A month of market mayhem

September has been a month of turmoil for international financial markets. The main driver was a sequence of policy rate increases from the world’s leading central banks that drove home the message that the world economy was now in the midst of a widespread and aggressive monetary policy tightening cycle that is unprecedented in the current century, that is far from over, and that increasingly risks triggering a global recession.

Higher rates and increased market uncertainty also helped turbocharge the US dollar, and the consequent foreign exchange market fallout has been widespread, including prompting the first currency market intervention by Japan’s Ministry of Finance since the 1990s to prop up a tumbling Yen, a fall in the offshore Chinese Renminbi to its lowest level since Hong Kong banks were first allowed to freely open renminbi accounts in 2010, followed by a drop in the onshore Renminbi to its lowest level since 2008, and a ‘flash crash’ in the British pound that saw sterling plummet briefly to an all-time low of US$1.035 against the US dollar.  By the middle of this week, the Australian dollar had slipped below US$0.64, falling to its lowest level since April 2020 and the onset of the pandemic.

Currency weakness will further complicate the RBA’s efforts to tame inflation and recent events make it more likely that Martin Place will decide to maintain its current pace of monetary policy tightening with another 50bp hike in the cash rate at next week’s meeting, rather than slowing to a more modest 25bp pace as previously expected.  

Rising global interest rates, a surging greenback and financial market turmoil

The current bout of central bank-fuelled market turmoil this month arguably started when the ECB announced on 8 September that it would increase policy rates by 75bp, lifting the benchmark deposit rate from zero to 0.75 per cent and taking it back up to its highest level since 2011. ECB President Christine Lagarde said there would be ‘several’ more rate rises in coming months – probably more than two but less than five, according to her post-meeting comments to media. But in reality, the big market-shifting move came on 21 September when the US Federal Reserve announced its third consecutive 75bp hike in the Fed Funds rate, taking the target range up to 3 – 3.25 per cent after a cumulative 300bp of rate increases. Like Lagarde, Fed officials signalled that more interest rate increases would follow, with the latest set of projections – the Fed’s ‘dot plot’ – indicating they expect to push the policy rate up to around 4.4 per cent by year-end and then see it peak at about 4.6 per cent next year. Fed Chair Jerome Powell noted that the chances of a soft landing for the US economy were now ‘likely to diminish’ because monetary policy would have to be ‘more restrictive or restrictive for longer’. He also conceded that ‘No-one knows whether this process will lead to a recession or if so, how significant that recession would be’, implicitly signalling that if it takes a recession to tame US inflation, then so be it.

The Fed’s actions and messaging were followed by falling share prices and rising treasury yields, as well as by more rate increases from a range of other key central banks including the Swedish Riksbank (with its biggest policy rate increase in three decades), the Swiss National Bank (which exited its negative interest rates policy after seven and a half years), and the Bank of England (with a 50bp increase taking UK policy rates to their highest rate since 2008).

The world is currently experiencing the most widespread tightening of monetary policy in modern times: according to the World Bank, the number of rate increases announced in July this year was the highest since records began in the early 1970s. Moreover, the size of those rises is also larger than usual, with central banks opting to move in 50, 75 and 100bp jumps. One clear and present danger arising from this rapid and synchronised but also uncoordinated move to tighten policy is that the international spillovers from individual national policy decisions will produce excessive tightening at the global level and drive the world economy into recession.

Further complicating the global picture is a soaring US dollar. The strength of the greenback reflects both the speed with which the US Fed is hiking rates and the search for a safe haven in increasingly uncertain times, both of which are combining to pull capital into the United States and push up the value of the dollar. One result is downward pressure on the currencies of other countries – adding more complications to their fight against inflation. A higher US dollar pushes up the price of imports and the cost of servicing dollar-denominated debt, and as a result, tighter US monetary policy and an appreciating US dollar have traditionally been bad news for emerging market financial stability. But this time the pressure is being felt across developed economies too, including here in Australia where – despite high terms of trade and a sequence of bumper current account surpluses – the Australian dollar has been sliding.

