Key insights from the week that was.
This week, Westpac surveys provided insight into both the current conditions and outlook faced by consumers and manufacturers. The Monthly CPI Indictor and job vacancies subsequently provided more evidence of the persistence of Australia’s disinflationary trend.
Westpac-MI Consumer Sentiment’s March survey signalled that consumers remain very concerned over their family finances, with headline confidence 16% below average at 84.4, little changed from 2023’s average of 80.9. Unsurprisingly, the underlying pulse of nominal retail sales remains weak and ‘time to buy a major household item’ assessments from the Westpac-MI suggests this trend will persist for some time.
Elements of the survey are showing tentative signs of promise though. The RBA’s more balanced commentary looks to have had a positive impact, as evinced by the rise in sentiment between those surveyed before the policy meeting (79.3) and after (94.9). Westpac-MI mortgage rate expectations also eased. That said, few consumers believe rate cuts are imminent.
The Q1 Westpac-ACCI Survey of Industrial Trends provided a timely perspective on the state of the economy from the perspective of manufacturers. Respondents were deeply pessimistic on the general business outlook, a view reinforced by the deterioration in new orders (from flat to declining) and a corresponding fall in output in the quarter. In response to a prolonged period of acute cost pressures over 2022 and 2023, manufacturers are reporting a reduction in both overtime and employment in 2024. The sector is keenly awaiting a less restrictive policy stance. Though, as rate cuts are likely to proceed slowly from September, it may be some time before manufacturers feel material benefit.
At least the other data released this week was consistent with steady progress towards the RBA’s inflation goal.
The Monthly CPI Indicator rose a benign 0.2% in February, leaving the annual rate unchanged at 3.4%yr for a third consecutive month. Trimmed Mean inflation ticked a little higher, from 3.8%yr to 3.9%yr; though the headline index excluding volatile items and holiday travel managed to move lower, from 4.1%yr to 3.9%yr.
Services inflation was a focus as this month’s release provided the quarterly update on prices in this category of spending, giving an idea of the risks surrounding the Q1 CPI report. We view these risks as balanced, the lift in services inflation (3.7%yr to 4.2%yr) due to a stronger increase in education costs being largely offset by softer electricity and holiday travel prices (both monthly surveys). Hence, we have retained our forecast of 0.7% (3.4%yr) for Q1 CPI and continue to expect inflation to reach the top of the target range by the end of the year.
On the labour market, job vacancies were reported to have fallen 6.1% between November and February, a pace of decline more in line with the average seen in the middle of 2022. The survey was consistent with other data. Labour demand is moderating in response to the broadening economic slowdown, but there remains a substantial ‘overhang’ of vacancies relative to pre-pandemic levels. This is in line with our expectation for a continued deceleration in jobs growth through 2024, albeit while avoiding outright national declines in employment. On the labour market, Chief Economist Luci Ellis’ essay this week explores productivity dynamics during and after the pandemic.
Offshore, markets took a breather in the absence of top-tier data.
In the US, total durable goods orders rose 1.4% in February thanks to orders for new non-defence transport equipment, particularly aircraft. Elsewhere in manufacturing, conditions are much weaker, core goods shipments and orders only marginally higher year-to-date.
The March regional Fed surveys also point to downside risks for activity ahead. The Richmond Fed Index declined to –11, with pessimism in new orders and the order backlog of note, while the Dallas Fed index fell to –14.4. The Dallas Fed’s ‘average employee work week’ and employment components point to businesses in the region dealing with softening demand by cutting hours instead of laying off staff. Expectations of a soft landing should limit downside risks for employment over the year ahead.
