployment rate to lift to 3.9%. 

A recap: Volatility continued but employment lifted solidly in Q1 

Employment surprised to the downside in March falling by 6.6k against expectations for a modest 7.2k increase. This was another in a series of volatile employment outcomes over recent months coming off the back of a 117.6k surge in February. Amid the volatility, employment increased solidly over Q1 (122.3k), an average increase of 40.8k per month. 

The decline in employment in March saw the unemployment rate rise from 3.7% to 3.8%, with a larger increase kept at bay due to an easing in the participation rate (66.6% from 66.7%). Although the unemployment rate increased, the broader underemployment rate declined from 6.6% to 6.5%, leaving the total labour force underutilisation rate unchanged at 10.3% - remaining at its lowest since October last year.

Hours worked advanced by 0.9% in March but were flat over Q1. Over the past year, labour market conditions have remained resilient to the economic slowdown in Australia, but an adjustment has played out through slower growth in hours worked. The annual pace in hours worked has stepped down to a 1.7% pace from 6.5% a year ago. 

Seasonal volatility again a factor in April

The consensus estimate is for employment to rise by around 22k in April, with the band of estimates ranging from -10k to 45k. As that range suggests, there is little conviction over what the outcome will be. This is partly due to seasonal effects. The reference period for the April survey commenced on Easter Sunday and took in school holidays in a few states. Payrolls data published by the ABS last week showed a 0.6% decline in the employment index for the month to mid-April, highlighting the seasonal impact of the holiday period. How that translates to a seasonally adjusted figure for employment is the big question, one which cannot be answered with any certainty. A slight uptick in the unemployment rate to 3.9% is anticipated (range: 3.8% to 4%), based on the participation holding flat (66.6%). 

 

Australian Q1 Wage Price Index 0.8%; 4.1%yr

The sequential slowing in the pace of Australia's Wage Price Index (WPI) continued in the March quarter. Base wages moderated to a quarterly increase of 0.8%, below expectations (0.9%) and the slowest rise since Q1 2022. After rising alongside the economic recovery from the pandemic since the second half of 2020, annual wages growth has started to ease printing at 4.1% from 4.2% previously. Today's report is consistent with wages growth moderating in response to an easing in labour market conditions.  

The WPI - a measure of wage inflation in the Australian labour market - was 0.8% in the first quarter of 2024, slowing from 1% in the previous quarter and well down on the equal-record 1.2% increase seen in Q3 last year. This slowing has been driven by a moderation in the pace of wages growth tied to individual agreements, while the effect on wages growth from large legislated increases to the minimum wage and awards (determined by the Fair Work Commission) and new enterprise bargaining agreements (EBAs) mostly passed through in the previous two quarters. Today's report suggests annual wages growth (4.1%) is around its peaks - consistent with the forecasts in last night's Federal Budget and the RBA's May outlook. 

Private sector wages growth matched the outcomes of the headline index. The 0.8% increase in the most recent quarter was the slowest recorded in 2 years, while the annual rate (4.2% to 4.1%) dipped for the first time since the pandemic crisis. 

ABS analysis reported that just 12% of private sector jobs saw a pay increase in Q1. The average pay increase for these jobs was 4.4%, unchanged from the previous quarter but well below the 5.8% pace seen in Q3 last year.  

In the public sector, wages growth pulled back to 0.5% in the quarter following a very strong increase in Q4 (1%) that was linked to the implementation of new EBAs and other wage policies coming into effect. The annual pace declined sharply from 4.3% to 3.8% driven by a base effect relating to a very strong quarterly rise in Q1 2023 (1%) falling out of the calculation. 

Aggregating the latest estimates for wages growth across the industries tracked by the ABS suggests the pace has either levelled out or is starting to ease. Wages growth across industries in business services and in goods-related areas continued to move sideways in Q1. Meanwhile, wages growth in household services slowed. 

Preview: Wage Price Index Q1

Australia's Wage Price Index (WPI) for the March quarter is due to be published at 11:30am (AEST) today. Wages growth neared 15-year highs at the end of 2023 at an annual pace above 4%. There are signs that wages growth is around its peak for the cycle, with labour market conditions easing but still remaining tight overall. In today's report, wages growth is expected to remain around 4.2%. 