Given this challenging global backdrop, one might think that this was not the best time to engage in any radical economic policy experiments. The UK government under Prime Minister Liz Truss and Chancellor Kwasi Kwarteng disagreed, however, and decided to test market sentiment with a fiscal package that included the largest unfunded tax cuts in half a century and which also deliberately excluded any accompanying assessment from the independent Office for Budget Responsibility (OBR). The immediate market reaction was a record-breaking plunge in sterling and a record-breaking surge in yields on UK gilts, followed by a public ticking off from the IMF and a severe dent to UK macro policy credibility. There were also destabilising impacts on the UK mortgage market and on the UK pensions industry. Sometimes British politicians are accused of being unduly nostalgic for a glorious past, but that’s usually assumed not to include the 1970s.

The Bank of England has been forced to implement a £65 billion bond buying program (£5 billion a day for 13 days) to stabilise the government debt market, citing a ‘material risk to UK financial stability’. That intervention required an abrupt policy shift from Threadneedle Street – as part of  its anti-inflation measures it had previously announced that it would start selling gilts from 3 October: so instead of quantitative tightening, the Bank is now embarked on another bout of quantitative easing, and doing so in the face of an ongoing inflation problem. It’s also another source of uncertainty for an already-troubled world economy – hence the testy reaction of the IMF. This is what is technically known as a big mess.

(The animus of the financial market reaction is also somewhat ironic, given that from one perspective the fiscal package could be seen as a bit of a love letter to the City of London, including as it did measures scrapping the cap on bankers’ bonuses, abolishing the top rate of income tax and promises of finance-friendly regulatory reforms. The love, apparently, is largely unrequited. Although to be fair, those shorting the pound will have been quite happy.)

Meanwhile, Australian consumers kept on spending in August

One of the critical uncertainties over the future growth prospects of the Australian economy is the consumer.  According to the minutes from the RBA’s 6 September Monetary Policy Meeting, although consumer spending to date has been resilient in the face of higher interest rates,

‘…an important source of uncertainty continued to be the behaviour of household spending. Higher inflation and higher interest rates were putting pressure on household budgets. Consumer confidence had also fallen, and housing prices were declining in most cities and regions after the earlier large increases. Working in the other direction, people were finding jobs, gaining more hours of work and receiving higher wages. Many households had built up large financial buffers and the saving rate remained higher than before the pandemic. While the high levels of payments into offset and redraw accounts suggested that some households remained in a favourable financial position, members acknowledged that other households were finding conditions difficult in the face of higher interest rates and higher inflation. The Board would be paying close attention to how these various factors balanced out as it assessed the appropriate setting of monetary policy.’

In that context, this week’s retail trade numbers showed that spending continued to rise in August this year. The ABS said retail turnover rose a seasonally adjusted 0.6 per cent over the month to be up 19.2 per cent over the year. That was a stronger result than the market consensus, with the median forecast calling for a 0.4 per cent monthly increase. It also marked an eighth consecutive monthly rise and followed a 1.3 per cent jump in July. The Bureau noted that the August results were driven by the combined increase in food related industries, with cafes, restaurants and takeaway services 1.3 per cent higher over the month and food retailing up 1.1 per cent. For the non-food component of retail trade, there were strong results for department stores (up 2.8 per cent to a new record level) and household goods retailing (up 2.6 per cent with its largest result since March 2022) but falls for other retailing (down 2.5 per cent and breaking a run of five consecutive monthly rises) and for clothing, footwear and personal accessory retailing (down 2.3 per cent in its largest monthly drop this year).

By state, retail turnover rose in Tasmania (up 2.2 per cent over the month), the ACT (1.9 per cent), New South Wales (1.5 per cent), South Australia (1.3 per cent), and Victoria (0.1 per cent) but fell in Western Australia (down 0.2 per cent) and Queensland (down 0.1 per cent). Turnover in the NT was largely flat.

Finally, note that the monthly turnover data are nominal, that is, they reflect the combined impact of volumes and prices. With prices rising, some of the growth reported here reflects the impact of higher inflation rather than increased volumes of purchases. Even so, the continued expansion in overall spending suggests that, as of last month, the factors listed by the RBA as supporting household spending (a tight labour market, large financial buffers) were still offsetting the headwinds from higher interest rates and inflation, falling house prices and weak sentiment. All else equal, that will make the RBA more confident about continuing to tighten monetary policy next week.

