April’s labour force survey delivered two surprises - a fall in employment and a rise in the unemployment rate – that together suggest that the recent period of extreme labour market tightness may now be starting to unwind. And while the March quarter wage price index (WPI) showed the annual rate of nominal wage growth rising to its fastest rate since 2012, wage growth remains below four per cent and the quarter-on-quarter rise was actually slightly softer than markets had anticipated.
The RBA minutes from the 2 May board meeting show that wage growth and the state of the labour market continue to be important considerations for Martin Place’s thinking about the future path of interest rates. In that context, taken together, the latest labour market readings would give the central bank the option for another pause at the upcoming June meeting. Before then, however, we will get monthly inflation and retail sales readings for April, which will also be important in influencing the decision.
Apologies that we are publishing on a Monday this time – this was due to events beyond my control and we are back to Friday publication this week. Thanks also to everyone who was able to join the economics webinar last week and my apologies again for having to reschedule at late notice, as well as for a croaky voice due to the lingering effects of COVID. If you weren’t able to make the new time, you should be able to find a recorded version here. And another reminder that I will be doing an in-person economic update in Melbourne on 8 June. Register here for the Melbourne Directors’ Breakfast: Economic Update 2023 (face-to face version). And register here for the virtual event.
This week on The Dismal Science podcast, we talk about the legacy in macroeconomics of Nobel Prize winning economist Robert Lucas, as well as at the latest on jobs, wages and consumer confidence as we look ahead to the June RBA meeting.
Labour market shows signs of easing in April 2023
The ABS Labour Force Survey for April 2023 showed the number of employed people falling by 4,300 over the month, with a decline of 27,100 in full-time employment exceeding a 22,800 increase in part-time employment (all seasonally adjusted figures).
The number of unemployed people rose by 18,400 last month. As a result, the unemployment rate rose from 3.5 per cent in March to 3.7 per cent in April. Although the underemployment rate fell by 0.1 percentage points to 6.1 per cent, that was not enough to stop the combined underutilisation rate edging up from 9.7 per cent to 9.8 per cent.
Other signs of a modest easing in what has until now been an extremely tight labour market were falls in the participation rate (from 66.8 per cent to 66.7 per cent, which helped limit the rise in unemployment) and in the employment to population ratio (from 64.4 per cent to 64.2 per cent).
Interestingly, hours worked moved in the opposite direction, increasing by 2.6 per cent over the month, despite the fall in employment. The ABS explained this in terms of fewer people than usual working reduced hours over the Easter period, which it said could reflect more people taking their leave earlier or later than usual. Or it could be because the current high number of vacancies meant that some people were unable to take leave.
The market’s consensus forecasts for the April release were for an employment gain of 25,000 and an unemployment rate of 3.5 per cent, so the actual outcomes were quite a bit weaker than expected. Of course, it remains the case that an unemployment rate of 3.7 per cent still indicates a labour market that is both historically tight and some distance from official estimates of the likely NAIRU (around 4.25 – 4.5 per cent). And this was just one month’s data. Even so, these numbers do suggest that the degree of labour market tightness has now started to ease.
Nominal wage growth in March 2023 quarter highest since 2012
The seasonally adjusted Wage Price Index (WPI) rose 0.8 per cent over the March quarter 2023 to be up 3.7 per cent in annual terms. The latter marks the fastest pace of growth since the September quarter 2012. But with the headline rate of CPI inflation running at seven per cent and the employee living cost index rising by an even faster 9.6 per cent in the same March quarter, real wages still went backwards again.
Private sector wages rose 0.8 per cent over the quarter and 3.8 per cent over the year (the highest annual growth since Q2:2012) while public sector wages were up 0.9 per cent quarter-on-quarter and three per cent year-on-year (their fastest annual increase since Q1:2013).
Across the private sector, the average hourly wage change for those jobs seeing a wage movement was a 4.3 per cent increase, with 14 per cent of jobs recording wage growth. The ABS also reported that the share of jobs receiving larger wage increases rose last quarter, with the proportion of jobs with a rise of between four and six per cent rising to 24.5 per cent (the highest since 2009) and the share with a rise of more than six per cent climbing to 10.6 per cent. At the same time, the share of jobs receiving a wage rise of two per cent or less fell to 18.6 per cent, down from more than 50 per cent of jobs in the first half of 2021. Overall, the ABS said there had been a significant increase in the share of jobs recording a larger annual wage rise compared to the previous year – indeed, at 60 per cent this is the highest proportion reported since the ABS began doing this analysis in 2003.
By industry, the annual rate of wage increase was highest in the Wholesale Trade and Other services industries (4.4 per cent) and lowest in the public administration and safety industry (2.9 per cent).
By pay setting method, jobs covered by individual arrangements accounted for a bit more than half of recorded wage growth in the quarter. The ABS also pointed to a larger than usual March quarter contribution from jobs covered by enterprise agreements, citing newly negotiated agreements across both the public and private sectors along with changes to public sector wage caps.
