Cliff Notes: time to take stock
Key insights from the week that was.
In Australia, the February Labour Force Survey provided a major surprise relative to market expectations. The main result was a significant contraction in the size of the labour force, seeing the participation rate fall from 67.2% to 66.8% – declines of this magnitude having only occurred in 11 out of the 564 months the survey has been conducted. This appeared as a –52.8k decline in the level of employment. Given these individuals left the labour market entirely, measures of labour market slack were broadly unchanged. Indeed, if anything, they tightened at the margin, the unemployment rate on the cusp of rounding down to 4.0% and the underemployment rate falling to 5.9%.
The ABS offered some more colour in the media release, stating that there were “[f]ewer older workers returning to work” and “higher levels of retirement in Australia over recent months”; while in contrast, “we continue to see growth in employment for people aged 15 to 54.” With this context, falling participation can have a variety of interpretations. One prominent explanation is that, with cost-of-living pressures having moderated, older workers that were pulled into the labour market to support household incomes under pressure are now starting to leave. It could also be interpreted as a signal of easing labour demand, although elevated job vacancies cast doubt over this view.
Either way, the scale of the decline in the month suggests some one-off factors are at play; we will have to wait until next week for more data to confirm the outcomes across age brackets. Until then, the RBA are unlikely to read too much into the latest result. Given the key measures of labour market slack are still consistent with a tight labour market, the Board will remain focused on the inflation and wage trends.
With limited new data, Chief Economist Luci Ellis’ essay this week investigates the evolution of structural trends and market psychology. Ahead of next Tuesday’s Federal Budget 2025-26, Chief Economist Luci Ellis' video update focuses on the fiscal dynamics at play and likely policy priorities.
New Zealand GDP provided a detailed update of activity across the Tasman. The 0.7% gain was welcome following two quarters of decline. As discussed by our NZ economics team, arguably the result overstates growth in the quarter owing to some technical issues. Still, there were some genuine positives in the detail, and the economy is expected to continue growing through 2025, albeit most likely at a below-trend pace. This outlook supports NZ economics’ view that the RBNZ cash rate will trough at 3.25% in coming months.
Moving further afield, policy makers’ actions were again the focus as the FOMC, Bank of England and Bank of Japan met.
The FOMC kept the fed funds rate unchanged as expected at their March meeting while making the “technical” decision “to slow the pace of decline of its securities holdings by reducing the monthly redemption cap on Treasury securities from $25 billion to $5 billion [from April]”. Chair Powell noted in the press conference that this decision followed some evidence of “tightness in money markets” and has no implications for the stance of monetary policy. Changes to the forecasts were more telling on the policy outlook.
On GDP, the 2025 forecast has been revised from 2.1%yr at December to 1.7%yr in March. The range of Committee forecasts is also now heavily skewed to the downside. For 2025 and 2026, the low of the range has shifted from 1.6%yr in December to 1.0%yr and 1.4%yr to 0.6%yr respectively. The FOMC’s initial take on the inflation effect of tariffs meanwhile suggests pressures will be contained and temporary, the core PCE forecast for 2025 revised up from 2.5%yr to 2.8%yr while projections for 2026 and 2027 were left unchanged at 2.2%yr and 2.0%yr. The range of Committee core PCE forecasts remain wide and biased up, however. The top end only edges lower from 3.5%yr in 2025 to 3.2%yr in 2026, then 2.9%yr in 2027.
Just as the FOMC must assess the net economic effect of policy change across trade, immigration and regulation, they also are intent on setting policy to suit the balance of risks across inflation, the labour market and demand. The unchanged fed funds rate projection from December – including 50bps of cuts forecast by end-2025, another 50bps in 2026 and one more cut come 2027 – suggests their view changes are largely offsetting. Our modestly weaker growth view for 2025 warrants the two cuts forecast by the FOMC in 2025, but we then expect the Committee to hold at 3.875% as tariff inflation effects linger and capacity constraints also buoy consumer inflation.
The Bank of England's decision to remain on hold in March was subsequently decided 8-to-1, the dissenter favouring a 25bp cut. "Domestic price and wage pressures are moderating, but remain somewhat elevated". "The Committee will continue to monitor closely the risks of inflation persistence and what the evidence may reveal about the balance between aggregate supply and demand in the economy. Monetary policy will need to continue to remain restrictive for sufficiently long until the risks to inflation returning sustainably to the 2% target in the medium term have dissipated further." Like the FOMC, the Bank of England clearly intends to determine policy meeting-by-meeting based on incoming data.
In the middle of a rate hiking cycle, in contrast to the FOMC and BoE, the Bank of Japan also held steady in March. Post-meeting communications highlighted concern over the implications of US tariffs for global economic activity; but the BoJ continued to show confidence in the domestic economy, recent activity data having been broadly in line with expectations and the wage data modestly above. Yen weakness on the BoJ decision was short lived, USD/JPY holding to a JPY148-150 range since, as has been the case for most of the past month. On the outlook for wages, trade confederation RENGO announced at the end of last week that it had secured a 5.46% wage increase against a 6.0% demand, exceeding the FY24 outcome of 5.28%. The caveat here is that the survey mostly reflects large businesses which have a greater capacity to fund wage increases. With inflation anticipated to remain elevated versus history, its important wage gains continue to be seen broadly across both big business and small. Such a trend will help shore up consumer confidence and sustain spending growth, allowing the BoJ to continue hiking to around 1.0%.
Economic data released outside of Australia and New Zealand this week was of little consequence for the outlook. The latest data round from China is worthy of study, however. The February data was the first major release for the calendar year, given the variable timing of lunar new year holidays year-to-year. On the consumer, the update was favourable, retail sales growth accelerating from 3.5%ytd in December to 4.0%ytd. Fixed asset investment also surpassed expectations, accelerating from 3.2%ytd in December to 4.1%ytd currently despite entrenched weakness in property investment, -9.8%ytd in February. Month-on-month price declines accelerated for new and existing homes in February, making clear the need for additional concerted action by authorities. Thankfully, this looks to be forthcoming, authorities making clear at the beginning of the week that new initiatives to strengthen employment, income and social security were being finalised for implementation in 2025. Additional aid for the housing sector is also progressing. 2025 therefore promises to be a much better year for Chinese consumer demand than 2024 or 2023, particularly with equities continuing to rally and key sub-sectors of private industry, such as technology, being encouraged to accelerate development and expansion. A full view of our outlook for China can be found in the recently released March Market Outlook.
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