HomeContributorsFundamental AnalysisCliff Notes: Eagerly Awaiting Chair Powell at Jackson Hole

Cliff Notes: Eagerly Awaiting Chair Powell at Jackson Hole

Key insights from the week that was.

Following last week’s update on aggregate wage inflation, Westpac revised its profile for wages growth over 2023 and 2024. In essence, the update speaks to a broad-based moderation in the pace of wage inflation. This is certainly highlighted by the softer-than-expected outcome for the headline figure in June, up 0.8% (3.6%yr), but is also witnessed to by the detail. The moderation is evident across most components of the data, not only in the breakdowns by sector and by bargaining arrangement, but also if bonuses are included or only those who received a pay increase are considered. The next update for September quarter 2023 will capture an above-average increase in the minimum wage (5.9% in 2023 vs. 4.7% in 2022) in addition to the 15% pay raise for aged care workers. Still, factoring in that strength – a forecast 1.3% gain – is still not enough to offset the broader moderation at play, leading us to revise down our year-end forecast for wages growth from 4.1%yr to 3.8%yr.

The August edition of Westpac’s Housing Pulse provided an in-depth update on the current drivers and outlook for Australia’s housing market. The upturn has gradually gained traction over recent months, but with turnover rising slowly, the recovery remains characterised as ‘price-led’. The nature of the recovery to date highlights the importance of affordability constraints, a factor which we believe will play a key role in guiding house price outcomes over the next few years. This is most aptly highlighted by the sub-indexes in the Westpac-MI Consumer Sentiment survey. At 72.1, the ‘time to buy a dwelling’ index remains near extreme cyclical lows; at 151.2, the House Price Expectations Index is meanwhile at a new cycle high, in strongly optimistic territory. Westpac expects house prices to rise by 7% in 2023; then, as affordability acts as a drag on buyer sentiment and demand, house price growth is expected to slow to 4% in both 2024 and 2025.

Before moving offshore, a quick note on Australia’s goods exports. This sector has become an increasingly important driver of growth over the last three years, with its share of the national economy up from 19% in 2019 to 27% in 2022. However, this strength was inherently built upon a fragile base, effectively being the consequence of a surge in global commodity prices, up 52.8% since 2019. Meanwhile, goods export volumes have declined by 2.1% over the last three years, the weakest result on record dating back to 1960. This largely speaks to the emerging weakness in resource exports, namely the “Big 3” of metal ores, coal and other fuels which together account for nearly two-thirds of Australia’s goods export volumes. The “Big 3” have suffered from a sustained period of underinvestment in capacity and repeat instances of disruptions to production, an environment that is clearly unable to foster quality growth in real export volumes. While the near-to-medium term outlook should benefit from fewer disruptions and some semblance of an investment response, the longer-term outlook for resource exports appears more uncertain. The transition to net-zero necessitates a restructuring of energy production globally, weakening global appetite for Australia’s fossil fuel exports. However, it also requires rapid investment in infrastructure and the replacement of transport fleets globally. The transition is therefore a constraint for some producers, but a great opportunity for others.

Offshore, the August flash PMIs for Europe, UK, US and Japan were instructive, pointing to a further deterioration in manufacturing and emerging weakness in services.

In the US, the manufacturing PMI ticked down to 47.0 from 49.0 led by declines in output and new orders. Services also ticked down from 52.3 to 51.0, likely attributable to softening consumer spending. The employment sub-index for both showed an incremental increase in employment, the slowest through this cycle, with declining new orders and rising wage costs arguably prompting some firms to consider cutting staff. Input price inflation was positive again after a brief trip below 50. This was supported by larger wage bills and an increase in raw material prices. However, output prices are now under pressure as firms discount their goods and services given constrained consumer spending power.

In the UK, the services PMI fell into contraction for the first time since January, 48.7. Both new orders and output declined while jobs rose marginally. A moderation in input costs came from lower energy and material prices, but wages continue to worry many firms. Output prices eased for the fourth month in a row, though this is yet to show up in the CPI. Manufacturing meanwhile fell deeper into contraction to 42.5, the thirteenth sub-50 reading in a row. New order and production both decelerated, signalling a bleak outlook.

Europe’s services PMI saw a sizeable decline to 48.3, a 30-month low, while manufacturing improved to a still deeply contractionary 43.7. Employment in manufacturing was weak while services employment softened but remained expansionary. Manufacturers’ costs declined, likely thanks to easing energy prices, as strong wage growth supported services input costs. Manufacturer output prices fell, continuing along their trend, while services prices rose slowly.

Japan’s manufacturing PMI was little changed at 49, and services held up at 54.3. Optimism in services is likely driven by strong tourism spending versus domestic demand. Employment continued to show promise, a constructive development for next year’s spring wage negotiations which the BoJ will keenly assess. Input prices also increased in Japan, though the detail suggests passthrough to services is more probable than manufacturing.

While there was no new data of significance for China this week, market participants remained focused on possible outcomes there in coming months. A quiet data week allowed us to take a deep dive into the recent detail for trade, investment and consumption, with a view to assess both the strengths and weaknesses of China’s economy and consequently the most probable evolution of growth with/ without further support from authorities. In our view, clear, active support from authorities can sustain growth around the current 5% target for a few more years. However, inaction is likely to entrench current pessimism amongst consumers and small business, weakening growth prospects to the extent that authorities medium-term development ambitions are unlikely to come to pass. Which path China takes will be determined in the next few months.

Westpac Banking Corporation
Westpac Banking Corporationhttps://www.westpac.com.au/
Past performance is not a reliable indicator of future performance. The forecasts given above are predictive in character. Whilst every effort has been taken to ensure that the assumptions on which the forecasts are based are reasonable, the forecasts may be affected by incorrect assumptions or by known or unknown risks and uncertainties. The results ultimately achieved may differ substantially from these forecasts.

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