Author: The Australian Macroeconomic Project

Credit deceleration in Australia should be ringing alarm bells – April 2017

Today, the RBA released its Lending and Credit Aggregates showing that growth in new credit (total private sector) in Australia has continued to slow in the latest month. In April 2017, the annual growth in new private sector credit declined by -$29.8b. In other words, there was $29.8b LESS private credit growth in the year to April 2017 than in the year prior. This doesn’t mean that the stock of outstanding credit is declining (that would be deleveraging), at this stage it means that credit growth has been slowing.

New credit, together with income growth, drives new spending in the economy.

With regulators and media (rightly) focused on reigning in the riskier mortgage credit, namely interest-only mortgages, there has been absolutely no focus on the worsening state of business credit growth. I work on the premise that business spending and investment supports future economic growth and improvements in labour market conditions. So, when I see a chart that shows business credit continuing to decelerate, then it makes me rethink my expectations for economic and employment growth.

The main driver of the slowdown in overall private sector growth in new credit has been the decline in new credit for business. Not even the acceleration in investment mortgage credit has been enough to drive the overall impulse higher, with total annual growth in new credit for mortgages only reaching +$7b in April:-

Source: RBA, The Macroeconomic Project

A longer term perspective highlights just where we are in this cycle, and it’s not good.

In dollar terms, the overall annual decline in new private credit is now larger than it was in the previous downturn of 2012/13. At that point in the cycle, the annual decline in new credit reached -$28.9b at its lowest point. As a % of GDP, it was approx. -1.9% of GDP in size. Although the current dollar amount is slightly larger, -$29.8b, it’s also a slightly smaller % of GDP about -1.7% of GDP (using a rosy GDP forecast).

Source: RBA, The Macroeconomic Project

Remember why credit growth started to accelerate again in 2013? A series of eight (8) official cash rate cuts by the RBA between Nov 2011 and Aug 2013 (-225bps in total) and the acceleration of Chinese credit growth. New credit growth started to accelerate for both business and mortgage credit. Which is why it’s surprising not to see more commentary about the slowing growth in business lending in this part of the cycle.

The annual growth in new credit for business started decelerating back in mid-2016. In dollar terms, the level of deceleration has surpassed the low of 2013. But as a % of GDP, the current annual decline in new credit for business is just shy of that post-GFC low, -2.02% in April 2017 versus -2.14% in June 2013.

Source: RBA, The Macroeconomic Project

In recent posts on this topic, I’ve given this deceleration in business credit growth the benefit of the doubt. The improvement in business profits (led by Mining) over the last few quarters may have cushioned some of this slowdown in new credit growth. But with commodity prices now off again and with consumer spending and labour market metrics looking lackluster, it’s not likely that we’ll see continued high growth in business profits. So without growth in new credit, what will be supporting at least more stable economic growth? We’ve seen hours worked grow by a mere +0.07% in the first quarter of the year (in the Dec quarter aggregate hours worked grew by +0.46%), indicating that activity may be slowing.

Despite the picture I’ve painted here, business sentiment and reported business conditions indices are at multi-year highs. It’s difficult to explain the disparity between improving business confidence & reported conditions and the slowing growth in new credit for business. I would have thought that improving business confidence would translate into decisions to invest and spend. But even the NAB survey for the month of April has a rather large pull back in capex:-

Source: NAB

Maybe business was waiting on the budget outcome in May. Either way, this ‘optimism’ hasn’t translated into better labour market conditions – underemployment continues to rise, unemployment remains elevated and growth in aggregate hours worked is flat.

And in the irony of all ironies, the one area where regulators are focusing efforts to slow lending, investor mortgages, the growth in new credit continues to accelerate. The annual growth in new credit for total mortgages of +$7.6b is the product of 1) continued deceleration in owner occupier credit (-$31b annual decline in new credit) and 2) the continued acceleration of investor lending from +$33b in March to +$38.9b annual growth in April. We are yet to see any slow-down in investor-led activity reflected in the data. Most measures to curb interest only lending only started to come into effect during April.

Whilst it’s the right idea to reign in riskier interest-only lending, know that this is going to happen now against a backdrop of slowing annual new credit growth across the board – business, owner-occupier mortgages and personal credit. Slowing our rate of debt growth isn’t a bad thing, but it comes at a price when economic output growth relies so heavily on accelerating credit growth.

