Cliff Notes: a fine balancing act
Key insights from the week that was.
Critical data for Australia’s economy was received this week; elsewhere though, it was the mindset and actions of policy makers that filled the headlines.
Of the data received this week, Australia’s October labour force survey was most significant. Against the market’s expectation for a 15k increase in employment, 32k jobs were instead created in the month. This was despite activity being restricted by holidays and sick leave as well as the floods, with participation edging down 0.02ppts from 65.55% to 65.53%. As a result of these two outcomes, the unemployment rate declined to 3.4% in October, its lowest level since November 1974. Westpac expects a further marginal decline in the unemployment rate to 3.3% in coming months before employment growth slows below population growth and the unemployment rate begins to trend higher. Note, immigration’s revival has already been seen, growth in the working age population lifting from 0.6%yr last December to 1.2%yr in October. Highlighting the continued need for further labour force gains though, growth in hours worked remains ahead of population growth, and underemployment is also near record lows.
It is not surprising then that wage growth in the private sector showed strength in Q3 2022. Underlying the 1.0% gain in the headline Wage Price Index was not only the largest minimum wage/award increase in more than a decade, but also a notable lift in individual bargaining agreements. Hence, private sector wages posted its largest quarterly gain since September 2010, up 1.2% in Q3 to be 3.4% higher than a year ago. Additionally, nearly half of the jobs in the private sector reported an increase in compensation; and of those that did, the average increase was a stellar 4.3% in the quarter. We expect the tightness in the labour market to continue flowing through to strong wage increase over next year, with the headline measure to rise from 3.6%yr in 2022 to 4.5%yr in 2023.
Meanwhile, steady progress in the recovery of overseas travel was evident in the October overseas arrivals and departures release, but it is clear that the pace is slowing. Since the June/July holidays, the seasonally adjusted three-month average growth rate for arrivals has declined from 18.8% in August to 6.2% in October; and for departures, it has fallen from 12.6% to 2.9%. The December/January period will see a strong boost to travel, but the recent easing in travel flows raises questions around the extent to which momentum can be sustained in 2023. The visa detail however remains constructive, with net arrivals of students and temporary workers tracking average monthly gains well above pre-pandemic levels – at around 20k/month and 10k/month respectively. This should, in time, go some way towards alleviating the critical labour undersupply problems Australia currently faces.
The November meeting minutes of the RBA were also received this week. While still highlighting the inflation challenge before Australia, the tone of these minutes was more dovish at the margin, their view on the interest rate outlook moderated to the Board “expects to increase interest rates further over the period ahead” in November from “likely to require further increases in interest rates over the period ahead” in October. Clearly, having raised interest rates aggressively through 2022 and with uncertain lags between policy announcement and effect, the RBA Board seem to increasingly be of the view that the risks to activity as well as inflation need to be monitored, and also believe that “acting consistently” will “support confidence in the monetary policy framework among financial market participants and the community more broadly”. While Westpac continues to believe the RBA will need to raise the cash rate to a peak of 3.85%, this is likely to only occur in 25bp increments, with 3.85% reached in May 2023.
Jumping to the US. This week’s data was decidedly mixed, with October retail sales ahead of expectations (1.3% for headline and 0.7% for the control group, albeit with part of the strength due to price movements) but the PPI, industrial production and housing data weaker. The focus of market participants was instead the run of Fedspeak delivered through the week. While there was some variation across speakers, the take home point from their messaging was that policy needs to remain restrictive for some time and that we have not yet seen this cycle’s peak for the fed funds rate. Arguably this cautious attitude towards the outlook is being evinced because we are yet to see a succession of weaker CPI prints and as the labour market is still historically tight. Until slack increases, the FOMC want to keep financial conditions tight; that requires the market to remain focused on upside risks for inflation and policy. It is unlikely to be a coincidence that this tone was struck just after the US 10 year yield breached the 4.0% level to the downside.
