Cliff Notes: Consumers bearing the brunt of inflation’s cost
Key insights from the week that was.
This week, updates on sentiment and the labour market put the Australian consumer in the spotlight. The US CPI report meanwhile again highlighted the challenge the FOMC face in bringing down services inflation.
The Westpac-MI Consumer Sentiment survey delivered a sour update on confidence. After earning some reprieve through the Christmas/New Year period, the headline index fell by 6.9% in February. At 78.5, confidence has returned to the lows seen last November, and before that the onset of the pandemic and the GFC. Households are clearly unnerved by the persistence of widespread inflationary pressures and the hawkish shift in the RBA’s guidance in early 2023. The survey’s sub-indexes clearly highlight both the fragile state of family finances and the likely implications for spending, with family finances versus a year ago 30% below long-run average levels and ‘time to buy a major household item’ 38% below average. For a detailed analysis of these topics, see this week’s video update by Senior Economist Matthew Hassan and/or our February Market Outlook in conversation podcast.
Of the data received domestically this week, the January labour force survey was most significant. Over the last two months, total employment has declined by 35.5k and the unemployment rate has risen 0.2ppts to 3.7% – results that are typically consistent with a softening trend emerging in the labour market. However, it is important to recognise that the survey also reported a rise in the number of unemployed people who have lined up a job in the near feature similar to the rise in unemployment. Additionally, the 2.1% decline in seasonally adjusted hours worked indicates a higher-than-usual number of people taking annual leave in January. Taken together, this suggests that some caution should be applied to recent labour force data, especially given that business (see below) and household surveys (see above) are still pointing to robust labour demand. Slack in the labour market will begin to emerge more clearly in time but we do not expect this to occur until H2 2023, with the unemployment rate forecast to rise to 4.6% by year-end.
The recovery in immigration flows has led to robust growth in the working age population, holding firmly above pre-pandemic levels at 2.1%yr. Indeed, there has been a surge in overseas arrivals and departures over the Christmas/New Year period, with seasonally adjusted estimates indicating that this strength is close to patterns seen during the pre-pandemic years. Although travel by Australian residents constitutes the bulk of this, it was promising to see the recovery in net visitor arrivals strengthen over the course of 2022, lifting from 420k in H1 to 675k in H2. The return of international visitors from China – a segment that has lagged the broader recovery to date – will be a key support over the coming year; however, broader strength in visitor flows will need to be sustained through 2023 before overseas travel can return to pre-pandemic levels.
Before moving offshore, a quick note on businesses. The latest NAB business survey suggests that business conditions and confidence were supported by robust consumer spending. Results from consumer segments have remained broadly constructive, with the large swings in overall conditions over the last two months (-8pts in Dec; +5pts in Jan) the result of extreme volatility within the mining, manufacturing and construction segments over a tricky survey period impacted by holidays. The +6pt bounce in confidence was also associated with the continued easing in labour costs and overall upstream price pressures, although mounting headwinds around the interest rate outlook and prospective weakness in consumption will likely dominate over 2023.
The key release in the US this week was the January CPI report. The 0.5% headline and 0.4% core results were as expected, as was the detail of the release. Core goods prices were little changed in the month, with a decline in used vehicle prices offsetting robust gains for apparel and medical care commodities. Core services inflation remained strong however, with prices up 0.5%. Within services, rent inflation continues to crest at a historically high rate, the downtrend reported for market measures of rents yet to flow through; also supporting the 0.7% total shelter gain in January was a strong rise in the cost of short-term accommodation (1.2%), arguably a consequence of demand from both US and international holiday makers.
While in line with expectations, the January CPI release is notable because it again highlights the stickiness of services inflation and consequently the challenge before the FOMC to return headline inflation to target. We still expect this to occur, but not until late-2023, necessitating a lengthy pause in FOMC policy once the peak rate is reached.
On demand, US January retail sales were also released this week. At +3.0%, the headline result was a material upside surprise to the 2.0% consensus view. Stripping out the monthly volatility and looking at the control group measure, spending growth was still strong at 1.7% and also ahead of the market’s expectation of 1.0%. Prices were supportive in the month, but the principal driver of the outsized gain is instead the weak results of late-2022, with the level in January only 0.4% higher than October in nominal terms. This multi-month result speaks to our expectation that the US economy will stagnate through 2023, albeit with volatility seen quarter to quarter.
Across in Europe, Q4 GDP was meanwhile confirmed at +0.1%, signalling the Euro Area is also likely to experience economic stagnation versus recession. However, as laid out on the Europe page of our February Market Outlook, the caveat to this view is that, in Q4, the country outcomes offset one another bar Ireland’s 3.5% gain. This result is not a one off, but with annual growth now at 15.7%yr, Ireland’s momentum seems unlikely to sustain for much longer. If the other Euro Area economies remain weak, a run of negatives is still a distinct possibility for Euro Area GDP, although the scale of cumulative decline is likely to be small given the strength of their labour market.
With the Euro Area now likely to outperform the US in 2023, and most certainly market expectations from 2022, Euro is expected to continue its uptrend during H2 2023 and 2024. Asian currencies are expected to be stronger still, outperforming the US dollar trend as they benefit not only from a sustainable growth advantage but also retreating inflation and rate risks. Australia’s dollar should follow the example of Asia, rising to USD0.74 end-2023 and USD0.77 end-2024.
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