New credit, together with income growth, drives new spending in the economy.

Aussie labour market still underperforming – March 2017

Overall, the Australian labour market is still underperforming. Employment growth has fallen below the peaks of 2014 and 2015 and is still well below recent growth benchmarks.  There are some areas of “better” performance as of the March 2017 data, but two points put into question whether we are on the path to an improved labour market. First, despite the more recent pickup in employment growth, the current increase in participation is leading to an increase in the number of unemployed persons. While there is a reason to give this the benefit of the doubt, it does appear that employment growth is not high enough to absorb those workers returning to the labour force. Secondly, the welcomed and positive shift to greater growth in full-time employed persons has not been confirmed by the growth in full-time hours worked. Growth in aggregate hours worked has slowed throughout the March quarter.

The top-line seasonally adjusted number was strong – employment grew by +60k persons. This is the largest (seas adjusted) monthly increase since October 2015. I always look at the trend data though, and that was good for the month too. The annual seasonal reanalysis was completed in February, so this changed the ‘shape’ of many trends between the February and March data, but at least our benchmark for 2017 has been set.

Labour market is still underperforming…

Across different measures and benchmarks, the Australian labour market continues to underperform.

First, the trend in the annual growth highlights just how much the growth in employed persons has slowed in the space of the last year.

In March 2016, the total number of employed persons grew by 250k persons (annual) – in March 2017, that growth has slowed to +122k persons. Total unemployed persons are increasing again as more people come back into the labour market:-


Source: ABS

On the positive side, the annual growth in total employed persons has started to improve over the last 3 months. More on this shortly.

Second, annual growth in employed persons is sitting well below the 10-year average benchmark.

The 10 year average measures the average annual growth (in 000’s persons) for March over the last 10 years. The current annual rate of growth in employed persons (at March 2017) is +122k persons versus the average over the last 10 years of +189k.

Source: ABS

This is much worse when you break out full-time (FT) numbers. Annual growth in FT employed persons was a mere +25k persons versus the 10 year average of +102k persons. On the flipside, part-time (PT) employment growth is performing just above the 10-year average, +97k annual growth in PT employed persons versus +86k for the 10-year average. The current annual growth in total unemployed persons is now above the 10-year average – which is not a good thing.

Third, the current growth in the number of employed persons is below that of the labour force.

Comparing the gap between the growth in employment and growth in the total labour force is an interesting way to gauge the ‘strength’ of employment growth. The result of employment growing slower than the labour force is an increase in the number of unemployed persons.

Source: ABS

For most of 2015 and the first half of 2016, employment grew by a greater number than the labour force and unemployment fell as a result. The (now negative) gap between employment and labour force growth since Sept 2016 is not the widest it has ever been, but it does mark a shift to a more negative trend.

One way to view changes in the labour force size is by looking at what population growth adds and the impact +/- of changes in the participation rate. Over the last four (4) months there has been a shift to people coming back into the labour force and it’s this increase in participation that has contributed to the growth in the labour force:-

Source: ABS, The Macroeconomic Project

The exact reason why people are coming back (or left in the first place) into the labour force cannot be answered by this data.

Comparing employment growth to LF growth suggests that employment is not growing fast enough to ‘absorb’ those people coming back into the labour market. It could be a timing issue. Participation has been increasing over the last four months and the current median duration of job search in Australia is 12 weeks (unchanged from a year ago) so it might take a few more months of data to gauge whether unemployment continues to accelerate. But the fact that the median duration of job search hasn’t changed suggests that there hasn’t been much, if any, tightening in the labour market -the same median job search duration suggests that it is neither easier nor harder to find a job overall.

Finally, while employment growth has improved recently, the distribution of that growth among the states has not been broad based.

The annual growth in employed persons has been concentrated in VIC. The problem is that some of the states that had previously been bigger drivers of employment growth (NSW, QLD and WA) have completely underperformed versus the 10-year average:-

Source: ABS

Smaller states have performed better with regard to employment growth – NT, TAS, ACT and SA all performed above the 10yr average but most of that growth has been PT employment (which is still better than no growth).

