Key insights from the week that was.
This week begun on a quiet note given much of Asia were out celebrating Lunar New Year and the President’s day holiday was observed in the US. Since then however, several interesting data points have been received.
The key data release for Australia this week was the January labour force survey. Employment increased by a robust 29k in the month, continuing the strong recovery from its pandemic low. The unemployment rate consequently fell from 6.6% to 6.4% against expectations for an unchanged outcome.
Equally as important as these headline outcomes: the number of individuals working zero hours for economic reasons fell again in January to just 76k, from 770k last April; and, at 8.1%, total underemployment is now just 0.7ppts lower than last March. This momentum puts the labour market in a good position to weather the end of JobKeeper in March and to make further healthy gains through 2021 and 2022.
Westpac’s Card Tracker continues to suggest that gains in the labour market and sentiment are buoying households’ willingness to spend – the index rising further last week despite Victoria’s snap 5-day lockdown.
The strength of the labour market and confidence notwithstanding, the RBA remains committed to their extraordinary stimulus for the foreseeable future. As outlined by Chief Economist Bill Evans when discussing the RBA’s February Meeting minutes this week, while a return to the pre-pandemic level of GDP is in sight for a number of nations, including Australia and the US, it will be many years until the level of GDP that could have been had the pandemic not occurred is seen.
As such, a hoped-for robust acceleration in wage gains is a long way off. We expect yield curve control to be continued until 2022, when it will need review, and asset purchases to run through 2022, albeit most likely at a reduced rate from October.
A key support for Australia’s outlook and that of the world is China’s economy. Data received just before the lunar new year holidays signal China’s economy will pick up after the break where it left off. Critical to our strong medium-term view is a continued focus by authorities on the quality and breadth of investment. If achieved, these aims will guarantee GDP growth is bolstered not only by investment but also by robust, income-fuelled household consumption.
Another critical element, particularly with respect to the Australian dollar, is an expected continuation of ultra-accommodative monetary policy in the US. Although retail sales surprised massively to the upside in January, the monthly gain printing above 5% versus a 1% market expectation, initial jobless claims disappointed again last week, pointing to a high degree of churn and underlying weakness in the labour market.
GDP growth at a multiple of trend will be required over 2021 and 2022 to drive the unemployment rate back down towards its full employment level. And even then the FOMC may still find achieving their goal for inflation a significant challenge given excess global capacity and a desire to re-coup the underperformance of the past decade, by exceeding 2%yr inflation for an extended period.