Q4 Australian Construction Activity -3.0%; 7.4%yr

The downturn in Australia's construction cycle intensified in the December quarter as activity contracted by much more than expected on renewed weakness in the residential sector, possibly accentuated by the summer bushfires. Furthermore, non-residential and engineering work also weakened in the quarter, with construction activity likely to weigh notably on next week's GDP growth outcome for Q4.     

Construction Work Done — Q4 | By the numbers

• Total construction activity (including the private and public sectors) fell by 3.0% in the December quarter to $49.773bn; much sharper than the 1.0% contraction expected. Activity in Q3 was revised up by the ABS in today's report to show a modest 0.4% rise from the -0.4% decline reported initially. Construction activity showed a steeper decline through the year from -5.6% to -7.4%. 
• The headline results were;  
• Residential work -4.6%q/q to $17.486bn (-12.8%Y/Y)
• Non-residential work -3.4%q/q to $11.451bn (+3.3%Y/Y)
• Engineering work -1.5%q/q to $20.836bn (-8.0%Y/Y)

Construction Work Done — Q4 | The details 

Australia's construction cycle remains mired in a sharp downturn with overall activity now having contracted in 5 of the past 6 quarters. This has has been driven by a rollover in residential construction work, residual weakness as remaining large-scale projects in the LNG sector completed and a slowdown in public works.   

Private sector construction activity showed renewed weakness in Q4 with a 4.2% fall to $37.674bn, driving the decline in annual terms from -5.0% to -9.7%. Engineering work pulled back for a 4th consecutive quarter with a 3.1% fall to $12.152bn (-13.3%yr), with tomorrow's capital expenditure data to provide further insight here. Building work fell by 4.6% in the quarter to $25.522bn to be contracting at its fastest pace in annual terms (-7.9%yr) in the post-GFC period. 

Within this, the residential construction cycle saw accelerated weakness in Q4 with activity falling by 4.6%; its sharpest quarterly fall since mid 2003, to be down by 12.6% over the year. This downturn is the deepest the sector has experienced since the early part of this century following the introduction of the GST. New home building contracted by 5.1% in the quarter (-13.5%yr), while alterations were down by a more modest 1.2% in Q4 (-5.6%yr).

Non-residential (commercial) building followed its volatile profile from the past few quarters in falling by 4.7% to $8.216bn, though this was after a 7.8% rise in Q3. Activity in this category is positive through the year (3.3%) and reflects strength in approvals from earlier in 2019. 

The public sector is providing some offset to weakness in the private sector, with activity lifting modestly in Q4 by 0.7% to $12.1bn as annual growth came back into expansion (+0.5%) for the first time in more than a year. Engineering (infrastructure) work drove this outcome rising by 1.0% in the quarter to $8.683bn (0.7%yr) and building work was flat in Q4 at $3.415bn (-0.1%yr). Overall, public works appears to be regaining momentum after coming through a slowdown between the second half of 2018 and the first half in 2019, and with an elevated pipeline of projects to be completed, it should remain supportive for the growth outlook.  

From a state perspective, the table (below) provides the breakdown for total construction work done in Q4 and over the year. In New South Wales, the construction cycle has been heavily impacted by the rollover in the residential sector, though strength in commercial work has proved some offset, while engineering work has been weak over the past year or so. It has also been a weak picture in Victoria, albeit not to the same extent as its northern counterpart. Residential weakness has weighed heavily on the construction sector in Queensland and Western Australia, with the full impact from the unwind in mining investment also being felt by these states, though commercial work has at least picked up. Following strength in 2018, both South Australia and Tasmania were mired in weakness by the end of 2019.  

Construction Work Done — Q4 | Insights

This was a much weaker-than-anticipated outcome and next week's national accounts are likely to show that construction activity weighed notably on GDP growth in Q4, led by the residential sector. There is a possibility that Q4's weakness has been accentuated by the summer bushfires and related smoke haze, with the ABS reporting some minor disruption to its data collection in New South Wales, Victoria and the Australian Capital Territory, but this is coming amidst a downturn in the construction cycle in any case. The contrast between private sector construction activity (-4.2%qtr, -9.7%yr) and the public sector (0.7%qtr, 0.5%yr) remains consistent with one of the key dynamics over the past year or so in the Australian economy, whereby private demand conditions have been weak at a time when growth in public demand has been expanding at a robust pace. A strong pipeline of public infrastructure work is likely to see this continue. The recent upswing in house prices and improving momentum in dwelling approvals will likely result in the downturn in the residential construction cycle ending by around Q3 or Q4, but not before subtracting further from GDP growth through the first half of 2020. 