Are we on the path to a better labour market performance? Have we turned the corner?

There is some evidence of more positive shifts in the labour market performance, but it is mixed.

A better sign is that on a National level, one of the more negative trends in the labour market appears to have reversed in the last five months. Full-time employment is now growing faster than part-time. I say this has been a negative trend because the underemployment ratio at an all-time high suggests that many are turning to PT work out of necessity and actually want more hours of work.

Over the last five months, FT employed persons has grown faster than PT. Below is the monthly change over the last two years:-

Source: ABS

But again, the distribution of this growth in FT employment, especially in this latest quarter is limited. Only two states have contributed to the bulk of this growth in FT jobs – VIC and WA.

Across the states in the latest quarter:-

  • NSW – PT job losses are driving the overall decline in employment for the quarter and FT employment growth has not been high enough to offset this decline. FT employ growth +3.7k persons and PT employed persons -8.6k
  • VIC – FT employment growth +14.1k persons and PT employed persons +1.8k
  • QLD – growth in PT employment has exceeded FT growth in the last 3 months but the trend for FT employment growth is looking positive. Growth in FT employed persons +3k and +10k PT employed persons
  • SA – growth in PT employment has exceeded FT and the trend has become more negative over the last few months. Growth in FT employed persons +0.3k and growth in PT employed persons +3.1k
  • WA – accounted for the largest growth in FT employment across all states – growth in FT employed persons +14.9k offsetting a decline in PT employed persons of -8.2k
  • TAS – an overall positive performance with +0.4k FT employment growth and +0.6k PT employment growth
  • NT – growth in FT employed persons +1.8k and +1.6k PT employed persons
  • ACT – growth in PT employment is just offsetting the decline in FT employment in the latest quarter. FT employed persons -1.2k and +1.3k PT employed persons

The turnaround in employment growth in QLD and WA is notable and NT continues to punch above its weight in the latest quarter. This is to be expected to a certain degree given the rebound in our main export commodity prices. But given these levels of employment growth, only in WA, TAS and NT has unemployment declined in the latest quarter.

While it is a better sign that FT employment has grown (increased income), PT employment growth has unfortunately been slowing and this has impacted overall employment growth in the last few months – the total growth each month (FT+PT) is still well below that of the peaks of 2014 and 2015.

Despite the shift to greater FT versus PT employment growth, the underemployment ratio has continued to rise:-

Source: ABS

In other words, a growing proportion of employed persons (9.1%) wants and is available for more hours. This is an important sign of how much slack still exists in the labour force and possibly how households might be coming under greater income pressure.

There is also a question mark over the rate of growth in FT employed persons – there has been a divergence between the growth in FT employed persons and the growth in FT hours worked over the last few months. 

There has been growth in the number of FT employed persons yet FT hours worked have been slowing and then declining month on month over the last four months:-

Source: ABS

It creates some doubt over which measure is the more accurate representation of the labour market – FT employment growth or FT hours worked?

Seeing hours worked grow faster than employed persons is easier to explain i.e as demand increases, it’s easier/faster/lower risk for firms to extend overtime hours of existing employees rather than expand the workforce, which takes longer. But it’s more difficult to see how we can be adding more FT employed persons, yet FT hours worked are declining. It doesn’t seem to be simply a timing issue – past data shows that the timing of the two measures is fairly consistent, with both measures turning at a similar time. In the chart above, the divergence has been occurring for most of the last half of 2016 and 2017 YTD.

No such divergence exists between the growth in PT employed persons and the monthly decline in PT hours worked:-

Source: ABS

Growth in PT employed persons and PT hours worked have slowed throughout the last half of 2016 to zero growth as of March.

Either way, there is a concerning trend that aggregate hours worked in the economy slowed throughout the March quarter.

Across most measures, the labour market is still underperforming. Employment growth is low, unemployment is increasing, under-employment is still increasing and hours worked is slowing.

 

Further deceleration in the Australian credit impulse – Feb 2017

The latest RBA credit and lending aggregates for Feb 2017 show that the growth in new credit has continued to decelerate.