A better-than-expected budget bottom line in 2021-22

The Treasurer announced the Final Budget Outcome 2021-22.  At the time of the March Budget, the expected underlying cash deficit for 2021-22 was $79.8 billion or about 3.5 per cent of GDP. The actual outcome was a much smaller shortfall of $32 billion or just 1.4 per cent of GDP – a $47.9 billion surprise to the upside. That improvement in the underlying cash balance was the joint product of receipts being $27.7 billion higher than anticipated at the time of the budget (of which $24.1 billion reflected higher total tax receipts) and payments $20.1 billion lower.

Source: Table 1.1, Final Budget Outcome 2021-22, Part 1.

On the revenue side of the fiscal accounts, company tax receipts accounted for more than half of the higher outcome ($14.2 billion), thanks mainly to higher commodity prices, but also reflecting lower than expected utilisation of COVID-19 business support measures. Receipts from total individuals and other withholding taxes were around $6.8 billion higher than budget estimates, mainly due to employment being higher than predicted.

On the expenditure side, lower than forecast payments reflected a combination of lower funding costs for COVID-19 programs due to a mix of delays and lower-than-estimated demand, lower-than-estimated demand for health-related programs, and a range of budgeted payments relating to road and rail infrastructure being delayed due to a combination of industry constraints, COVID-19 impacts on supply chains, and staff shortages. There were also lower-than-estimated take up for the National Disability Insurance Scheme and for Aged Care Services.

Gross debt for 2021-22 came in $10.7 billion below the budget forecasts (at $895.3 billion or 39 per cent of GDP vs. budget projections of $906 billion and 39.5 per cent of GDP) while net debt was $115.8 billion lower ($515.6 billion and 22.5 per cent of GDP vs budget projections of $631.5 billion and 27.6 per cent of GDP).

The reduction in gross debt was smaller than the improvement in the fiscal position because the Australian Office of Financial Management (AOFM) issued bonds in line with the original budget estimates. That means that the AOFM has effectively pre-funded some of the 2022-23 financing task in the form of accumulated cash reserves.  The fall in net debt is much larger than the change in gross debt and larger than the improvement in the fiscal position, both because net debt is measured at market value while gross debt is measured at face value, and because net debt also includes financial assets. Rising yields meant that the market price of government bonds on issue has fallen substantially, while the accumulation of cash reserves has further reduced the level of net debt.

The good news here is that, thanks in part to record highs for Australia’s terms of trade, the fiscal position is looking much stronger than envisioned as recently as the March budget. While the impact of the war in Ukraine and the associated disruption to global food and especially energy markets has been bad news for global political stability, growth and inflation, it has also delivered a windfall for Australian tax receipts. That also means that the fiscal repair job is now looking less daunting than it previously appeared, particularly if commodity market disruptions continue to support global energy prices. Still, any budget optimism has to be tempered somewhat by the observation made by RBA Governor Lowe during his recent testimony to the House Economics Committee (see the annex for more on this) that despite those record high terms of trade, and despite a multi-decade low in the unemployment rate, the budget is not only still in deficit, but is expected to remain there. And since some of the gains on the expenditure sides reflected delayed rather than foregone spending, there will also be some payback from this result.

Australia’s new monthly CPI indicator rose at an annual rate of 6.8 per cent in August

The ABS reported that its new monthly Consumer Price Index (CPI) indicator rose 6.8 per cent over the year in August 2022, down slightly from a seven per cent increase in July and back to the same rate recorded in June this year. The Bureau said that slight decline in the rate of annual inflation in August was largely driven by a decrease in prices for automotive fuel, with the annual rate of increase having eased from 43.3 per cent in June to 29.2 per cent in July to 15 per cent last month. Along with automotive fuel, the other big drivers of the August inflation result were new dwelling construction (up 20.7 per cent at an annual rate in August and little changed from the previous two months) and food and non-alcoholic beverages (up 9.3 per cent, including a 18.6 per cent rise for fruit and vegetables).