Preview: Construction Work Done Q4

The ABS is due to release the latest update of Australian construction activity covering the December quarter at 11:30am (AEDT) today, which will feed into next week's GDP growth outcome for Q4. The nation's construction cycle fell into a downturn from the second half of 2018 as the residential sector rolled over, work on major LNG projects wound down and public works slowed. Expectations are that activity contracted further over the final months of 2019, potentially impacted by the bushfires and related smoke haze.    

As it stands | Construction Work Done

Construction activity recorded a fifth consecutive quarterly decline with a 0.4% contraction in Q3 to be down by 7.0% through the year, though this is well above the trough in the cycle of nearly -17.5%Y/Y in Q3 2018. 

Private sector residential construction activity fell by a further 3.0% in Q4 with the decline in annual terms increasing from -8.1% to -10.4% making this downturn its sharpest in more than 18 years. New home building saw a 3.4% contraction in Q4 as the pace of decline through the year steepened from -8.5% to -10.7%, while alteration work was broadly flat in the quarter (- 0.2%) but down by 7.9% across the year. Private non-residential (commercial) work provided some offset with a 4.1% rise in Q4 for an annual gain of 6.4% in response to an earlier upswing in approvals. Private engineering work remained weak with a 4.6% fall in Q4 (-11.4%yr), which largely reflected the wind-down in the final stages of the remaining large-scale LNG projects under construction.  

Public sector works lifted for the first time since the June quarter 2018 with a 5.4% rise in Q4, slowing the annual decline from -13.4% to -5.1%. This was led by renewed strength in engineering (infrastructure) activity (6.4%qtr) following several soft quarters but it remained down on the level from a year earlier (-7.0%). Public building rebounded from weakness in the previous two quarters rising by 2.6% in Q4 to be little more than flat through the year (0.4%).

For a full review of construction activity in Q3 see here 


Market expectations | Construction Work Done 

For today's outcome, the consensus forecast according to Bloomberg's survey of economists is for construction activity to fall for a sixth straight quarter with a 1.0% contraction in Q4. The range of individual estimates is between -3.0% and +0.6%. 


What to watch | Construction Work Done

Details on private residential construction activity are key, with the possibility that weakness in the cyclical downturn may have been accentuated in Q4 due to disruptions associated with the bushfires and smoke haze. Activity in December quarter is also likely to reflect sharp declines in dwelling approvals through Q2 and Q3. 

Macro (Re)view (21/2) | Support from central banks remains key

The labour market was the key focus in Australia this week as the latest updates on wages and employment confirmed an ongoing persistence of spare capacity. For the Reserve Bank of Australia (RBA), lowering spare capacity is key but while it still has policy space and the preparedness to ease further, it is far from a straightforward case for the Board. Wages growth remained confined to the slow lane in Q4 as the Wage Price Index lifted by 0.5% in the quarter and 2.2% on the year, both as expected and unchanged from Q3 (reviewed here). While wages growth has lifted off its 2016 lows of around 1.9% in annual terms, the momentum of this gradual uptrend faltered over the second half of 2019 in line with a slowing in the pace of employment growth.

In the private sector, wages growth posted its 4th consecutive quarterly rise of 0.5% but the annual pace moderated from 2.25% to 2.16% to its softest in more than a year. A sharper slowdown was seen in the public sector, with the quarterly pace stepping down from 0.5% to 0.4% as annual growth weakened from 2.49% to 2.25% to a 3-year low. The cross-industry breakdown highlighted the weakness of the wages impulse, with the pace of wages growth picking up in only 5 of 18 measured industries over the year, including in the mining and healthcare sectors. Outside of the Fair Work Commission's 2019 decision to raise the minimum wage by 3.0%, there appears to be very little underlying pressure being applied to wages from labour market conditions. 

This week, the first update on the labour market for 2020 was released by the ABS (reviewed here). The good news was that employment posted its third straight above-consensus result with a 13.5k increase in January, with markets anticipating a more modest rise of 10.0k. However, with the participation rate ticking up from 66.0% to 66.1%, employment growth in the month was vastly slower than growth in the labour force. As a result, the unemployment rate was driven from up 5.08% to 5.29%, which was its sharpest rise (+0.21ppt) in a single month in 4 years and unwound the declines achieved over the final two months of 2019. Of more concern for policymakers, spare capacity in the labour market became more elevated at the start of 2020, rising to its highest levels since mid 2018 as the underemployment rate (workers currently wanting more hours) lifted from 8.3% to 8.6% and the underutilisation rate (including the underemployed and unemployed) rose from 13.4% to 13.9% (see chart of the week, below).