A recap: Wages growth continued to rise into year-end  

The WPI increased by 0.9% in the December quarter to an annual pace of 4.2%, a near 15-year high. After falling to cycle lows of 1.4% during the pandemic crisis, wages growth accelerated alongside the economic recovery as the labour market tightened and wage-setting processes adjusted to a high inflationary backdrop.  

Wages growth in the most recent quarter was driven by the public sector, which saw its fastest quarterly increase (1.3%) since 2009. This drove the annual pace from 3.5% to 4.3%, overtaking growth in private sector wages (4.2%) for the first time in this cycle. The catch-up in the public sector reflects new wage agreements progressively coming into effect, including in specific industries such as healthcare and education.     

There were signs in the Q4 report that wages growth may be around its peak, consistent with the level of tightness in the labour market having eased. Wages growth in the private sector tends to be more responsive to changes in underlying economic conditions, and wages growth in the sector appears to be stabilising. Additionally, wages growth for workers on individual agreements (most commonly used in the private sector) has softened slightly. However, new enterprise bargaining agreements (both in the private and public sector) are continuing to come into effect with a lag and so are expected to contribute further upward pressure on wages growth. Meanwhile, the bulk of the recently legislated increases to the minimum wage and awards determined by the Fair Work Commission have already flowed through to wages growth. 

RBA Chart, May Statement on Monetary Policy 

Wages growth to remain firm in the March quarter

Expectations are that wages growth remained firm in the March quarter; the consensus estimate going into today's report is for a 0.9% quarter-on-quarter outcome (range: 0.8% to 1%), which would hold the annual pace around 4.2%. In last week's Statement on Monetary Policy, the RBA reaffirmed its view that wages growth is around its peaks for the cycle, highlighting wage developments for individual agreements as a sign of responsiveness to the easing in labour market conditions. This is also informed by the year-ahead view on wages growth reported by firms in the RBA's liaison program, with the pace anticipated to slow to around 3.5%.

Australian Federal Budget 2024/25: Competing pressures

The Australian Federal Budget for 2024/25 was handed down by the treasurer in Canberra this evening. The sizeable revenue upgrades that have driven the budget into surplus for two years in succession are moderating as pressures on governments at the federal and state levels to deliver key services and infrastructure are driving up the outlook for spending. In the short term, the government has prioritised delivering cost-of-living support, set to provide around $9.5bn of stimulus in 2024/25. 

Budget 2024/25 | Fiscal Position

Although Australia will post a second consecutive budget surplus in 2023/24, larger deficits are now expected in the coming years. Following a $22.1bn surplus in 2022/23, a $9.3bn surplus is forecast for the current financial year - upgraded from a $1.1bn deficit anticipated in the Mid-Year update (MYEFO) published last December. As the chart below shows, so-called cyclical factors have swung the budget into surplus over the past couple of years. Resilient economic conditions; very low unemployment; and elevated commodity prices are key factors that have contributed to delivering a revenue windfall to the government.  

This has put Australia in an unusual position among peer economies in running twin surpluses; the current account has been in surplus for an extended period that now dates back to mid-2019. 

However, with the economy slowing, commodity prices set to retrace and structural pressures on the nation's finances intensifying, the budget is expected to fall back into deficit in 2024/25 (-$28.3bn) and remain in the red through the forward estimates. These structural pressures on the Budget were identified in the 2023 Intergenerational Report and include spending associated with climate change, an ageing population, regional security and the increased demand for care and support services. Cumulatively, deficits to 2026/27 are now forecast to run to $88.5bn, a deterioration from the $74.6bn in deficits anticipated in MYEFO. 

The deterioration comes about due to revenue windfalls moderating alongside rising government spending. Government receipts are now expected to peak at 25.8% of GDP this financial year (up from 25.6% in MYEFO) but to then slow to 25.1% of GDP by 2026/27. By contrast, government payments - although revised down to 25.4% of GDP in 2023/24 from 25.7% in MYEFO - have increased across the forward estimates to a peak of 26.6% of GDP in 2025/26.   