The monthly CPI indicator excluding volatile items of fruit, vegetables and fuel increased from an annual rise of 5.5 per cent in June to 6.1 per cent in July and 6.2 per cent in August.

What else happened on the Australian data front this week?

The ABS reported that the number of job vacancies in August 2022 was 470,900, a fall of 2.1 per cent from May 2022. Private sector vacancies were down 425,500 or 3.3 per cent from May, while public sector vacancies were up 45,300 or 10.5 per cent. Despite the drop in the three months to August this year, the level of vacancies is still more than double the 227,100 vacancies reported in February 2020, before the start of the COVID-19 pandemic. Moreover, the ABS noted that there were a similar number of unemployed people (488,000) to job vacancies in August 2022, compared with three times as many unemployed people to vacancies before the start of the pandemic. At the same time, the share of Australian businesses reporting at least one vacancy rose to 26.7 per cent in August, up from 25.2 per cent in May, and well above the 11 per cent share recorded in February 2020. The labour market boom may now be at or past its peak, but conditions remain very tight.

The ANZ Roy Morgan Consumer Confidence Index for the week ending 25 September rose 2.1 per cent, taking the index up to its highest level in four months (albeit with the index sitting at 87.8, still deep in pessimistic territory). Four of the five subindices registered gains last week, with particularly large increases for ‘current economic conditions’ (up 4.8 per cent) and future economic conditions (up six per cent). Household weekly inflation expectations fell to five per cent, the lowest reading since mid-February this year, with the 0.6 percentage point drop coming despite a rise in petrol prices.

According to the Australian National Accounts: Finance and Wealth data for the June quarter of this year, Australian household wealth fell $484 billion (3.3 per cent) to $14,383 billion.  The ABS noted that this was the first decline in household wealth since the start of the pandemic in March 2020, and reflected a combination of housing market weakness and revaluation losses in superannuation assets: there was a $149.5 billion fall in the value of land and dwellings owned by Australian households after house prices fell for the first time in two years while a $252.3 billion fall in superannuation reserves reflected declines in domestic and overseas share markets.

The latest ABS Household Impacts of COVID-19 Survey said that in August this year, 21 per cent of Australians reported that the job situation of someone in their household had changed due to COVID-19 in the last four weeks, down slightly from 23 per cent in July 2022. The most common job situation changes included being unable to work for a period of time due to COVID-19 (nine per cent, unchanged from the July survey result), and a change to working from home (seven per cent, down from 11 per cent in July).

This week on The Dismal Science podcast we discuss the central bank decisions and the market mayhem that has followed. Plus, we preview next week's rates decision from the RBA.

Other things to note . . .