Chart of the week

These are challenging dynamics for the RBA. On the one hand, it will see workforce participation at or near record highs as a long-term positive that will add to the nation's growth potential, but on the other, the current pace of employment growth means that it can only achieve gradual progress towards its objectives of full employment and inflation within the 2-3% target. The RBA's minutes from its February meeting showed that the Board had discussed further lowering that cash rate in an attempt to speed up the pace of employment growth and bring it closer to meeting its objectives, though it opted against that action on the basis that more time was needed to assess the impact of its three rate cuts in 2019, while it had also become mindful that even lower rates could pose risks to financial stability with house prices continuing their upswing. The Board's deliberations on policy settings are set to become even more nuanced following the outbreak of the coronavirus, which it noted: "presented a material near-term risk to the economic outlook for China and for international trade flows, and thereby the Australia economy". The Bank's recent set of updated forecasts implied that it anticipates activity to be held back over the first half of 2020, due largely to the coronavirus and bushfires, before picking up over the second half. Overall, it appears the Board will seemingly be prepared to look through some weakness in the near-term data flow, though its confidence in its outlook will be tested if this shows signs of being a more material deterioration.  

— — —

Moving abroad, the response to the coronavirus outbreak from authorities in China ratcheted up as the People's Bank of China (PBoC) announced a range of interest rate cuts, while government sources in media reports had also indicated that the banking sector had been providing key firms with cheap loans to support activity through the disruption. The stimulus measures saw Chinese equity markets surge higher on the week, though concerns around the global economic outlook in the face of the outbreak saw weakness ensue across the other regions. The first signs of the disruption caused outside of China were provided on Friday through weak Purchasing Managers' Index (PMI) readings for Japan, with manufacturing conditions falling further into contraction from 48.8 to 47.6, while the services sector swung from modest expansion (51.0) into contraction at 46.7. This followed a much sharper-than-expected contraction in activity in Japan in Q4 where GDP fell by 1.6%, and while this was influenced by a sharp decline in household spending following a rise in the sales tax rate from 8% to 10%, effective from the start of the quarter, it also reflected weakness from business investment and residential construction. 

In the US, the minutes of the Federal Reserve's (Fed) policy meeting at the end of January were released, where the Committee remained on hold and continued to assess that the "current stance of monetary policy (1.5-1.75%) was appropriate" to support the ongoing expansion in the economy, strong labour market conditions and inflation returning to target. Vice Chair of the Federal Reserve Richard Clarida reaffirmed these themes during the week, noting that "the fundamentals in the US are strong... It's a good picture". However, the Committee is clearly cautious on the global outlook due to the prominence of risks around trade uncertainty and the coronavirus, highlighted in the minutes by the line that it is "mindful of the possibility that the tentative signs of stabilization in global growth could fade". A deterioration in the global economy would have implications for the US and, most likely, the Fed's policy stance and this played through markets this week as yields across the curve flattened; the 10-year Treasury yield going sub 1.5% for the first time since 2016. Meanwhile, US equity markets reflected this risk-averse sentiment where declines accelerated after February's flash PMI readings came in weaker than expected, with the composite index falling into contraction for the first time in more than 6 years (from 53.3 to 49.6), which was driven activity in the services sector rolling over from 53.4 to 49.4 to signal its first contraction in 4 years. In the manufacturing sector, activity was also weaker in the month, though it was still able to remain in expansion at 50.8. 

Over in Europe, expectations were that Friday's flash PMI reads would show signs of the impact of the coronavirus spilling over into activity in the bloc. In the event, the readings came in better than expected, with the composite PMI for the Eurozone rising to a 6-month high of 51.6, as the services sector continued to show resilience (52.8) amid the ongoing contraction in manufacturing (49.1). In the Account of the European Central Bank's most recent policy meeting, released this week, the Governing Council had agreed that the performance of the services sector was a sign that its stimulus measures announced back in September were supporting the economy, even though investment intentions were still weak. With the euro area being heavily trade-exposed economy, the completion of the phase one deal between the US and China had been generally perceived as lessening the downside risks to the outlook. Nonetheless, some members had warned against becoming Governing Council "becoming too optimistic". Certainly, caution seems warranted on this week's PMI readings, with the impacts of the coronavirus on supply chains, tourism and external demand seemingly yet to be reflected in the data. 

Australian employment +13.5k in January; Unemployment rate 5.3%

Australian employment lifted by more than expected in January with a 13.5k increase, but that was outweighed by a sharp rise in the unemployment rate to 5.3% as the declines achieved towards the end of 2019 were unwound. 

