Weekend Economist: Easy touch

Weakness in the labour market and consumer sentiment, and a stop-start housing market, point to the need for plenty of monetary stimulus in 2014.

Firstly on business, we have already pointed out the evidence in 1996 when a Coalition victory (after a long period in opposition) was greeted with solid boosts to business confidence although business conditions were little changed. The NAB survey on business confidence which printed this week showed a similar story. The measure for business confidence surged from 4 to 12 – the highest read for 3.5 years; that contrasted with its average read over the past 6 months of around zero. The measure for business conditions also improved from –7.4 to –4.2. That compares with an average over the last 12 months of around –6 and an average in the 6 months to September 2012 of –1.8.

Conditions, while showing improvement relative to the last 12 months, are still markedly weaker than a year ago. This result, however, will be sufficiently buoyant to tempt the Reserve Bank to await further developments. Similarly there was a modest improvement in the employment series. It improved from –9 to –6 but was still firmly in negative territory. Over the last 12 months the employment index has averaged around –6.6, compared to –1.6 in the six months to September 2012.

On the other hand, consumer sentiment failed to retain all the gains from around election time. The Westpac Melbourne Institute Index of Consumer Sentiment fell by 2.1 per cent in October, from 110.6 in September to 108.3. The shutdown of the US government and media speculation around a US government default would have unnerved respondents. The business survey was completed before the shutdown was announced.

Consistent with the weak reads for the employment component of the business survey, we saw that respondents remained concerned about their jobs. The Westpac Melbourne Institute Index of Unemployment Expectations rose by 0.6 per cent in October, indicating ongoing concerns. The index is 10.1 per cent above the level in November 2011 (the date of the first rate cut in this cycle), indicating significantly more heightened concerns around job prospects than at that time. That contrasts with the overall Consumer Sentiment Index which is 4.7 per cent above its level in November 2011.

The employment report for September showed a weak labour market. Total employment rose 9100 in September. This is an insipid rate of employment growth as total employment has lifted just 0.8 per cent year-on-year, or by just 95,500 in the year to September. Total hours worked contracted 0.4 per cent in the month, bringing the annual pace down to 0.6 per cent year-on-year, more in line with annual growth in total employment. Surprisingly, the unemployment rate fell to 5.6 per cent from 5.8 per cent in August. At two decimal places, the fall was only slightly more than 0.1 percentage point, from 5.76 per cent to 5.65 per cent.

Westpac estimates that underlying growth in the labour force is around 17,000 a month.  Were it not for the surprising fall in the participation rate, to 64.86 per cent from 64.98 per cent, the unemployment rate would have printed at 5.82 per cent in September. Indeed if, in this cycle, the participation rate had held around its average since March 2008, the unemployment rate would now be 6.5 per cent – not 5.6 per cent.

The employment to population ratio is at 61.2 per cent, below the low point hit in 2009. Growth in employment has been running well behind population growth.

So far this year, most of the growth in employment has been in part-time female employment. Total female employment is up 55,500 versus 25,000 for male employment; part-time employment is up 69,600, compared to a pitiful 10,800 rise in full-time employment.

Recent increases in house prices are another reason for the bank to delay any move. Last week I wrote: "Our judgement remains that the housing recovery will continue to be a 'stop-start' one, uneven across both segments and states. There are significant headwinds that are yet to fully impact with some markets facing a significant increase in the supply of new dwellings (Victoria, Western Australia) and the mining downturn yet to play through fully to housing (Western Australia, Queensland)."

The Consumer Sentiment survey lent some credibility to those views of a ‘stop-start’ housing market.

There was a shock reading on whether now is a good time to buy a dwelling. That index fell by 10.3 per cent, from 145,000 to 130,000. There were some big falls in individual states – particularly New South Wales (22.5 per cent) and Queensland (11 per cent). It may be that affordability issues, particularly in Sydney, are already weighing down the attractiveness of property.

Finally we received the latest global growth forecasts from the IMF. Readers will be aware that our downbeat global growth outlook for 2014 has been a key reason behind our view that the bank will continue cutting rates in 2014. The IMF lowered its global growth forecast from 3.8 per cent to 3.6 per cent – in the right direction but still well above our forecast of 3 per cent. The main reason behind the IMF downgrade is its view on developing economies and emerging markets. It retains an overly optimistic view on US and Europe.

It has lowered its forecast for China's growth next year from 7.7 per cent to 7.3 per cent – still above our forecast of 7.1 per cent. Other adjustments to India (5.1 per cent to 4 per cent); the ASEAN five (5.4 per cent to 5.1 per cent) and Latin America (3.4 per cent to 3.1 per cent) are even lower than our own numbers. Indeed, if we were to take on board the IMF's views on the emerging markets, we would lower our own global growth forecast in 2014 to 2.8 per cent.

We are comfortable with both our decisions last week. There is enough evidence around business conditions and confidence for the Reserve Bank to seek further information before moving rates in February.

However, global growth, the labour market housing and the consumer continue to point to the need for further stimulus next year.

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