Over in the UK, overnight the Sunak Government delivered a Fiscal Update that stood in stark contrast to its predecessor. The Government’s fiscal package involves £55bn of fiscal tightening over the next five years, comprised of £30bn in spending cuts and £25bn of tax hikes, the latter the largest tax increase in three decades. The budget’s major profiles were of little surprise to markets though given a broad outline had already been circulating in the media over recent weeks. The OBR’s assessment does however emphasise the stark fiscal outlook, with the tax burden set to reach 37.1% of GDP (a post-war record) and net debt to peak at 97.6% of GDP in 2025/26 before easing modestly upon the improvement of economic conditions. Indeed, the economy is expected to remain in recession through to 2024 as historic inflation pressures see UK households face the largest fall in real wages in six decades, declining 7% into 2023/24. Overall, the budget was welcomed as a more appropriate fiscal stance given the high-inflation environment, but risks to the activity outlook are firmly to the downside, raising the possibility of a deeper and more sustained period of negative and/or below-trend growth should inflation pressures persist longer than expected.
Whereas the US and UK’s growth prospects into 2023 are weak to very weak, China’s momentum looks to be strengthening. In our view, the market was right to discount the weaker-than-expected October activity data – with retail sales hit by lockdown uncertainty in the month and total fixed asset investment resilient despite even weaker conditions for housing – given the significant increase in support for the economy announced at the weekend.
As we highlighted this week, these changes make clear that authorities are now seeking a return to growth for the housing sector and, more importantly, that China is embarking on a progressive domestic re-opening of their economy, with large-scale lockdowns to be avoided from now on. That guidance on the latter comes as case loads reach new highs in many regions signals authorities’ intent to seek to live with the virus. It is critical however that these measures restore confidence across the economy. Without that, the robust growth we are forecasting cannot eventuate (3.5% for 2022 and 6.0% in 2023; year-average). While secondary to a domestic re-opening, the market will also continue to assess geopolitical uncertainties and their impact on trade. Meetings held at this week’s G20 were constructive, but there needs to be follow through if trade relations with the West are to improve. In the meantime, China is likely to continue investing into expanding their Asian markets which have shown considerable promise of late.
Stay informed with Westpac IQ
Get the latest reports straight to your inbox.
Related articles
Browse topics
Disclaimer
©2025 Westpac Banking Corporation ABN 33 007 457 141 (including where acting under any of its Westpac, St George, Bank of Melbourne or BankSA brands, collectively, “Westpac”). References to the “Westpac Group” are to Westpac and its subsidiaries and includes the directors, employees and representatives of Westpac and its subsidiaries.
Things you should know
We respect your privacy: You can view our privacy statement at Westpac.com.au. Each time someone visits our site, data is captured so that we can accurately evaluate the quality of our content and make improvements for you. We may at times use technology to capture data about you to help us to better understand you and your needs, including potentially for the purposes of assessing your individual reading habits and interests to allow us to provide suggestions regarding other reading material which may be suitable for you.
This information, unless specifically indicated otherwise, is under copyright of the Westpac Group. None of the material, nor its contents, nor any copy of it, may be altered in any way, transmitted to, copied of distributed to any other party without the prior written permission of the Westpac Group.
Disclaimer
This information has been prepared by the Westpac and is intended for information purposes only. It is not intended to reflect any recommendation or financial advice and investment decisions should not be based on it. This information does not constitute an offer, a solicitation of an offer, or an inducement to subscribe for, purchase or sell any financial instrument or to enter into a legally binding contract. To the extent that this information contains any general advice, it has been prepared without taking into account your objectives, financial situation or needs and before acting on it you should consider the appropriateness of the advice. Certain types of transactions, including those involving futures, options and high yield securities give rise to substantial risk and are not suitable for all investors. We recommend that you seek your own independent legal or financial advice before proceeding with any investment decision. This information may contain material provided by third parties. While such material is published with the necessary permission none of Westpac or its related entities accepts any responsibility for the accuracy or completeness of any such material. Although we have made every effort to ensure this information is free from error, none of Westpac or its related entities warrants the accuracy, adequacy or completeness of this information, or otherwise endorses it in any way. Except where contrary to law, Westpac Group intend by this notice to exclude liability for this information. This information is subject to change without notice and none of Westpac or its related entities is under any obligation to update this information or correct any inaccuracy which may become apparent at a later date. This information may contain or incorporate by reference forward-looking statements. The words “believe”, “anticipate”, “expect”, “intend”, “plan”, “predict”, “continue”, “assume”, “positioned”, “may”, “will”, “should”, “shall”, “risk” and other similar expressions that are predictions of or indicate future events and future trends identify forward-looking statements. These forward-looking statements include all matters that are not historical facts. Past performance is not a reliable indicator of future performance, nor are forecasts of future performance. Whilst every effort has been taken to ensure that the assumptions on which any forecasts are based are reasonable, the forecasts may be affected by incorrect assumptions or by known or unknown risks and uncertainties. The ultimate outcomes may differ substantially from any forecasts.
