Last week we wrote about how Australia’s economic outlook is hanging in the balance between forces supporting stronger economic growth and those suppressing growth. Over this past week the economic outlook scales have taken a stronger tilt, notwithstanding a bigger-than-expected fall in December housing finance commitments. This week the focus is on wages growth and labour force data and these may tilt the economic outlook scales stronger again.
Looking at the Australian data, reports and surveys released over the past week, housing finance commitments for owner-occupiers took a turn for the worse back in December falling by 6.1% m-o-m, after a 0.9% fall the month before. In isolation this report would seem to point to further deterioration in the housing market. Yet more contemporary reports covering housing auctions for the weekends 9th/ 10th February and 16th/ 17th February point to a noticeable improvement in buying activity with clearance rates climbing above 60% in both Melbourne and Sydney over the most recent weekend.
The better news on weekend housing auction clearance rates needs to be treated with some caution. The number of auctions is much lower than was the case through much of last year. Also, the average prices being achieved are lower too. Nevertheless, there is a hint of better housing market conditions in the auction clearance numbers, not a continuing deterioration built in to many analysts’ forecasts of a deteriorating Australian economic growth outlook.
Other positive news last week came from the latest NAB monthly business survey and the February Westpac consumer sentiment survey.
In the case of the NAB business survey the indicator of how businesses view the current operating environment (business conditions) lifted to +7 from +2 the month before. The indicator showing how businesses view future conditions also lifted a touch to +4 from +3 the month before. These readings are consistent with businesses spending more.
The February Westpac consumer sentiment survey was also surprisingly positive showing a lift of 4.3% m-o-m after falling 4.7% in January. It is true that the rise in consumer sentiment in February comes after several months of declining consumer sentiment and another month or two of positive results will be needed to confirm the positive change, but it still adds to the case presented by better housing auction clearance rates and more buoyant business sentiment that the economic outlook scales may be starting to tilt stronger rather than weaker as indicated in the recent reports of many analysts.
A test of how the economic outlook scales are tilting comes this week with the Q4 wages report on Wednesday and the January labour force report on Thursday.
The slow lift in annual wages growth over the past year has been a key factor helping the household sector to keep spending and have the confidence to run down savings to fund higher spending in part. If wages growth falters the economic outlook scales will tilt weaker. The consensus forecast for Q4 wages growth is a quarterly rise of 0.6%, the same as in Q3 and holding the annual change in wages at 2.3%. If the result is in line with consensus it will probably add little to views about the relative strength of the economic outlook. An above-consensus result, however, would be a very different matter coming after the better reports last week. The tightness of the labour market over the past year points to the possibility of accelerating wages growth and is the reason why we expect a 0.7% q-o-q lift in wages edging up annual wage growth to 2.4% y-o-y.
The labour force report for January is also important. The repeated stories month after month of the unemployment rate holding down at 7-year low point of 5.0% and employment continuing to grow well provide a strong counterpoint to negative news surrounding housing and excessive household borrowing. If employment growth falters and the unemployment rate increases, the likelihood would increase that households cut back their spending plans and the economic growth outlook would deteriorate sharply.
While labour market data are volatile month-to-month the trend running through the data remains strong. Job vacancies are close to record highs. More businesses are noting shortages of labour. Another firm monthly labour market reading seems likely this week.
If the wage and labour market reports this week are at, or better than consensus forecasts as seems likely, they will reinforce the positive surveys and reports released last week and will confirm that the economic outlook scales have taken a stronger tilt