Total Private Credit – growth in new credit decelerates further in Feb to -$24b

The growth in new credit at the aggregate level (total private sector) began to decelerate sharply from April 2016. Since then, the annual growth in new credit has gone from +$30b in April 2016 to -$24b as of the latest February 2017 data. This is now approaching the lows reached in mid-2013:-

Source: RBA, The Macroeconomic Project

The main driver of this slowing growth in new credit has been business credit, which has continued to slow since June 2016. The growth in new credit for mortgages started to accelerate in November 2016, but this has not been large enough to offset the deceleration in business credit growth.

Progressively smaller increments in the growth in new credit are likely to result in lower spending and growth. Consider that the annual growth in the stock of total private credit in February 2016 was $161.9b and this annual growth in credit slowed to $137.9b in February 2017 – overall, this is -$24b less annual credit growth in the economy. This equates to approx. -1.4% of nominal GDP.

Given the recent strength in economic growth data (which is so far only the Dec ’16 quarter), the question is whether other sources of spending growth, such as income, are accelerating to offset this deceleration in total private credit growth.

Read more on the Australian Debt and Credit Impulse page of this blog.

Negative outlook for GDP – Sept 2016

There are several concerning aspects to the Sept quarter decline in Australian GDP.

The main one is that this was not the result of an external shock forced upon our economy. It is a reflection of the state of our low growth economy and how vulnerable we are to quarterly gyrations in spending. On a broader level, investment spending continues to detract from overall growth. Even growth the strongest area of spending, household consumption spending, is starting to slow. Whilst there were a few bright spots, there is some evidence to suggest that this may not be the ‘one-off’ event.

Sept qtr GDP declines by -0.47% in real terms, annual growth slows to +1.76%

Over the longer term, real GDP growth has continued to trend lower and even more so since 2011:-

Source: ABS

There was little surprise in the contributors to the latest quarterly decline in GDP:-

Source: ABS

Public and private investment spending were the main contributors to the quarterly GDP decline. Private investment spending has been a drag on growth for several years now.

Net exports also made a negative contribution in the latest quarter. The net export result (exports less imports) was actually positive for the third quarter in a row, but that ‘surplus’ in real terms was smaller than in the previous quarter.

On the positive side, household consumption spending continued to contribute to overall GDP growth. Growth was not strong enough to offset the declines elsewhere and household consumption spending is continuing to slow.

Public and private investment spending is a drag on growth

The decline in private investment spending, due the end of the mining investment boom, continues. But it was also public investment, dwelling related construction investment and new non-dwelling building construction that drove the overall decline in investment spending in the latest quarter:-

Source: ABS

Most notable was the “improvement” in the latest quarter for private business investment which made a positive, albeit small, contribution to quarterly GDP growth. This was driven by three of the four areas –

  • There was a small improvement in investment spending on machinery and equipment – but total spend in real terms remains 16% below the peak
  • Cultivated biological resources (small) and intellectual property products both grew in the quarter

These areas off-set the 12% quarterly decline in the non-dwelling construction spending component of total business investment – this includes mining related engineering construction.

One thing caught my eye in the non-dwelling construction data. It was actually a speech by the Treasurer, Scott Morrison that led me to this. First the quote:-

“In this new data, though, released today, new building construction was also down 11.5 per cent for the quarter. That was impacted by some weather events during the course of the September quarter, as we know can affect these figures from quarter to quarter, when you break it down to that level. It was also the result of some larger projects coming to an end. But with such a change in both engineering and building construction, there could not have been a more important time to have passed legislation to restore the Australian Building and Construction Commission…” Australian Treasurer, Scott Morrison, 7th Dec 2016

The full transcript is available at http://sjm.ministers.treasury.gov.au/transcript/178-2016/

I was curious about the 11.5% decline in new building construction. Non-dwelling construction is one of five areas that is measured as a part of total private sector investment spending in Australia and accounted for approx. 30% of total private investment in the latest year to Sept 2016. New building construction falls under this category and while it isn’t the largest area of spending in non-dwelling construction, it might say something about sentiment. The following chart looks at the trend in private non-dwelling construction spending since Sept 1976:-

Source: ABS

What immediately stands out to me is the cyclical nature of new building investment spending over time. Note that this chart is in real dollars, so we can compare spending over time.

Splitting out new non-dwelling building construction strips away the overriding influence of engineering construction spending of the mining boom – that is when this cyclical trend becomes evident.

