Cliff Notes: seeking clarity on labour market conditions
Key insights from the week that was.
In Australia, the March Labour Force Survey provided some much-needed clarity on labour market conditions after an incredibly volatile opening to the year. Following an upwardly revised gain of nearly 118,000 in February, employment fell only modestly in March, down by just 6,600. On a quarter-average basis, employment’s momentum was strong in Q1 at 2.7%yr but consistent with a trend softening from 2023’s 3.0%yr. At the same time, the declines in average hours worked per employee have become less severe, H2 2023’s correction of 2.7% followed by a more modest 0.4% fall in Q1 2024 (both in quarter-average terms). Consequently, the net effect on total hours worked, or total labour usage, was flat in the opening months of this year.
The unemployment rate ticked up slightly from 3.7% in February to 3.8% in March, its three-month average of 3.9% virtually unchanged from Q4 2023. With labour demand’s softness largely presenting in average hours, underemployment continued to rise (albeit slightly) in the opening quarter, from 6.5% in December to 6.6% in March on a quarter-average basis. The stronger-than-expected degree of resilience suggested by these figures are broadly mirrored by other measures of spare capacity, including hours-based underutilisation, youth unemployment, vacancies-to-unemployment and indicators from business surveys.
On balance, this update presents a slightly better read on the underlying state of labour market conditions in Q1 2024. On average, outcomes over the past three months are still consistent with a trend softening in the labour market, just not to the extent observed over the second half of 2023. The extent to which labour demand will continue to cool near-term, however, critically depends on the interplay between headcount and average hours. We continue to expect some softness to present via the latter, but given recent data, prospects of material economy-wide declines in employment seem increasingly unlikely at this stage; that, of course, being one of the key goals of the RBA in its current policy cycle.
In New Zealand, the Q1 CPI (PDF 608KB) came in between Westpac and the RBNZ’s expectations, rising 0.6% in the quarter and 4.0%yr. The detail suggests imported inflation is easing, but domestic inflation pressures continue to show strength. This poses a considerable challenge for the RBNZ as they seek to bring inflation back to the mid-point of the target range. Next week sees the release of Australia’s Q1 CPI. We expect a 0.8% rise in the quarter, but base effects will see the annual rate fall to 3.5%yr. Our preview is available at Westpac IQ. Chief Economist Luci Ellis this week also discussed the implications of global inflation developments for Australia and the RBA.
Over in the UK meanwhile, the annual CPI nudged down to 3.2%yr in March, mostly due to food prices. BoE Governor Andrew Bailey remains confident that inflation will fall sharply in April because of energy prices, putting the inflation target in sight and allowing the central bank to consider cutting rates. However, services inflation remains persistent, contributing 92% of total inflation over the year.
Strong wages gains continue to pressure services inflation, boosting consumer spending capacity and raising firms’ production costs, which they aim to pass on. Wage growth has eased from a high of 8% in the middle of 2023, but has held above 6% the last three months. Decision Maker Panel’s wage expectations for the year ahead continue to edge lower, but at 4.7% is still strong. Persistence in wage and services inflation will continue to cast doubts over whether the BoE will easily meet their 2% medium-term objective and consequently how far policy can be eased. Still, the first cut is in sight and welcome as the UK economy stagnates.
In Europe, services inflation also remains sticky, but goods disinflation is increasingly taking the pressure off the ECB, headline inflation now 2.4%yr and core 2.9%yr. Labour market momentum has also eased, pointing to an increasingly benign balance of risks for wage and services inflation. This puts the European Central Bank in a comfortable position to begin easing in June, although they are also likely to proceed cautiously.
Across the pond, headline US retail sales rose 0.7%mth in March, and the control group, which feeds into GDP calculations, gained 1.1%mth. This result follows a soft January/ February and may have been inflated somewhat by sales promotions. However, holding real GDP growth materially above trend in Q1, it reinforces the market’s current concerns over inflation’s persistence.
While only a qualitative guide, the FOMC’s April Beige Book depicted a much softer economy. Overall, “economic activity expanded slightly” over the 3 months to April, with 10 of the 12 districts experiencing “slight or modest economic growth”. “Consumer spending barely increased overall” and consumers’ price sensitivity was called out. Employment “rose at a slight pace overall”, and the labour market was seen as coming into balance. Wage growth was regarded as benign, annual wage growth having “recently returned to their historical averages”. This guidance points to a continued deceleration in inflation and restraint by consumers in the months ahead.
How much further progress is necessary for the FOMC to be comfortable easing policy remains an open question. At 2.5% and 2.8%, February’s annual headline and core PCE inflation was very similar to Europe’s CPI momentum at March, 2.4% and 2.9% for headline and core. But the US’ CPI measure has shown greater persistence January through March, primarily as a result of capacity constraints (e.g. rents) and the lagged secondary influence of prior goods inflation (e.g. motor vehicle insurance). Next week’s US GDP and March PCE reports are eagerly awaited.
Finally, back in Asia, China’s Q1 GDP highlighted the benefit of reform, with high-tech manufacturing and infrastructure investment driving a 6% annualised GDP gain in the quarter, even as the property sector continued to contract and consumer demand remained fragile. Authorities 5.0% target for 2024 is now within sight, only requiring annualised growth between 4% and 5% Q2 to Q4. Sentiment in China’s economy is unlikely to improve quickly, as property and financial sector risks remain front of mind. However, we expect the economy’s momentum to persist and authorities aims to be achieved, or modestly excee.
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