As a result of the deterioration to the fiscal outlook, the profile for net debt has also worsened relative to the forecasts in the MYEFO. From 18.6% of GDP in 2023/24 (18.4% previously), net debt grinds higher to 21.8% of GDP in 2026/27 (up from 20.8%).    

Budget 2024/25 | Policy Measures 

New policy measures announced in the Budget are framed around providing support for the cost of living (including the stage 3 tax cuts) as well as in other areas such as defence and aged care and for the government's initiative to revive local manufacturing to assist with the net zero transition. The net cost of these measures is substantial - $9.5bn in 2024/25 for a total of $23.2bn to 2026/27. Major items include: national defence ($5.7bn over 4 years), energy bill relief ($300 rebates to every household, total cost $3.5bn over 3 years); new Pharmaceutical Benefits Scheme listings ($3.4bn over 5 years); road and rail infrastructure ($2.9bn over 5 years); Future Made in Australia initiative ($2.6bn over 5 years); aged care ($2.2bn over 5 years); Commonwealth rent assistance ($1.9bn over 5 years); Stage 3 tax cuts ($1.3bn over 5 years).  

Budget 2024/25 | Economic Outlook

The evolution in Treasury's economic forecasts since the 2023/24 Budget is presented in the table below. Alongside a slowing global economy, the outlook for domestic growth has been revised lower. This results in softer employment growth over the next couple of years; however, the path for the unemployment rate is little changed - signalling a soft landing scenario remains the central view. A retracement in commodity prices sees the terms of trade fall but at a slower pace than earlier forecast.   

The major point of contention in this budget is around the inflation outlook. As a result of the government's energy bill relief and rent assistance, Treasury forecasts inflation could be back inside the RBA's 2-3% target band by the end of the year, with these measures expected to deduct around 0.5ppt from headline CPI in 2024/25. This is a faster timeline than forecast by the RBA (second half of 2025) and is contentious in the sense that these measures could free up households to boost spending in other areas. 

Macro (Re)view (10/5) | RBA remains neutral

European equities stood out this week posting strong gains to close at or near record highs. US equities and most Asian indices saw steady rises. Moves on key currency crosses were limited, though the US dollar rebounded against the Yen following last week's interventions by the authorities in Japan. US CPI data is the key risk event next week, while in Australia the Federal Budget and reports on wages (Q1) and the labour market (April) are ahead.   

There was lull of key events out of the US this week, leaving markets continuing to trade the narrative of April's softer-than-expected payrolls report validating dovish Fed messaging on 2024 rate cuts. This will be put to the test next week with CPI and retail sales data due on Wednesday. Producer prices (Tuesday) will give markets an early steer to the CPI outcome. Meanwhile, Chair Powell is set to speak in Europe (Tuesday), headlining a busy week of appearances from other Fed officials, notably NY Fed President Williams (Thursday) and Governor Waller (Friday).   

The Bank of England's Monetary Policy Committee (MPC) held a steady hand on interest rates (5.25%) and on its guidance that policy "needs to be restrictive for an extended period" at this week's meeting, but with the MPC sounding less concerned about the risks of inflation remaining persistently elevated the easing cycle appears to be nearing. Post-meeting rates pricing indicates the timing of the first cut is a close call between June and August, set to swing one way or the other on the upcoming data. Meaningful steps towards the easing cycle were inferred from developments including the MPC's 7-2 vote (as Ramsden joined Dhingra in voting for a cut); new forecasts projecting inflation to fall below target over the next couple of years; and dovish comments from Governor Bailey at the media conference, notably that it was "likely" rates would need to be cut "over the coming quarters" and that it was possible more cuts would be needed than is currently priced into markets. 

Those comments about the potential for lower interest rates was in the context of downward revisions to the inflation outlook in the May Monetary Policy Report. Conditional upon the market-implied path for the BoE's interest rate, inflation is projected to come back to the 2% target within a two-year timeframe - two quarters earlier than previously anticipated - and to then fall further to 1.6% in 2027. Governor Bailey's point was that a scenario where interest rates are cut by more than currently priced may be needed if, in the current best judgments of the Bank, inflation risks falling below target by the end of the forecast horizon. A key part of that assessment is that the MPC now assesses that the risk of high inflation persisting due to 'second-round' effects on wages and prices has eased; however, Governor Bailey said there were varying views on this judgment amongst individual MPC members. 

