Key insights from the week that was.

The data made available this week again highlighted the downside risks to the outlook.

Domestically, attention was focused on the labour market. Thursday’s labour force survey reported a 13.5k increase in employment, in line with our 15k expectation. However, the unemployment rate lifted 0.2ppts in the month (compared to the 0.1ppt we expected) on higher participation. Underemployment also rose in January, from 8.3% to 8.6%, highlighting that a significant share of established workers remain underutilised.

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The key messages to take from these outcomes are that considerable slack remains in Australia’s labour market and that the new supply of labour is greater than marginal demand. If, as we expect, job growth throttles back further, then supply and demand will become more unbalanced.

The consequence for wages of the above was again evident in the Q4 wage price index. An ‘as expected’ but disappointing gain of 0.5% was reported for the three months to December 2019, leaving annual growth at just 2.2%yr. 2019 therefore continued the trend apparent since 2013 of next-to-no aggregate real wage growth in Australia.

Contrasting the final six months of 2019 to the two prior six-month periods, it is also apparent that the wage pulse is losing rather than gaining momentum – the six-month annualised growth outcomes being 2.3%, 2.2% and 2.1% at December 2018, June 2019 and December 2019 respectively. This pattern is certainly not supportive of robust discretionary consumer spending, particularly given high household debt.

The minutes of the February RBA meeting highlight that the Board recognise the challenge before them in achieving their policy targets. “Members reviewed the case for a further reduction in the cash rate at the present meeting. This case rested largely on the only gradual progress towards the Bank’s inflation and unemployment goals” which are still not achieved by mid-2022 under current policy settings.

As highlighted by Chief Economist Bill Evans, their decision to not cut in February principally came as a result of the RBA’s view of the “risks associated with very low interest rates”.

Arguably of most importance among these risks is the RBA’s concern that low interest rates could encourage additional borrowing at a time when the housing market was already in a strong upswing. While we recognise the upturn in prices has been abrupt and strong, credit growth remains historically weak and there has been little evidence of a shift in investors’ appetite. Consequently affordability will likely increasingly act as a constraint for price gains in coming quarters, allowing the RBA to re-focus on the need for additional support for economic activity and to bring inflation back to the target range.

On the international front, the COVID-19 outbreak was noted by the RBA as a “new source of uncertainty” in the February minutes. While markets are still sanguine overall, guidance from a number of international brands such as Apple on the disruption and uncertainty they face along with the extension of travel bans and a further increase in cases has clearly affected sentiment on occasion this week. The first data prints following the lunar new year holidays will be the next major test.

After we go to press, preliminary February PMI outcomes for Japan will provide the first clear view on the consequences of the COVID-19 outbreak for nations neighbouring China. Note, Japan’s Q4 GDP, released earlier this week, highlights their economy was already weak ahead of COVID-19, a 6.3% annualised decline reported in the three months to December as consumption and business investment both contracted.

Preliminary PMI’s will also be made available today for the Euro Area, UK and the US, though the economic consequences of COVID-19 for these jurisdictions will likely come with a delay, as the shock ripples through the global supply chain.

Coming back to the Antipodes, our New Zealand economics team’s latest quarterly highlights the anticipated impact of the current outbreak on New Zealand as well as their overall expectations for the economy and policy. The view for Australia and global financial markets can be sourced from our February Market Outlook.

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