All of the obvious major declines in non-dwelling construction of new buildings correlate in time with our largest episodes of economic weakness: recessions of ’81 and the early 90’s, the dot-com bust in 2000 and the GFC in ’08. Which leads me to ask: is the decline in the Sept 16 quarter a warning that this is not just a ‘one-off’ in GDP decline? The decline doesn’t appear to be related to any mining slow down, as spending on non-dwelling buildings continued to grow while construction engineering (the mining element) started declining from the Dec 2013 quarter. Actual spending on new non-dwelling buildings only topped recently in the Dec 2015 quarter, but fell much harder in the Sept 2016 quarter. The deceleration in new credit for business at the same time, is also evidence that something may have shifted in the spending and investment patterns of business in Australia.

This is only one quarter of data. The forward looking nature of construction investment spending lends itself well as a proxy for business sentiment. At the very least, it is an interesting chart and it will be something that we will continue to monitor.

What is likely to change with regard to investment spending?

Public investment spending is likely to be subdued unless the government changes its focus on reducing spending to improve the budget deficit – but that focus is not likely to change:-

“Once borrowing for recurrent expenditure is under control, we will have more headroom to take on and deploy so-called good debt,” Scott Morrison, Australian Treasurer, 14 Dec 2016, in response to calls for the government to take advantage of low interest rates and boost investment spending on infrastructure.

Whilst private investment spending is still detracting from growth, the impact wasn’t as negative as in previous quarters:-

Source: ABS

But investment spending intentions are still lacklustre for the rest of the 2016/17 financial year. The latest capex survey (which doesn’t cover every industry – approx. 60% of the ‘value’ of private investment spending) highlights that non-mining investment spending will remain fairly flat, with only minor increases versus the year prior:-

Source: ABS

The overall -17% decline equates to approx. -$21B less investment spending versus the prior year.

As mentioned, the credit impulse for business shows a sharp deceleration in growth for business credit. This will need to reverse and turn positive before we anticipate improvement in business spending.

Household consumption is the key growth driver – but growth is slowing too

The strongest contributor to GDP growth remains household consumption expenditure. Household expenditure accounted for 57% of real GDP in the year to Sept 2016 – the single largest area of measured spending in the economy.

But quarterly growth in household consumption spending is continuing to slow.

In the latest quarter, household consumption spending in real terms grew by +0.44% – and has been slowing for the last 3 quarters. It is now at its slowest level of quarterly growth since 2012:-

Source: ABS

The state split of household expenditure provides some interesting insights into the growth shift among the states:-

Source: ABS, the HH Final Consumption Expenditure figures are sourced from the State Final Demand worksheets. The total of State Final Demand is more or less the equivalent of Domestic Final Demand (GDP less inventories, net exports and statistical error). The contribution figures are based on total state final demand.

On an annual basis, NSW and VIC accounted for the largest share of the total growth in household spending. But in the latest quarter, there has been a clear shift away from NSW, the single largest state driver. Growth in household spending in NSW has slowed fairly significantly over the last two quarters from +1.1% in Mar 2016 qtr to +0.08% in the Sept 16 qtr. On the positive side, household spending in QLD has accelerated higher in the latest quarter to be the strongest performing state.

The slower growth in household spending is not surprising when you consider the weaker labour market, record low wage growth and the deceleration in new private credit growth. If these three trends remain firmly in place, the expectation will be for continued lower growth in household spending.

National income growth – improving off the back of commodity prices

The growth in the Real Net National Disposable Income is the best indicator of changes in national income and annual growth is now up to +3.2%.

Source: ABS

Unfortunately, we can’t break this data series down into its income component parts, so we need to look at Gross National Income at current prices to see how this improvement has been shared throughout the economy.

In the last two quarters, it’s been the return of corporate profits (orange bars, chart below) from a negative to a positive contribution that has been a major driver of domestic income growth – this is not surprising given the improvement in the Terms of Trade (ToT).

In context of history, overall income growth is still extremely low (all four coloured stacked bars add up to the annual rate of growth in GNI in each quarter):-

Source: ABS

There has been a small improvement in the annual contribution of compensation of employees over the latest quarter (red bars). But at the same time, annual small bus profits (Gross Mixed Income) declined after a solid performance during 2015.