Labour Force Survey — January | By the numbers

• Employment on net increased by 13.5k (seasonally adjusted) in January, beating the consensus estimate (+10.0k) for the third straight month. December's initially reported 28.9k increase was revised to 28.7k.

• Australia's unemployment rate lifted by more than expected rising from 5.1% to 5.3%, where consensus had been for a more gradual uptick to 5.2%.  
• Underutilisation rate increased from 13.4% to 13.9% and the underemployment rate lifted by 0.3ppt to 8.6%, with both measures rising to their highest since June 2018. 

• Workforce participation rate edged up unexpectedly by 0.1ppt to 66.1% (expected: 66.0%), just below its record high of 66.2%.

• Aggregate hours worked declined by 0.4% in January — its weakest monthly outturn since May 2018 — as the annual pace pulled back from 2.2% to 0.9%. 

Labour Force Survey — January | The details

Starting on a positive note, January's employment outcome of 13.5k was stronger than the 10.0k rise anticipated by markets and followed the outperformance recorded in November (37.1k) and December (28.7k). The last time employment came in ahead of consensus for three straight months was between March and May 2019. The downside was that employment in January was not nearly strong enough to meet the number of new entrants into the labor force (44.6k) as the participation rate lifted from 65.99% to 66.09%. As a result, the total of unemployed increased by 31.0k, which equated to the unemployment rate rising by its most (0.21ppt) in a single month in 3 years from 5.08% to 5.29%, unwinding the declines recorded in November and December.  

Arguably, of more concern to the Reserve Bank of Australia will be the rise in spare capacity. The underemployment rate (counting workers who want and are available to work more hours) increased from 8.3% to 8.6%, and the underutilisation rate (combining the unemployed and underemployed) escalated from 13.4% to 13.9%. An elevated level of spare capcity continues to restrain the pace of wages growth in Australia, as highlighted in yesterday's WPI data for Q4 (see here).  

Breaking January's employment outcome down, the 13.5k increase was the net result of full-time employment rebounding from several weak months rising by 46.2k, while the part-time segment declined by 32.7k after showing strength in the preceding two months. In annual terms, the pace of employment growth eased from 2.06% to 1.94%. Annual growth in the full-time segment softened from 1.76% to 1.65% and part-time moderated from 2.72% to 2.58%.

Aggregate hours worked were notably weaker in January falling by 0.4%, though the ABS's analysis had found no significant bushfire-related impact, while annual growth was lowered from 2.2% to a soft 0.9%. On an average basis, hours worked per employee declined by 0.6% to 137.1 hours in January to be down by 1.0% from a year earlier. 

Looking across the states, employment outcomes were generally subdued in the month; New South Wales -1.5k, Victoria +2.9k, Queensland +2.8k, Western Australia +6.7k, South Australia +1.0k and Tasmania +0.3k. In terms of unemployment rates, South Australia was the only state to record a decline this month falling from 6.2% to 5.7%. New South Wales' unemployment rate was maintained at 4.5%, but there were increases for all other states; Victoria from 4.9% to 5.4%, Queensland from 5.7% to 6.3%, Western Australia from 5.4% to 5.8% and Tasmania from 5.5% to 5.9%. 

Labour Force Survey — January | Insights

Employment growth softened over the second half of 2019, though the year did finish on a somewhat positive tone after the strong outcomes in November (37.1k) and December (28.7k). Today's result was much more modest at 13.5k, but taking into account the strength towards the end of 2019, the 3-month average has lifted to 26.4k off lows of around 9.0k between October and November. The surprise in today's report was the sharp rise in unemployment and spare capacity more broadly, even allowing for the increase in participation. The Reserve Bank of Australia has made it clear that further easing will be dependent on a deterioration in labour market conditions, and while today's report in isolation probably does meet meet that qualification yet, the warning signs are there. 

Preview: Labour Force Survey — January

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

As it stands | Labour Force Survey

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

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

For a full review of December's report see here 

         

Market expectations | Labour Force Survey

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

What to watch | Labour Force Survey

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

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

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

Wage Price Index — Q4 | By the numbers

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

Wage Price Index — Q4 | The details 

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

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

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

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

  

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

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

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

   

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

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

Wage Price Index — Q4 | Insights

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

  

Preview: Wage Price Index Q4

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

As it stands | Wage Price Index

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

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

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

Market expectations | Wage Price Index

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

What to watch | Wage Price Index

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

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

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

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

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

Chart of the week

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

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