• The RBA released its Review of the Bond Purchase Program, which was also the subject of a speech by Deputy Governor Michele Bullock.
• RBA Head of Domestic Markets Jonathan Kearns spoke on interest rates and the property market. Kearns said the shift to higher interest rates would: (1) reduce the maximum loan size for prospective borrowers looking to buy houses, and that the 225 bp increase in the cash rate since May will have reduced borrowers’ maximum loan size by around 20 per cent (or more for borrowers with existing debt, such as property investors); (2) boost expected repayments on new mortgages, with a 225 bp increase in the mortgage rate making payments on a new (principal and interest 25-year loan) about 25 per cent larger, influencing borrowers’ demand for credit; and (3) boost actual repayments on existing loan payments – although note that since about 35 per cent of housing credit is fixed rate debt, while other borrowers have paid ahead / used offset accounts, the actual increase here will be less than 25 per cent.  Kearns also noted that a simple ‘user cost’ model of house prices suggests that a 200bp increase in interest rate would lower real house prices by about 15 per cent over a two-year period. (If rates were assumed to be permanently 200bp higher, the same model would imply that house prices would end up being 30 per cent lower relative to a world with unchanged rates.)
• The September 2022 RBA Quarterly Bulletin. Content includes pieces on the current climate for small business finance, sentiment, uncertainty and households’ inflation expectations, and financial stress in China’s property development sector.
• A new RBA Research Discussion Paper examines Macrofinancial stress testing on Australian banks.
• Sticking with the RBA, the government’s Review into the central bank published an Issues Paper.
• The Parliamentary Budget Office (PBO) has produced an explainer on fuel taxation in Australia.
• The Productivity Commission (PC) released an interim report on the National School Reform Agreement. About four years ago, on the back of a $319 billion funding deal, the Commonwealth, Staters and Territories struck an agreement on national reforms to lift education outcomes, based around eight National Policy Initiatives (NPIs). The PC’s interim assessment is that, to date, ‘the NPIs have likely had little impact on Australian students’ academic achievement, educational attainment and skill acquisition.’ It reckons that two of the key NPIs (the online formative assessment initiative and the plan for a national unique student identifier) have stalled and that ‘despite mounting concerns about teacher shortages, little progress seems to have been made in developing the data and evidence needed for an effective national workforce strategy.’
• Also from the PC, the third and fourth interim reports in the current Five-Year Productivity Inquiry. The third report focuses on Innovation for the 98 per cent. The idea here is that only between one and two per cent of Australian businesses innovate in ways that are new to the world, and while such leading innovations promotive productivity, they are already the focus of industrial policy. But what about the remaining 98 per cent? According to the Commission, there ‘is a large group of Australian businesses whose management practices, uptake of technology and productivity are below their best practice peers…by incrementally improving the performance of those businesses, higher rates of diffusion of best practice could significantly lift aggregate productivity growth.’ The fourth interim report, A competitive, dynamic and sustainable future,  argues that ‘Trade in goods and services and foreign direct investment are key sources of competitive pressure for Australian companies and we cannot afford to close ourselves off from the rest of the world. Supply chain shocks and global upheavals do not diminish the case for openness. In fact, increased global linkages are likely the best way for Australia to build resilience to deal with future upheavals and uncertainties.’
• The OECD Interim Economic Outlook September 2022 reports that the world economy is slowing more than the OECD had previously anticipated while inflation has become more widespread. The OECD blames the Russian invasion of Ukraine and the generalised tightening of global monetary policy for slower growth, along with Beijing’s zero COVID-19 policy. According to the new forecasts, after expanding by 5.8 per cent in 2021, world real GDP will grow by just three per cent this year and 2.2 per cent in 2023. Headline inflation across the G20 is expected have risen from 3.8 per cent in 2021 to 8.2 per cent this year and is then projected to ease to 6.6 per cent in 2023. The OECD thinks economic growth in Australia will slow from 4.9 per cent last year to 4.1 per cent this year and downshift to two per cent in 2023. Over the same three years, Australia’s headline rate of inflation is projected at 2.8 per cent, 6.1 per cent and 4.4 per cent.
• The World Bank recently published a major new report on the risk of global recession due to rising interest rates.
• Also from the World Bank, the latest economic outlook for East Asia and the Pacific. Growth in China is projected to slow from 8.1 per cent last year to just 2.8 per cent his year. Regional growth ex China is forecast to pick up from 2.6 per cent to 5.3 per cent over the same period.
• Related, the NY Fed asks, is China running out of policy space? The piece argues that ‘there are strong reasons to be watchful for signs of a sustained downshift in China’s historical pattern of economic performance’ and cites serious diminishing returns to Beijing’s credit-driven growth model, political and institutional constraints on fiscal and monetary policy, an ageing population, and a future slowdown in the export growth engine.
• The September 2022 BIS Quarterly Review. John Plender in the FT on why trade couldn’t buy peace. Also from the FT, Tooze reviews Delong. And Delong responds.
• The AIER on 4,000 years of failed price controls. Howard Marks explains why making helpful macro forecasts is so difficult. The WSJ’s Greg Ip reckons that the UK’s troubles illustrate the broader point that the return of inflation makes budget deficits more dangerous.
• The Odd Lots podcast discusses What Europe needs to do this winter.