Hours worked grew in the Sept quarter GDP and the rate of growth is consistent with that reported by the monthly labour market reports. The latest GDP results show hours worked in the economy grew by +0.49% for the Sept qtr versus +0.41% for the Sept qtr using the latest month labour force data (Nov 16). The labour force data highlights that this is growth is driven by PT hours worked, which grew by +1.26% for the Sept qtr versus +0.24% growth in FT hours. This helps to explain why the contribution to of compensation of employees remains low.

The most concerning part of this report is the government response to it. The economy is clearly not getting better and we face more headwinds in the form of potentially higher interest rates and slowing growth in China (Chinese authorities are trying to deal with internal liquidity issues). Yet, no one seems to want to face the giant elephant in the room – our economic model, based on accelerating debt growth and house price growth is faltering. Not that it should be saved. This should be an opportunity to start the process of reform in our economy, to manage our country away from this debt-driven model – but this is not happening. We are falling behind in our standard of education and we have one of the poorest performing broadband networks in the world. We have tax incentives targeted at speculating on property rather than rewarding labour and entrepreneurship. This is hardly the stuff of the agile economy for the future.

Australian credit impulse decelerates further in October 2016

The RBA released its credit and lending aggregates last week which gave me a chance to update the growth in new credit indicators. The growth in new credit is one of two important sources of spending that can provide some insight into the broad direction of growth in spending and house prices in the near term. You can read more about the credit impulse here.

In October 2016, growth in new credit for the private sector continued its much sharper deceleration – the overall trend for growth in new private sector credit remains negative:-

Source: RBA, The Macroeconomic Project

Total private sector growth in new credit peaked back in October 2014 with growth in new credit reaching +$50b. Since then, growth in new credit started to decelerate and this has picked up significant pace since Apr 2016. As of Oct 2016, total private sector growth in new credit is firmly negative at -$20b. To generate growth in spending, credit growth (and/or income) needs to be accelerating.

To be perfectly clear, the overall level of outstanding debt is still growing, but new credit is now growing at a decreasing rate. The longer term chart below of total private growth in new credit in Australia provides some context for where we are in the cycle:-


Source: RBA, The Macroeconomic Project

The main driver behind this recent deceleration is new business credit.

The period of expansion for total private sector credit between May 2013 and Oct 2014 was driven mainly by the acceleration in the growth in new credit for business. For a period of time, the size of the growth in new credit for business was even on par with that of mortgages. This was a strong indication that the economy could expect to see greater stability in employment growth and investment spending (at least to help off-set falls in mining investment spending). Despite drifting off again, there was a period of modest acceleration between Jun 2015 and Jun 2016.

Since Jun 2016, the growth in new credit for business has started decelerating at a much faster pace. As of Oct 2016, the growth in new credit for business is also firmly negative at -$13b. The previous cycle low was -$33b in May 2013, and while we are still a way off this, the negative slope of the curve is what is important:-


Source: RBA, The Macroeconomic Project

The size of the business credit impulse is now smaller than that of mortgages and other personal credit.

This deceleration is not consistent with higher growth expectations for the economy, especially against a backdrop of already low income growth. The peak in this most recent cycle of new credit growth for business also highlights how much weaker this ‘expansion’ (2014-2016) has been compared to the period prior to, and immediately after the GFC. For the moment, we are seeing a much weaker labour market and continued lackluster business investment. Without accelerating business credit, we are likely to see this continue.

There was a small, positive shift in the growth in new credit for mortgages in Oct. Although still negative, the growth in new credit for mortgages accelerated slightly from -$8.3b in Sept to -$6.9b in Oct – the first positive move since mid-2015. Looking at the split between the owner occupier and the investor credit impulse is problematic due to data cycling over large series breaks from 2015. For example, the largest adjustment in loan classification from investor to owner occupier mortgages occurred in Oct 2015 when $17b in mortgage loans were reclassified.

The slope of the overall mortgage credit impulse curve has been negative since Jun 2015, with growth in new mortgage credit decelerating from +$30b to now -$6.9b in Oct 2016. This means that new credit is now growing at a more constant pace, suggesting that price growth is also not likely to accelerate.