Revised data for the December quarter 2022 showed the WPI had risen by 0.8 per cent over the quarter (and 3.4 per cent over the year), so the March quarter 2023 result showed no acceleration in the quarterly pace of wage growth. That meant it was a bit below the consensus forecast, which had anticipated a 0.9 per cent quarterly increase. And on that basis, the headline result is unlikely to sound any inflation alarm bells. That said, there were some signs of still-mounting wage pressures in some of the detailed numbers, such as the rise in the share of jobs receiving higher pay increases.
It’s also worth noting that although the RBA in the past has said it thinks wage growth with a three in front of it is quite consistent with the inflation target, it has apparently become somewhat less comfortable with that position in recent weeks, due to Australia’s recent weak productivity outcomes (see next story).
RBA minutes explain 2 May decision to hike cash rate target
The RBA published the minutes of the 2 May 2023 Monetary Policy Meeting at which the central bank delivered a ‘surprise’ 25bp rate hike. They explain how the RBA Board weighted up the arguments between holding the target cash rate unchanged and delivering a 25bp rate hike. The key message is that while the central bank’s decision was ‘finely balanced’, ultimately concerns about upside risks to inflation due to the still high level of overall inflation, the threat of persistent services inflation, concerns relating to weak productivity growth and shifts in inflationary expectations were together enough to tip the balance in favour of a rate hike.
Starting with the case for leaving the cash rate target unchanged, the minutes highlighted several arguments:
- First, the March quarter 2023 CPI release confirmed that inflation had peaked, and there were signs of further falls to come, particularly relating to goods prices.
- Next, even though the pace of wage growth had picked up, forward-looking indicators suggested that wage growth was likely to peak at around four per cent and then stabilise. If so, at current rates and provided productivity growth returned to its (low) pre-pandemic rate, wage growth would be consistent with the RBA’s inflation target.
- The outlook for household consumption looked weak and had been revised lower in the near term as spending was squeezed by higher living costs and increased mortgage payments. The latter were expected to increase further as fixed rate mortgage deals expired.
- Unemployment was expected to increase and this would exert further downward pressure on inflation.
- Finally lags associated with the monetary policy transmission mechanism, plus the significant degree of policy tightening delivered already, implied some substantial uncertainties around the economic outlook.
Set against these arguments, the minutes listed the case for another rate hike:
- Despite the fall in headline inflation in the March quarter, the RBA’s view was that ‘inflation in Australia remained too high and broadly based’ while the latest set of RBA forecasts did not see inflation returning to even the top of the RBA’s target band until mid-2025. While this was consistent with the RBA’s mandate, it also ‘left little room for upside surprises to inflation given that inflation would have been above target for around four years by that time.’ Moreover, the RBA’s own inflation forecasts were still predicated on the technical assumption of one further rate increase.
- There was also the potential for an upside risk to inflation arising from services prices. International evidence from several economies was that services price pressures were quite persistent, underpinned by wages growth above rates consistent with inflation targets. This was of concern, given what the minutes describe as ‘the high degree of commonality in inflation globally since the COVID-19 pandemic.’ Persistent services price pressures could potentially be reinforced by the impact of strong population growth (due to the uptick in overseas arrivals) plus low rental vacancy rates on rental price inflation.
- A second key risk was that productivity growth would not recover, but rather remain stuck below pre-pandemic rates. In which case, the resultant growth in unit labour costs ‘would be uncomfortably fast’.
- Moreover, a sustained period of high inflation would lead to changes in inflation expectations and therefore in price- and wage-setting behaviour, making it considerably more difficult to lower inflation.
The minutes also referenced recent developments in Australian asset markets including the depreciation of the exchange rate and the rise in house prices. While noting that the central bank ‘does not target asset prices’ the minutes said these developments ‘provide relevant information and need to be considered.’
Finally, looking back at recent data releases, the RBA’s interpretation of the numbers was that they confirmed that the labour market remained tight, that inflationary pressures were significant, and that there were upside risks to inflation which, if they materialised, would further delay the return of inflation to target. Thus, despite the significant uncertainties involved:
‘In weighing up the two options, members recognised that the arguments were finely balanced but judged it was appropriate to increase interest rates at this meeting.’
What do the minutes tell us about the prospect of further rate increases from here? They note:
‘Members also agreed that further increases in interest rates may still be required, but that this would depend on how the economy and inflation evolve.’
Which suggests that, although the RBA remains in data-dependent mode, it is still too soon to rule out at least one more rate hike over the next two or three meetings.
