**Labour Market Trends: A Crucial Factor for the Medium-Term Outlook**
The Australian labour market has been a key focus for economists and policymakers alike, as it plays a crucial role in shaping the country’s medium-term economic outlook. The latest data from the week that passed shed light on various aspects of the labour market, consumer sentiment, and wage growth, providing valuable insights into the current state of the economy.
**Consumer Sentiment and Labour Market Dynamics in Australia**
Consumer sentiment in Australia showed a slight improvement at the start of the week, with the Westpac-MI Consumer Sentiment Index recording a 2.8% increase to 85.0 in August. This uptick was driven by households’ more positive views and expectations around their finances, likely boosted by the tax cuts introduced in the new financial year. Notably, the sub-indexes tracking ‘family finances vs a year ago’ and ‘family finances next 12 months’ saw significant increases of 11.7% and 5.1%, respectively.
However, despite the improvement in consumer sentiment, there was a cautious approach towards spending, as earlier surveys indicated a preference among consumers to rebuild their savings buffers from the tax cuts. This hesitancy was reflected in the lack of significant improvement in card spending or intentions to make major purchases.
On the other hand, the labour market in Australia continued to show resilience, with July’s data revealing stronger-than-expected growth in employment. Nearly 60,000 jobs were created in July, following a series of solid gains in recent months. Of particular interest was the surge in labour force participation to a cycle high of 67.1%, the highest level in over a century. This increase in labour supply led to the unemployment rate rising to 4.2%, highlighting the presence of some slack in the labour market.
**Income and Wage Growth Trends**
From an income perspective, conditions remained favorable, with the wage price index rising by 0.8% (4.1% year-on-year) in Q2. While nominal wage growth moderated on a six-month annualized basis, from 4.7% year-on-year in December to 3.4% year-on-year in June, it still outpaced annual inflation. This moderation in wage growth, coupled with slower inflation, has started to alleviate some of the cost-of-living pressures faced by consumers, which should translate into improved family finance expectations and spending over time.
The Chief Economist of Westpac, Luci Ellis, and Senior Economist Pat Bustamante highlighted the puzzling aspect of the Reserve Bank of Australia’s (RBA) revised forecasts, particularly regarding aggregate supply. Despite the RBA’s concerns, the latest labour force data underscored the strength in labour supply, pointing to a different narrative than what the central bank had anticipated. In an upcoming essay, Chief Economist Luci Ellis will delve deeper into the implications of the recent data on the RBA’s views on productivity and economic activity.
**International Developments: New Zealand and the United States**
Moving beyond Australia, the focus shifted to international developments, with the Reserve Bank of New Zealand (RBNZ) surprising the market by cutting the cash rate by 25 basis points to 5.25%. This decision was accompanied by a downward revision of the OCR track, indicating the possibility of another cut at the October Monetary Policy Review and a total of 75 basis points of cuts by the end of 2024. The RBNZ’s updated profile also suggested a faster path towards reaching neutral OCR levels around 3% by 2027.
In the United States, economic data continued to reflect a ‘goldilocks’ economy, characterized by benign inflation and robust activity growth. Consumer prices in July rose by 0.2%, leading to a slight decrease in annual inflation to 2.9% for headline inflation and 3.2% for core inflation. The data pointed to subdued inflationary pressures, with wage growth remaining moderate and discretionary demand showing modest growth. The Producer Price Index (PPI) also supported the inflation outlook, rising by 2.2% year-on-year in July.
Retail sales in the US registered a strong performance in July, posting a 1.0% gain driven by a rebound in auto sales. While nominal gains have been modest overall this year, the control group’s average monthly gain of 0.3% is indicative of consumption growth slightly below trend, rather than signaling a recession. Despite weak readings from regional Fed manufacturing surveys, initial claims continued to suggest a lack of firing across the economy.
**Economic Trends in the United Kingdom and Asia**
In the United Kingdom, economic data justified the Bank of England’s decision to continue with its policy easing, despite expectations of an economic upturn. The July Consumer Price Index (CPI) surprised to the downside, with prices falling by 0.2% month-on-month. While annual headline inflation edged up to 2.2% year-on-year, annual core inflation slowed to 3.3%. The narrowing breadth of inflation, coupled with softer wages excluding bonuses, gave the BoE more confidence to persist with its cutting cycle.
On the activity front, UK GDP growth in Q2 met expectations, with a 0.6% increase (0.9% year-on-year). However, there were concerns about weak private consumption and business investment, which failed to meet expectations. Government spending partially offset the weakness, rising by 1.4% in Q2.
In Asia, Japanese GDP surprised on the upside in Q2, with a 0.8% gain offsetting the decline seen in Q1. Private consumption and business investment were the primary drivers of growth during the quarter. In contrast, Chinese economic data disappointed again, with industrial production and retail sales growth showing no improvement in July. Fixed asset investment weakened further, with property investment contracting and home prices falling, signaling the need for additional policy support to boost sentiment and stimulate the economy.
**Conclusion: Navigating Uncertainty in the Global Economy**
As the global economy navigates through uncertainties and challenges, the labour market continues to be a critical factor shaping the medium-term outlook for economies around the world. From consumer sentiment and wage growth trends to international developments and economic data, the week that was has provided valuable insights into the current state of affairs. Policymakers and economists will need to closely monitor these trends and developments to make informed decisions and steer economies towards sustainable growth and stability.