Source: RBA, The Macroeconomic Project

The question is, how has this manifested in house price growth at a National level?

Using the latest ABS data (to June 2016), growth in residential property prices has slowed in the last year (to June 2016) compared to the year prior (to June 2015). This is very much in line with what the credit impulse would suggest has happened.


Source: ABS

The slow down in price growth is evident in both established houses as well as attached dwellings and, in both cases, growth has slowed quite significantly. Again this is very much in line with the steep, negative slope of the credit impulse during that time.

The same data, over time, also clearly correlates with the slope of the mortgage credit impulse curve.


Source: ABS

The performance of the housing market in Australia has been very uneven and state performance varies widely, but on aggregate, the deceleration in credit growth suggested that overall residential price growth would also slow. Until there is a more sustained acceleration in the credit impulse for mortgages, we can expect house price growth, on aggregate, to remain low/neutral.

Australian labour market conditions continue to weaken – Oct 2016

There are, unfortunately, several concerning trends coming out of the October 2016 labour market report. Employment on a National level is declining, annual full-time (FT) employment is declining, part-time (PT) employment growth is slowing and the size of the labour force is declining as a result of falling participation. On the surface it looks like the falling number of unemployed persons is a bright spot in the report. That would be great if it was so, but falling participation is likely masking a higher number of unemployed persons. We don’t know the exact reasons why people are leaving the labour force, but I’m more likely to take a negative view of this outcome due to the number of declining employed persons. The implications of a weak labour market for private sector growth and budget outcomes is important. Slowing private sector credit growth, rising mortgage interest rates and a weak labour market is a combination that doesn’t bode well for private sector growth in Australia.

As always, I use trend data to analyse the labour force. The data points will move around from month to month, but it’s the broader trends that are important to focus on.

Annual growth in employed persons has slowed from +290k in Oct 2015 to +108k in Oct 2016

What a difference a year makes.

The chart below shows how employment growth has been distributed over the last 36 months. The most negative change has occurred over the last 12 months (if you add the monthly change for each of the last 12 months, you’ll get the annual change in employed persons of +108k).

The monthly growth in employed persons has slowed from a peak of +33k in Sept 2015 to National employment declining by -1k persons in the latest month.

Source: ABS

There are two important points about this chart.

Firstly, even though employment growth is declining, it is declining slower than the labour force. This means that, despite the point that employment is declining, the total number of unemployed persons is also declining. This is the labour market situation in a nutshell at the moment. Rather than be counted as ‘unemployed’, people are leaving the labour market and participation is falling. Declining unemployment isn’t a clear sign of an improving labour market when both employment and labour force participation are also declining.

There is a second important point. Declining National employment, even on a monthly basis, is a relatively rare event. Below is the monthly change in total employed persons going back to 1979 – there are only seven (7) periods where National employment declined on a monthly basis:-

Source: ABS

Since 1979, the periods when the monthly change in employed persons was negative were – 81/82, 90/91, 2000, 2003, 2008, 2013 and now. While only two of these periods were officially ‘recessions’, it easy to link each of these periods back some more general economic weakness. The most recent period of ‘weakness’ during 2012/13 (ToT falls/end of mining investment phase, GFC fiscal stimulus was wearing out and the impact of the European sovereign debt crisis), prompted the RBA to cut rates twelve (12) times, or 325bps, between Nov 2011 and Aug 2016. This helped indebted households as well as residential construction and the real estate market. We no longer have twelve rate cuts available to deal with any economic weakness.

Clearly, this current episode of declining employment is not anywhere near the severity of previous periods. But the direction remains concerning.

It would be easy to argue that this is a ‘one month’ data point and is more likely to result in revision in the following month due to the nature of the trend data. But you can break down this National employment trend to FT and PT trends and further still, down to state trends, to see that this is not a recent phenomenon. Some of the larger states have recorded declining employment well before the most recent month – NSW since August 2016, QLD since Jan 2016 and WA since Apr 2016. Employment growth in ACT has just started to dip into negative territory.

The number of FT employed persons declined by 50k over the last year

This is a disturbing part of this current labour market situation – the persistent decline in FT employed persons throughout 2016. This has been the driver behind the decline in overall employment.