Conflicts of Interest: In the normal course of offering banking products and services to its clients, the Westpac Group may act in several capacities (including issuer, market maker, underwriter, distributor, swap counterparty and calculation agent) simultaneously with respect to a financial instrument, giving rise to potential conflicts of interest which may impact the performance of a financial instrument. The Westpac Group may at any time transact or hold a position (including hedging and trading positions) for its own account or the account of a client in any financial instrument which may impact the performance of that financial instrument.
Author(s) disclaimer and declaration: The author(s) confirms that (a) no part of his/her compensation was, is, or will be, directly or indirectly, related to any views or (if applicable) recommendations expressed in this material; (b) this material accurately reflects his/her personal views about the financial products, companies or issuers (if applicable) and is based on sources reasonably believed to be reliable and accurate; (c) to the best of the author’s knowledge, they are not in receipt of inside information and this material does not contain inside information; and (d) no other part of the Westpac Group has made any attempt to influence this material.
Further important information regarding sustainability-related content: This material may contain statements relating to environmental, social and governance (ESG) topics. These are subject to known and unknown risks, and there are significant uncertainties, limitations, risks and assumptions in the metrics, modelling, data, scenarios, reporting and analysis on which the statements rely. In particular, these areas are rapidly evolving and maturing, and there are variations in approaches and common standards and practice, as well as uncertainty around future related policy and legislation. Some material may include information derived from publicly available sources that have not been independently verified. No representation or warranty is made as to the accuracy, completeness or reliability of the information. There is a risk that the analysis, estimates, judgements, assumptions, views, models, scenarios or projections used may turn out to be incorrect. These risks may cause actual outcomes to differ materially from those expressed or implied. The ESG-related statements in this material do not constitute advice, nor are they guarantees or predictions of future performance, and Westpac gives no representation, warranty or assurance (including as to the quality, accuracy or completeness of the statements). You should seek your own independent advice.
Additional country disclosures:
Australia: Westpac holds an Australian Financial Services Licence (No. 233714). You can access Westpac’s Financial Services Guide here or request a copy from your Westpac point of contact. To the extent that this information contains any general advice, it has been prepared without taking into account your objectives, financial situation or needs and before acting on it you should consider the appropriateness of the advice.
New Zealand: In New Zealand, Westpac Institutional Bank refers to the brand under which products and services are provided by either Westpac (NZ division) or Westpac New Zealand Limited (company number 1763882), the New Zealand incorporated subsidiary of Westpac ("WNZL"). Any product or service made available by WNZL does not represent an offer from Westpac or any of its subsidiaries (other than WNZL). Neither Westpac nor its other subsidiaries guarantee or otherwise support the performance of WNZL in respect of any such product. WNZL is not an authorised deposit-taking institution for the purposes of Australian prudential standards. The current disclosure statements for the New Zealand branch of Westpac and WNZL can be obtained at the internet address www.westpac.co.nz .
Singapore: This material has been prepared and issued for distribution in Singapore to institutional investors, accredited investors and expert investors (as defined in the applicable Singapore laws and regulations) only. Recipients of this material in Singapore should contact Westpac Singapore Branch in respect of any matters arising from, or in connection with, this material. Westpac Singapore Branch holds a wholesale banking licence and is subject to supervision by the Monetary Authority of Singapore.