Over at the ECB, the account of the April meeting effectively set out the roadmap to culminate in a June rate cut. For "a few members" there was a strong enough case to cut in April but ultimately the majority of the Governing Council needed a little more convincing. Comments from many ECB officials since that meeting indicate the threshold to cut will be crossed in June. The policy outlook beyond June is highly uncertain, however, and is likely to be conditional upon the ECB staff macroeconomic projections to be updated at the next meeting.   

Attention domestically was on the RBA's policy meeting. The Board's decision to keep rates unchanged (4.35%) was no surprise but there was a strong reaction in markets via a weaker AUD and lower bond yields as the neutral guidance that it was "not ruling anything in or out" was retained and then reaffirmed in the press conference against expectations for a more hawkish lean. Updated forecasts in the May Statement on Monetary Policy lifted the near-term inflation outlook; however, the return to the midpoint of the 2-3% target band remained on a mid-2026 timeframe under a higher for longer cash rate path. More detailed analysis can be found in my review of the RBA meeting here. On the data docket this week, retail trade volumes contracted 0.4% in the March quarter, a weak outturn that underscored the headwinds to household consumption from the increased cost of living and higher interest rates (see here). 

RBA keeps rates steady in May

There were few surprises at today's RBA meeting. Interest rates were left unchanged (cash rate 4.35% and exchange settlement rate 4.25%) and the Board held the line that it "is not ruling anything in or out". Two years on from the start of the tightening cycle, inflation remains well above the 2-3% target band but the Board is content that monetary policy is in a good place to see the job through without inflicting too much damage on the economy and the labour market. With the RBA's messaging defying expectations for a more hawkish tone, the Australian dollar weakened and bond yields declined sharply.

Broadly speaking, my interpretation of today's developments was that the RBA has not lost patience with its strategy, aiming to gradually return inflation to target while preserving the labour market. Governor Bullock said at the post-meeting press conference that a rate hike had been discussed but the Board concluded it was not warranted. This was despite the near-term outlook for inflation rising in the May Statement on Monetary Policy: headline inflation is now expected to end the year at 3.8% (from 3.2% previously) with the core rate at 3.4% (from 3.1%), upgrades that reflect stronger services inflation, a tighter labour market and higher petrol prices. Governor Bullock said the Board could remain "vigilant" to these risks without needing to act now. 

Notwithstanding the higher outlook near term, inflation is still projected to return to the midpoint of the target band by the end of the projection horizon in mid-2026. This is largely because the new assumption for the cash rate in the May forecasts is notably higher than in the February forecasts, reflecting the global repricing of expectations for easing cycles. Imputing market pricing, the May forecasts push back the timing for the first rate cut to mid-2025, ending the projection period in mid-2026 (3.8%) around 50bps higher than assumed in February.

Although the implicit assumption is for the cash rate to stay restrictive for longer, there was minimal effect on the growth outlook other than a slight moderation in GDP growth this year from 1.8% to 1.6%. On the labour market, the RBA has been surprised by the resilience it has seen this year, resulting in its outlook for the unemployment rate being trimmed from 4.3% to 4.2% in 2024 and from 4.4% to 4.3% in 2025. For some time, I had been of the view that the unemployment rate would rise more slowly than the RBA was projecting, so this was an encouraging development. 

Australian retail sales volumes -0.4% in Q1

Following a temporary boost from the Black Friday sales ahead of Christmas, weakness in Australian retail volumes returned falling by 0.4% in the March quarter. The ABS reported this was the 5th decline for retail volumes in the past 6 quarters, with cost-of-living pressures and higher interest rates seeing households cutting back, particularly on discretionary-related purchases. 