One last point. The minutes also reported the Board discussion reviewed the RBA’s approach to reducing its holdings of government bonds acquired during the pandemic (‘quantitative tightening’ or QT). The current approach to QT is to hold the bonds until maturity, rather than seeking to actively shrink the central bank’s balance sheet by selling them. The minutes note that members agreed to stick with this policy for now, but that the large holdings exposed the RBA’s balance sheet to significant interest rate risk, and that it would be appropriate to continue to review the policy.
What else happened on the Australian data front?
The monthly Westpac-Melbourne Institute Consumer Confidence Sentiment Index (pdf) fell 7.9 per cent in May, dropping from an index reading of 85.8 in April to a reading of 79 this month. The index is now just above the low levels recorded in March this year, which had seen the lowest monthly results since the COVID outbreak in 2020. Westpac points to the combined impact of the RBA’s 2 May hike to the cash rate and the 9 May announcement of Budget 2023-24 as driving the fall. It notes that sentiment amongst those surveyed before the budget was announced showed an index read of 81.3 vs a read of 75.3 from those surveyed after, and therefore that a strict interpretation would then attribute about 60 per cent of the monthly drop in sentiment to the budget and the remaining 40 per cent drop to the RBA rate decision and other factors. The Westpac commentary reckons that this strict take is ‘probably being too harsh’ on the budget, and points out that while self-assessed budget ‘losers’ (27 per cent of those surveyed after the budget expected it make them worse off) outnumbered ‘winners’ (15.5 per cent expected it to improve their finances), a negative net assessment is typical post-budget, and this time’s gap of 11.5 percentage points has only been bettered by one budget in the years between 2010 and 2019, in the form of the income tax cutting 2018 budget (which still saw a gap of 9.1 per cent). The survey also pointed to a rise in the share of respondents expected a further increase in interest rates over the next 12 months following the RBA’s rate decision.
Elsewhere in the survey results, Westpac reckons the standout finding was a 10.7 per cent surge in the House Price Expectations Index, which is back to its highest level since February 2022. At an index reading of 144, those expecting prices to rise now significantly outnumber those anticipating a fall (recall that 100 represents a neutral reading where the two camps are in balance).
The weekly ANZ-Roy Morgan consumer confidence index fell by 1.8 points last week to an index reading of 75.5. This measure of consumer confidence has now fallen to its weakest reading since April 2020 and has been below an index reading of 80 for 11 consecutive weeks. By subindex, the reading for ‘current financial conditions’ has now fallen to its lowest level on record since 2001. Interestingly, readings for both current and future economic conditions both edged higher last week, which ANZ said might in part reflect the announcement on 9 May of an expected budget surplus this financial year.
The accompanying ANZ-Roy Morgan measure of weekly inflation expectations was unchanged at 5.3 per cent.
The Melbourne Institute’s measure of expected inflation (based on the trimmed mean) rose by 0.6 percentage points to stand at 5.2 per cent in May 2023. The Institute reckons this spike in inflation expectations is likely to be associated with the federal budget, although it notes that inflation expectations are only a little above their May 2022 level.
ABS data on overseas arrivals and departures for March 2023 show short-term visitor arrivals rose by 442,080 trips over the year to 613,340, while short-term resident returns were up 489,390 trips to 635,730. The same data show 53,640 international student arrivals that month, an increase of 25,460 compared to the same month in 2022.
Other things to note . . .
- Treasury Secretary Steven Kennedy’s post-Budget economic briefing.
- Peter Martin on how economists graded Budget 2023-24.
- The PBO explains the long-term consequences of indexation for the budget.
- Two pieces from the AFR. Is Grattan’s Danielle Wood now Australia’s most influential economist? And Richard Holden defends the yet to be delivered Stage 3 Tax cuts.
- Greg Earl on paying for the new security era.
- A WSJ obituary for Robert Lucas. Useful balance for my more critical take on Lucas’s impact on economics on the latest Dismal Science podcast. See also this assessment of Lucas’s work by Noah Smith.
- The FT’s Martin Wolf considers the threat and promise of AI.
- On trying to calculate the economic costs of Brexit.
- The Economist magazine has a special briefing on China, including a look at the question of how soon and at what height will China’s economy peak.
- Also from the Economist, Henry Kissinger on how to avoid a third world war.
- The end of East Asia’s Cold Peace?
- An IMF working paper analysing the post-2020 failure to forecast inflation.
- The Great German Gas Recession that Didn’t Happen.
- On the extraordinary generosity of central banks to banks.
- The WSJ explores why US workers in 2022 were feeling happier than they’d been in decades. Job switching and hybrid work seem to have been important. Underpinning conference board survey here.
- Using job postings to quantify remote work.
- The BoJ’s monetary trilemma.
- Walter Russell Mead says you are not destined to live in quiet times.
- Guardian long read on the Dark Avenger, the most dangerous computer virus writer in the world.
- Horsemen of the apocalypse.
- Tyler Cowen in conversation with former IMF chief economist Simon Johnson on banking, technology, and prosperity.
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