Finally, While the Weekly was taking a break over the past fortnight, there were several important data releases. For a summary of what we missed, see below:

Annex: Other important Australian data releases from the previous fortnight

RBA minutes and testimony

The RBA published the minutes of the 6 September 2022 Monetary Policy Meeting of the Reserve Bank Board. They revealed that earlier this month board members had discussed whether it was time to start slowing the pace of monetary policy normalisation:

‘Members…discussed the arguments around raising interest rates by either 25 basis points or 50 basis points…They acknowledged that monetary policy operates with a lag and that interest rates had been increased quite quickly and were getting closer to normal settings. Given the importance of returning inflation to target, the potential damage to the economy from persistent high inflation and the still relatively low level of the cash rate, the Board decided to increase the cash rate by a further 50 basis points.’

And later:

‘All else equal, members saw the case for a slower pace of increase in interest rates as becoming stronger as the level of the cash rate rises.’

At the same time, the minutes also confirmed that while the pace of monetary policy tightening might now be up for discussion, the case for further rate increases remains in place, noting:

‘The Board expects to increase interest rates further over the months ahead, but it is not on a pre-set path given the uncertainties surrounding the outlook for inflation and growth.’

More detail on the central bank’s thinking came when RBA Governor Philip Lowe appeared before the House Standing Committee on Economics. His opening statement is here. And here is the Hansard transcript of the RBA’s testimony. Several points are worth highlighting:

• On the likely pace of future rate increases, Lowe acknowledged that ‘At some point, it will be appropriate to slow the rate of increase in interest rates and the case for doing that becomes stronger as the level of interest rates increases.’ And again later, ‘the fact that we’ve raised interest rates by quite a lot already increases the strength of the argument for smaller increases going forward. We were having interest rates at essentially zero…so we needed to move fairly quickly to get interest rates back to a more normal setting. We’re closer to a normal setting now, which means that the case for large adjustments in interest rates has diminished. I think at our next board meeting we’ll be considering whether it’s a 25-basis pint or a 50-basis point move…at some point we’ll obviously not need to be increasing interest rates by 50 basis points at each meeting, and we’re getting closer to that point.’
• On what a ‘normal’ setting for the cash rate might look like, Lowe explained that on the assumption that the equilibrium real interest rate was zero, and given that the inflation target is two-three per cent, then one should expect that if inflation averages 2.5 per cent over the medium term, the cash rate should be at least 2.5 per cent on average as well, otherwise the real rate would be negative, with no compensation for inflation.  If productivity growth turns out to be positive, then the equilibrium real rate will be greater than zero, and over time, we should expect the average interest rate to be equal to the inflation rate plus productivity growth, so in Lowe’s view it’s likely that ‘we’ll cycle around some number between 2.5 and 3.5…up and down with the economic cycle…We’re 2.35 [now], so we’re getting to that range you’d think is normal but probably still on the low side.’
• On the labour market, Lowe commented that stronger wage growth was something the RBA has been seeking for some time, adding that some pick-up in wages was ‘very welcome’, adding that to date ‘the stronger growth in wages has not been a factor driving inflation higher and…growth in labour costs remains consistent with inflation returning to target.’
• On unemployment, Lowe said: ‘I am doubtful whether we can sustain 3.5 per cent because the feedback we’re getting from business…is that…it’s way too hard to find workers.’ The RBA now thinks that the Non-Accelerating Inflation Rate of Unemployment (the NAIRU) is ‘something in the low fours’.
• Lowe remarked that ‘Businesses too have a role in avoiding these damaging outcomes, by not using the higher inflation as cover for an increase in their profit margins.’  Adding later that ‘I think in some industries there has been an increase in margins…when the demand for goods has been so strong over recent years…firms don’t discount as much…We have to be careful there, because inflation doesn’t just come from wages, it can come from profit margins as well…we’ve got to make user that simple high-profit margins don’t become a source of inflation.’
• Finally, asked about Australia’s fiscal position, the governor said that ‘At the moment, we’re the closest to full employment we’ve been in 50 years and we’ve got the highest terms of trade ever in Australian history, yet we’ve still got a budget deficit and are projected to have a budget deficit. That’s a significant issue.’ He went on to argue that the Australian community needed to work out to how fund the spending it wants: ‘Taxes, cutting back and structural reform – we have to do one of those three things, maybe all three of them, if we’re going to pay for the goods and services that the community wants from our governments.’ Importantly, he added that he had no issues with the current stance of fiscal policy, stating: ‘That’s my medium-term fiscal issues. It’s not really bearing on the current setting of monetary policy – I have no issues there’.