Retail volumes (retail sales adjusted for inflation) fell by 0.4% for the 3 months to March. The weakest outcomes were in household goods (-2.9%) and department stores (-0.4%), driving an overall decline of 0.7% across the discretionary categories. However, volumes increased in clothing and footwear (1.3%), cafes and restaurants (0.3%) and 'other' retailing (0.5%). Food volumes were flat in the quarter. 

Over the past year, retail volumes have decreased substantially by 1.3%. This is partly inflated by the post-pandemic rotation to services spending, while new vehicle sales - not a component of the retail data - have also been very strong; however, household demand has unequivocally pulled back in the retail sector as the headwinds from the higher cost of living and RBA rate hikes have impacted. Weaker demand (as well as improvements on the supply side) has seen retail price growth slow materially to a pace around 2.5% in year-ended terms from 6% a year ago. Because prices have kept rising (albeit at a slowing pace), retail spending in nominal terms increased over the past year (1.2%) - despite the large contraction in underlying demand. 

The weakness in retail volumes is especially notable as it has come alongside rapid population growth driven by post-pandemic inward migration. Adjusting for the population increase, retail volumes are even weaker on a per capita basis, falling for the 7th quarter in a row in Q1 (-1%). This leaves per capita volumes just 3.3% above their pre-pandemic level at the end of 2019, compared to a 9.7% increase in headline volumes over the period.  

Preview: RBA May Meeting

The RBA Board is widely expected to leave its key interest rate unchanged (4.35%) at today's meeting (decision due 2:30pm AEST). Aside from the decision, today provides the platform for the RBA to firmly set the narrative on the policy outlook via updated growth and inflation forecasts and at Governor Bullock's post-meeting press conference. 

A recap: RBA leaves all options on the table 

At its March meeting, the Board left the cash rate at 4.35%, a setting unchanged since last November. Over this period of steady interest rates, the Board's guidance has shifted gradually from a tightening bias back in November to a more neutral stance by March where "the Board is not ruling anything in or out". Although this shift has been meaningful, its messaging on policy has essentially remained the same: monetary policy is working to slow demand and bring down inflation but a return to the 2-3% inflation target band is not yet assured. By contrast, markets have been much less stable in their outlook, swinging from pricing in 2-3 rate cuts in 2024 at the start of the year, then expecting no rate cuts, and more recently moving towards pricing in further tightening.  

RBA to hold a steady hand, though a hawkish turn is a risk 

Turning to today's meeting, I think rates will remain on hold, with the Board retaining the line that it is not ruling anything in or out. In March, the risks to both sides of the RBA's mandate for inflation and employment were judged to have become "a little more even" and I don't expect a material change to this assessment today. That view is based upon the Board remaining content that inflation is still projected to return to target "within a reasonable timeframe", currently expected in mid-2026.    

The main risk is that the Board takes a more hawkish turn if the new forecasts (prepared by RBA staff, not the Board) to be published today contain upward revisions to the inflation outlook following the stronger-than-expected Q1 CPI report. Currently, headline inflation (3.6%Y/Y) is projected to ease to 3.3% by mid-year; 3.2% by year-end and eventually near the midpoint of the target band in mid-2026 (2.6%). Similarly, the core rate (4%Y/Y) is seen at 3.6% mid-year; 3.1% year-end; and 2.6% in mid-2026. The RBA's tolerance to a mid-2026 timeframe is subject to the incoming risks it sees, particularly in the areas it has highlighted including services prices and labour costs; if that tolerance is breached then it could hike again, or at least strengthen the signal it sends today that it could do so at an upcoming meeting.   

One factor to consider, however, is that the conditioning assumption used for the cash rate in the new forecasts will be higher than it was in the February Statement on Monetary Policy. In February, the cash rate profile (an amalgamation of market pricing and economists' views) factored in 4-5 rate cuts over the next couple of years to mid-2026, including 2 cuts in 2024. Market pricing now discounts 2 cuts at most by the end of 2025. A higher cash rate track will put downward pressure on the forecasts for inflation and growth while pushing up the outlook for the unemployment rate (3.9% average in Q1), currently projected to rise to 4.3% by year-end and 4.4% by 2025.

