Cliff Notes: the emergence of slack
Key insights from the week that was.
It was a relatively quiet week in Australia, with the June Labour Force Survey the only market sensitive date release. The main surprise in the report was labour supply’s strength, evinced by the participation rate printing its second-highest read for the cycle at 66.9%. The level of employment also rose at a solid clip in June, up +50.2k for a cumulative gain of a quarter-million over H1 2024, the same pace as H1 2023 when the labour market was much ‘tighter’. It is worth noting that employment is behaving as expected given the trend in participation – the percentage increase in both measures over the last three months is well within the historical range. While both were robust, labour supply slightly outstripped demand in the month, resulting in the unemployment rate just rounding up to 4.1%.
These results are unlikely to drive any material change in the RBA’s view of the labour market, which is currently assessed as “tight relative to full employment”. Employment has transitioned from outpacing population growth to now tracking broadly in line, pointing to balance between labour demand and supply. The unemployment rate gradually ticking higher, as a consequence of labour supply outstripping still-resilient labour demand, is consistent with the RBA achieving a ‘soft’ landing. Looking ahead, the Q2 CPI (due July 31) will prove critical to assessing the near-term outlook for policy. In this week’s essay, Chief Economist Luci Ellis discusses recent international developments with disinflation and the similarity of Australia’s experience.
Across in New Zealand, this week’s Q2 CPI shifted the debate around the policy outlook. The below expectations Q2 print of 0.4% resulted in annual inflation moderating from 4.0%yr in Q1 to 3.3%yr in Q2. Our New Zealand team now expects annual inflation to fall below 3.0%yr in Q3 and to then continue to decelerate towards 2.0%yr into 2025. This trend will allow the RBNZ to place a greater weight on activity data, which has been recessionary for a few months, and to bring forward their first cut to November. Westpac NZ economics sees an earlier cut in October as around a 30% chance.
Further afield, the European Central Bank kept rates steady at their July meeting and made clear policy would be decided meeting by meeting. At this stage, September is regarded as “wide open”. President Lagarde also emphasised the ECB is looking at a range of data not one particular variable. The Governing Council view policy as restrictive. The Bank Lending Survey, released earlier in the week, support this perspective, highlighting that credit conditions are tight and loan demand sluggish, particularly among corporates. Going ahead, the ECB will be mindful of underlying strength in the labour market and an expected acceleration in activity growth into 2025; but inflation trending sustainably to target should instil confidence in a succession of rate cuts towards neutral.
In the UK meanwhile, key data ahead of the August meeting made clear the complexity of the task before the Bank of England. The headline CPI rose 2.0%yr in June, consistent with the May print and their medium-term policy target. However, both core inflation and services inflation remained unchanged at an elevated level, 3.5%yr and 5.7%yr respectively. Wages also rose 5.7%yr in May, continuing their downtrend but still elevated versus history. Significant further progress with wages is necessary to quell services inflation. In this light, while annual headline inflation is at target, the Bank of England may choose to hold in August and wait to September to cut. The August decision is likely to be finely balanced; the market views it as such, with a cut seen as a roughly 50/50 proposition.
US retail sales were flat in June after an upward revision in May from 0.1% to 0.3%. The sales control group, which feeds into GDP calculations, was robust at 0.9% in June, up from 0.4% in May. Though, year-to-date, growth in control group sales remains weak, having averaged a gain of around 0.2% per month, less than half of 2023's pace. While decelerating inflation and the promise of rate cuts are supportive of spending, growing uncertainty over the labour market should restrict consumption to a modest pace through the remainder of 2024.
Taking a broader view, the FOMC's Beige Book for July signalled the economy is softening and price conditions are consistent with a return to target inflation. Respondents noted that activity was maintaining "a slight to modest pace" in aggregate, but five districts reported "flat or declining activity". On employment, "Most districts reported employment was flat or up slightly" and wages grew at a "modest to moderate pace", in part because of improved labour availability. Price increases were "modest" overall, with a "couple" of districts noting only "slight increases".
Finally to China, where the economy expanded 0.7%qtr in Q2 and 5.0% year-to-date. This puts the economy on track to achieve the 5.0% growth target set for 2024 overall, even without active government support. Growth is being fuelled by capacity expansion and a drive to increase value add, principally to meet foreign demand. Fixed asset investment growth of 8.5%ytd (excluding property) against a 10% decline in property investment and retail sales growth of just 3.7%ytd highlights that the consumer has, to date, missed out on the dividends from trade. As we discuss in our note, this situation has to change if downside risks are to be extinguished and the government’s medium-term objectives for the whole economy met.
This week also saw the conclusion of China's latest Plenum. There was no change in the priorities of officials, with “high-quality development” remaining the focus and the property market receiving little attention. The reference to "actively expanding domestic demand" does not necessarily mean the consumer will receive immediate or significant support. Rather, it is more likely the central Government will focus on public and private investment, anticipating this activity will support employment and confidence and consequently stronger consumer demand. Further detail is likely to be provided in coming weeks, with a Politburo meeting scheduled for month end.
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