ABS data on the labour market

On 15 September, the ABS released the August 2022 Labour Force. According to the Bureau, the unemployment rate edged up to 3.5 per cent last month from 3.4 per cent in July, although the underemployment rate fell from six per cent to 5.9 per cent over the same period, leaving the underutilisation rate unchanged at 9.4 per cent.  This was the first monthly increase in the unemployment rate since October 2021, but the rise mainly reflected an increase in participation in the labour market, as employment rose by 33,500 people over the month, with a 58,800 increase in full-time employment more than offsetting a 25,300 fall in part-time employment. Both the employment to population ratio (up 0.1 percentage point to 64.3 per cent) and the participation rate (up 0.2 percentage points to 66.6 per cent) rose in August. Hours worked also increased over the month, rising by 0.8 per cent. This was despite the number of people working reduced hours due to being sick remaining elevated, at around 760,000 people, or roughly double the number typically seen at the end of winter.

The ABS also published June quarter 2022 Labour Account data. In Q2:2022, the total number of jobs increased 2.5 per cent to 15.5 million, driven by a 2.2 per cent increase in the number of filled jobs (to 15 million) and a 14.3 per cent increase in the number of vacancies (to almost 0.5 million).  All three figures marked record highs. The share of vacant jobs rose to 3.1 per cent in the June quarter up from a 1.4 per cent vacancy rate in the decade before the pandemic.  The Bureau also noted that around 900,000 people worked multiple jobs in the quarter, or 6.5 per cent of all employed people. That’s the highest rate of multiple job holding on record and about 0.5 percentage points above its pre-pandemic average.

Consumer sentiment, business confidence and PMIs

The Westpac Melbourne Institute Index of Consumer Sentiment (pdf) rose 3.9 per cent in September 2022, to an index reading of 84.4. That marked the first increase in the index since November 2021. Westpac noted that this month’s increase was ‘a little surprising, especially given continued sharp increases in the cost of living and the RBA’s decision during the survey week to make another 50bp increase in the official cash rate.’  The improvement likely reflects the continued strength of the labour market, with the Westpac Melbourne Institute Unemployment Expectations Index falling below 100 again in September, indicating that more consumers expect unemployment to fall than rise over the next 12 months. Despite the positive change, however, the overall level of the sentiment index remains deep in the kind of pessimistic territory Westpac says is associated with recessions or major economic disturbances such as the pandemic or the global financial crisis (GFC). (According to Westpac, the only sustained sub-80 index readings were during the long, deep recessions of the early 1990s and the short, sharp recession of the early 1980s, with COVID and the GFC both bringing just a single month of a sub-80 reading. Notably, both of those recessions saw the unemployment rate move above ten per cent vs. the current sub-four per cent rate).

The NAB Monthly Business Survey for August 2022 showed both business conditions and business confidence edged up last month. Business confidence rose three points to +10 index points while business conditions were up one point to +20 index points. Capacity utilisation at 86.3 per cent remained close to a near-record high, forward orders increased, and trading conditions improved. The indicators for profitability and employment both eased in August, but at +16 index points in both cases, remain deep in positive territory. Cost indicators fell back from the record rates recorded in July but remain elevated, with purchase costs up 4.4 per cent at a quarterly rate (down from 5.3 per cent in July) and labour costs up 3.5 per cent (down from July’s 4.5 per cent). Overall, the survey suggested that businesses remain upbeat about both the current and expected economic environment.

The S&P Global Flash Australia Composite PMI (pdf) edged up to an index reading of 50.8 in September from 50.2 in August, hitting a two-month high. The Flash Services PMI Activity Index was also up slightly at 50.4 while the Flash Manufacturing PMI index rose to 53.9. The Composite PMI signals that the pace of private sector activity strengthened a little this month. The pace of expansion in services was only marginal, however, with activity powered mainly by the manufacturing sector. The survey results also showed prices pressures easing further in September, with rates of input cost and output price inflation slipping to seven-month lows despite respondents continuing to cite rising prices across labour, energy, freight and raw materials.