Macro (Re)view (3/5) | US outlook takes a dovish turn

Rates pricing in the US shifted notably this week, with markets restoring the prospect of 2024 rate cuts following the Federal Reserve's policy meeting and softer-than-expected employment data. US bond yields rallied and the dollar declined. Most notably, the US dollar fell several figures against the Yen this week as the authorities in Japan intervened (yet to be confirmed) to push against the substantial depreciation in its currency. 

Although the decision by the Federal Reserve's policy-setting FOMC to leave rates unchanged at 5.25-5.5% was seen as a foregone conclusion, the tone of Chair Powell's press conference defied expectations to push back more aggressively on prospects for near-term rate cuts in the US. As it was - and despite recent inflation readings - Chair Powell said the committee viewed monetary policy as well calibrated and that further rate hikes were "unlikely". Additionally, there were credible paths the US economy could take that would warrant rate cuts, despite the data currently not giving the FOMC adequate assurance that inflation is headed back to the 2% target on a sustainable basis. The one tweak the FOMC did make was to slow the pace of balance sheet reduction, from a cap of $60bn/mth to $25bn/mth for its Treasury holdings, effective from June. 

Given the sentiment coming out of the meeting, a nonfarm payrolls report for April that was softer than expected gave markets the green light to renew pricing for rate cuts in 2024. Employment increased by 175k in the month, below estimates for 240k as a net 22k was subtracted off payrolls over February and March. This saw the unemployment rate tick up from 3.8% to 3.9% alongside an unchanged participation rate (62.7%). Perhaps the most impactful aspect of the report was the slowing in average hourly earnings growth from 4.1% to 3.9%yr, a sign that easing tightness in the labour market is reducing wage pressures - albeit that was not the signal markets had taken away from the Employment Cost Index (4.2%Y/Y in Q1) earlier in the week.

Last week, PMI data showed economic activity in the euro area was picking up following a lengthy period of stagnation since the back half of 2022. Consistent with that signal, GDP data for the March quarter came in above expectations expanding by 0.3% (vs 0.1%). Taken together, these are tentative signs that the weak growth over the past year (0.4%) is starting to turn. With the labour market having remained resilient to the economic slowdown (the unemployment rate held at a record low of 6.5% in March) and inflation declining materially, real household income dynamics have improved, likely supporting consumption growth - particularly in the services sector. 

On inflation, the latest data was broadly as expected with the headline HICP printing at 0.6%m/m in April to leave the annual pace at an unchanged 2.4%. Core inflation remains firm to the headline rate at 0.7%m/m and 2.7%yr (vs 2.6%), though it eased slightly from 2.9%yr in March as prices in the key services basket cooled to 3.7%yr from 4%. Overall, markets saw this as validating a June rate cut from the ECB. The ECB's Chief Economist Lane spoke during the week highlighting that the Governing Council is moving towards dialing back restrictive monetary policy and in doing so it is managing "two-sided risks" from easing too quickly before inflation is well contained and staying overly restrictive for too long potentially leading to a downturn.

In Australia, attention turns to next week's RBA meeting. Rates are expected to remain on hold (4.35%), leaving much of the focus around the Board's messaging on the policy outlook that will accompany a revised set of growth and inflation forecasts. Different from the likes of the Fed and ECB, commentary from RBA officials is limited between meetings, so there is an element of uncertainty around whether the messaging that the Board "is not ruling anything in or out" from a policy perspective will be tweaked following the firmer-than-expected Q1 inflation report. 

The activity data published this week suggests that monetary policy is restrictive and is working to slow demand. In a large downside surprise, March retail sales fell by 0.4% driven by a post-summer pullback in spending across discretionary-related categories (see here). Dwelling approvals rose by 1.9% in March but fell to their lowest quarterly total in 12 years, with higher interest rates, capacity pressures and weak sentiment all headwinds (see here). On the other hand, conditions in the established housing market remain hot: housing prices lifted for the 15th consecutive month in April, generating an associated upturn in housing finance commitments of 3.1% in March to a 19-month high (see here), though this more reflective of tight supply than the stance of monetary policy. Meanwhile, the trend of narrowing trade surpluses continued, with the surplus for March ($5bn) retracing to its lowest level in more than 3 years (see here).