U.S.: Westpac operates in the United States of America as a federally licensed branch, regulated by the Office of the Comptroller of the Currency. Westpac is also registered with the US Commodity Futures Trading Commission (“CFTC”) as a Swap Dealer, but is neither registered as, or affiliated with, a Futures Commission Merchant registered with the US CFTC. The services and products referenced above are not insured by the Federal Deposit Insurance Corporation (“FDIC”). Westpac Capital Markets, LLC (‘WCM’), a wholly-owned subsidiary of Westpac, is a broker-dealer registered under the U.S. Securities Exchange Act of 1934 (‘the Exchange Act’) and member of the Financial Industry Regulatory Authority (‘FINRA’). In accordance with APRA's Prudential Standard 222 'Association with Related Entities', Westpac does not stand behind WCM other than as provided for in certain legal agreements between Westpac and WCM andobligations of WCM do not represent liabilities of Westpac. This communication is provided for distribution to U.S. institutional investors in reliance on the exemption from registration provided by Rule 15a-6 under the Exchange Act and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors in the United States. WCM is the U.S. distributor of this communication and accepts responsibility for the contents of this communication. Transactions by U.S. customers of any securities referenced herein should be effected through WCM. All disclaimers set out with respect to Westpac apply equally to WCM. If you would like to speak to someone regarding any security mentioned herein, please contact WCM on +1 212 389 1269. Investing in any non-U.S. securities or related financial instruments mentioned in this communication may present certain risks. The securities of non-U.S. issuers may not be registered with, or be subject to the regulations of, the SEC in the United States. Information on such non-U.S. securities or related financial instruments may be limited. Non-U.S. companies may not be subject to audit and reporting standards and regulatory requirements comparable to those in effect in the United States. The value of any investment or income from any securities or related derivative instruments denominated in a currency other than U.S. dollars is subject to exchange rate fluctuations that may have a positive or adverse effect on the value of or income from such securities or related derivative instruments.
The author of this communication is employed by Westpac and is not registered or qualified as a research analyst, representative, or associated person of WCM or any other U.S. broker-dealer under the rules of FINRA, any other U.S. self-regulatory organisation, or the laws, rules or regulations of any State. Unless otherwise specifically stated, the views expressed herein are solely those of the author and may differ from the information, views or analysis expressed by Westpac and/or its affiliates.
UK and EU: The London branch of Westpac is authorised in the United Kingdom by the Prudential Regulation Authority (PRA) and is subject to regulation by the Financial Conduct Authority (FCA) and limited regulation by the PRA (Financial Services Register number: 124586). The London branch of Westpac is registered at Companies House as a branch established in the United Kingdom (Branch No. BR000106). Details about the extent of the regulation of Westpac’s London branch by the PRA are available from us on request.
Westpac Europe GmbH (“WEG”) is authorised in Germany by the Federal Financial Supervision Authority (‘BaFin’) and subject to its regulation. WEG’s supervisory authorities are BaFin and the German Federal Bank (‘Deutsche Bundesbank’). WEG is registered with the commercial register (‘Handelsregister’) of the local court of Frankfurt am Main under registration number HRB 118483. In accordance with APRA’s Prudential Standard 222 ‘Association with Related Entities’, Westpac does not stand behind WEG other than as provided for in certain legal agreements (a risk transfer, sub-participation and collateral agreement) between Westpac and WEG and obligations of WEG do not represent liabilities of Westpac.
This communication is not intended for distribution to, or use by any person or entity in any jurisdiction or country where such distribution or use would be contrary to local law or regulation. This communication is not being made to or distributed to, and must not be passed on to, the general public in the United Kingdom. Rather, this communication is being made only to and is directed at (a) those persons falling within the definition of Investment Professionals (set out in Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the “Order”)); (b) those persons falling within the definition of high net worth companies, unincorporated associations etc. (set out in Article 49(2)of the Order; (c) other persons to whom it may lawfully be communicated in accordance with the Order or (d) any persons to whom it may otherwise lawfully be made (all such persons together being referred to as “relevant persons”). Any person who is not a relevant person should not act or rely on this communication or any of its contents. In the same way, the information contained in this communication is intended for “eligible counterparties” and “professional clients” as defined by the rules of the Financial Conduct Authority and is not intended for “retail clients”. Westpac expressly prohibits you from passing on the information in this communication to any third party.
This communication contains general commentary, research, and market colour. The communication does not constitute investment advice. The material may contain an ‘investment recommendation’ and/or ‘information recommending or suggesting an investment’, both as defined in Regulation (EU) No 596/2014 (including as applicable in the United Kingdom) (“MAR”). In accordance with the relevant provisions of MAR, reasonable care has been taken to ensure that the material has been objectively presented and that interests or conflicts of interest of the sender concerning the financial instruments to which that information relates have been disclosed.
Investment recommendations must be read alongside the specific disclosure which accompanies them and the general disclosure which can be found here. Such disclosure fulfils certain additional information requirements of MAR and associated delegated legislation and by accepting this communication you acknowledge that you are aware of the existence of such additional disclosure and its contents.
To the extent this communication comprises an investment recommendation it is classified as non-independent research. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and therefore constitutes a marketing communication. Further, this communication is not subject to any prohibition on dealing ahead of the dissemination of investment research.