Key insights from the week that was.
Income gains are crucial to sustained growth in consumer spending. The past five years have seen next-to-no real wage growth in Australia and, as a result, persistent, sub-par consumption growth. Another soft reading for wages in the September quarter suggests both trends will persist into 2020. Notably, after much stronger growth over the year to June (2.6%yr), public sector wage growth matched the private sector in the most recent quarter, circa 2% annualised. That these outcomes have occurred coincident to a 3%yr increase in the minimum wage highlights that wage gains for non-award workers are very slim. Bonuses are being paid to some of these non-award workers (wages including bonuses are up 2.9%yr versus 2.2%yr excluding bonuses), but the pass-through to consumption from this form of compensation is likely to be quite limited with households unsure if these one-off payments will repeat.
On top of the enduring weakness in wages, the October labour force report signalled that employment growth may be abruptly decelerating. To August, six-month annualised employment growth was a strong 2.6%. However, following September/October’s net 7k decline, six-month annualised employment growth is now just 1.6% – below growth in the labour force. Indeed, had it not been for a 0.1ppt fall in the participation rate in October, the unemployment rate would have printed at 5.4% instead of 5.3% (up from 5.2% in September). Not only is this unemployment rate well above the RBA’s full-employment estimate of 4.5%, it is heading in the wrong direction. Further, underemployment (which includes those willing and able to work more than they currently do) also rose back above 8.5% in October to be near recent highs.
It will not surprise then that, while Westpac–MI consumer sentiment bounced back in November, the detail remains weak. Unemployment expectations are now 13% higher than a year ago, and views on family finances are stuck well below average. On spending, ‘time to buy a major household item’ is also below average, and almost 90% of consumers expect to spend less or the same this Christmas compared to last year (33% less; 54% the same). Importantly, accommodative policy does not look to be improving the situation households face, with consumer sentiment down 4% since rate/ tax cuts began to take effect mid-year.
For the RBA then, a return to trend growth in 2020 will be particularly challenging. Indeed, even with another 25bp cut in February and the adoption of unconventional monetary policy, we foresee a continuation of below-trend growth. To our mind, this is why there is need for the legislated tax cuts to be brought forward.
Across the Tasman, this week the RBNZ delivered a surprise to the market, holding fire on another rate cut. Our NZ team had emphasised that the decision was much more finely balanced than the market anticipated, and the statement augurs with this view. Ahead, the sustainability of the nascent lift in house price growth will prove key, as will actual and expected inflation. Developments on the external front will also heavily influence future policy decisions – indeed our NZ team see this as the deciding factor behind the final cut they forecast for February 2020.
International developments this week have had little consequence for markets. President Trump’s animosity towards China and the FOMC remained clear, but there was no new information for the market to trade off. FOMC Chair Powell’s testimony to Congress also contained no surprises. Updates for China fixed asset investment and retail sales meanwhile highlighted the downside risks that remain in the global economy.
In October, China fixed asset investment and retail sales growth both disappointed, remaining at historically weak levels – respectively 5.2%ytd and 7.2%yr. The way out of this situation for China, and indeed the globe, is the development of new industry and rising productivity. For China, reported near-14%ytd gains for high-tech manufacturing and services highlights this is in the works. The US in contrast is stuck with heightened uncertainty over trade conditions and domestic politics as well as the impact of an elevated US dollar. In contrast to the market’s current view of one more cut from the FOMC, we expect that weak US investment and the flow-on impact to employment and consumption will see the FOMC deliver three cuts in 2020, to ward off the threat of a material, domestically-driven downturn.
Lastly on the UK, of major significance this week, the Brexit Party announced that they will not contest the 317 seats that the Conservatives won at the last election. This is an important win for PM Johnson as the UK have a first-past-the-post system where competition from the Brexit Party would have potentially split the pro-Brexit vote and created the opportunity for victory for Remain-leaning parties. Accordingly, odds have narrowed for a Conservative majority – betting markets currently imply around a 2/3 chance.