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It always takes time before an economic recovery is widely acknowledged, mostly because employment is last to improve in the recovery phase. Businesses want to be sure the economy is improving before they start adding workers. If businesses are not yet comfortable about hiring more workers, there is always a concern that lack of employment growth and a rising unemployment rate may stunt what lift in household spending has started to occur before it has a chance to broaden and strengthen. Adding to concern in the early stages of the current economic recovery are a number of potential dampeners on household enthusiasm to spend more freely including a bunching of announcements of future job losses in high profile parts of the manufacturing sector and warnings of a tough Federal Government Budget approaching in May.
The latest labour market reading for January is still mostly bleak. Total employment fell unexpectedly by 3,700 and there has been no growth in employment over the 12 months ending January 2014. The unemployment rate rose slightly to 6.0% in January and is up from 5.4% a year ago. There is, however, one hint in the January labour force report from rising total hours worked, up 1.3% in January and up 2.0% from January 2013, that employment growth may soon take a turn for the better. As the economy starts to improve and demand increases, businesses usually respond in the first instance by lifting the hours worked by existing workers, much as has been the case over recent months. If demand continues to improve extending hours worked starts to become impractical and hiring becomes essential to help meet demand.
Our view is that many businesses are on the cusp of needing to hire more workers, notably in the good parts of the economy – real estate, lending for real estate, legal conveyance, property management and residential building trades. Not far behind and recently entering the ranks of the “good parts” are retail and wholesale trade, transport and communication, and even domestic tourism. Interestingly, Australian businesses in general have become steadily more optimistic over recent months according to the NAB monthly business survey. The latest readings from the NAB survey for early February showed business confidence up at +8 from +6 in January and business conditions at +4 and +3. Positive readings indicate more respondents reporting or expecting better conditions than those expecting worse conditions.
While businesses are starting 2014 on a high note, the household sector is a little more complex. The housing market is very strong. Housing finance commitments are erratic month-to-month, but mostly because they are tracking very strong levels, excluding refinancings up in value more than 28% y-o-y in January. Home building approvals are likewise tracking at very high levels and although down by 2.9% in January are up by 21.8% y-o-y and are also up in every state ranging from 8.8% y-o-y in Tasmania to 39.1% y-o-y in Queensland. Home building activity is clearly going to be rising strongly through 2014 and across Australia.
House prices are rising too and according to the Australian Bureau of Statistics were up in Q4 2013 by 3.4% q-o-q and by 9.3% y-o-y. Rising house prices are boosting household wealth and are at the same time encouraging more spending on housing which the Reserve Bank is not inclined to dissuade for the time being promising to leave very low interest rates on hold for some time to come. There is every reason to expect spending on housing to continue at a strong pace for many months to come.
If spending on housing continues strongly, it is also likely that the improvement in retail spending will continue too, notwithstanding the pullback in consumer sentiment over recent months. February Westpac-Melbourne Institute consumer sentiment fell by 3.0% to 100.2, the lowest index reading in 9 months. Most likely announcements about Toyota ending car production in 2017 and the potential closure of the SPC fruit canning plant had a negative impact on consumer sentiment. However, there is reason to expect a split between how consumers feel and how they spend. The current revival in consumer spending is not being driven by improving incomes, but rather a sense that very high savings of the past few years are less necessary and could even be wealth constraining as house prices rise.
In any case, if employment growth starts to improve soon, as we believe is likely, improving household income and wealth presents a compelling case for a sharp rebound in consumer sentiment before long. All told, the economy is only good in parts at present, but the stronger likelihood is that the good parts expand and a more broad-based recognition develops that economic growth is accelerating. This type of economic environment continues to favour narrowing credit spreads, but it also implies that the next official interest rate move is upwards, although the date of the first move is still several months away.