Source: ABS

Growth in FT employed persons has been slowing since Sept 2015, turned negative in Jan 2016 and has stayed negative since. Until Sept 2016, the decline in FT employed persons was at least off-set by the growth in PT employed persons. The growth in PT employed persons peaked back in May 2016. Since then, growth in PT employed persons has been slowing such that the decline in FT employment equalled and exceeded any PT employment growth in the last two months. If there is a glimmer of hope, its that the cycle of decline in FT employed persons may have peaked in Sept looking at the chart above.

The state data shows how widespread the decline in FT employed persons has been. On an annual basis, only VIC, SA and ACT have seen any growth in FT employment. But in the latest quarter, the state picture worsens – only SA recorded any FT employment growth:-

Source: ABS

Australia is becoming increasingly reliant on part-time employment. Of total employed persons, 32% are PT employed – this is the highest proportion of PT workers in the data history. The underemployment rate has reached a new high in the August 16 quarter of 8.6%, highlighting that an increasing proportion of the labour force are available for and want more hours of work. It’s a telling point that suggests the shift to PT is not entirely by choice.

Unemployment is declining…but so is labour force participation

In the latest month, total unemployed persons declined by a further 4.15k persons. In the last 12 months, the total number of unemployed persons declined by -45k persons.

Source: ABS

This should be a great highlight of the labour force data – the falling number of unemployed persons. But we are in a situation where employment is declining at a slower rate than the labour force. Going back to the first chart in this post highlights this relationship:-

Source: ABS

The difference between the blue line (employment) for Oct 16 (-1.05k) and the orange line (total labour force) for Oct 16 (-5.2k) equals the monthly change in unemployed persons of -4.15k. As mentioned, this declining unemployment isn’t a clear/consistent sign of an improving labour market when both employment and labour force participation are also declining.

Labour force participation falls to 64.5% – almost back to where it was ten years ago

The other way to measure the changes in the labour force is to estimate what population growth adds to the labour force plus changes in participation. This perspective highlights the severity of the current round of declines in the labour force participation:-

Source: ABS, The Macroeconomic Project

As mentioned in previous posts, its best to ignore the two most recent estimates for underlying population growth – they are always low for the most recent months.

In the last year, I’ve estimated that underlying population growth has added approx. 185k persons to the labour force and the decline in participation has resulted in -122k persons leaving the labour force. This equals the annual growth in the labour force of +63k persons. On a monthly basis, the labour force size has been declining for the last 3 months – driven by declines in participation.

As of Oct 2016, the labour force participation rate is 64.5% – almost back to where it was ten years ago. Since Dec 2015, participation has declined sharply and I estimate this resulted in -125k persons leaving the labour force since then. This has been driven by both male and female workers leaving the labour force, but mostly males (-78k males left the labour force over the last year).

Source: ABS

The decline in participation is potentially masking the real rate of unemployment. If over the last year, participation had remained constant, and employment had continued to fall, it would mean that our unemployment rate could have been as high as 6.5% – not the 5.6% that is quoted. The important point here though is that we don’t know exactly WHY people are leaving the labour force. I’ve previously looked at the decomposition of participation declines by age and gender and by state to at least understand whether we are seeing ‘boomers’ retiring from the labour force or if there was a geographic element to the trends. It will be worthwhile revisiting this analysis once updated data is available.

Looking at the state distribution of participation rate changes shows that the bigger changes in participation have occurred in key mining states such as WA and QLD, but participation is down in all states except VIC on an annual basis:-

Source: ABS

Part of the reason for the fall in participation in WA & QLD is likely to be the result of workers transitioning to other states or jobs as the more labour-intensive investment phase of the mining boom continues to wind down. The latest quarter data suggests some improvement with participation higher in VIC, TAS & NT.

Hours worked confirms the FT and PT employment growth

Hours worked continued to grow for PT employed persons and continued to fall for FT employed persons:-

Source: ABS

The trend in hours worked still looks lacklustre. Even though there is growth in PT employed persons, the growth in PT hours worked is only just above the longer term average. The year on year change (decline) in FT hours worked is well below the longer term average growth in FT hours worked.

Implications

The implications on spending and taxation are large.

We are a few weeks away from understanding the impact of the weakening labour market on tax receipts at the MYEFO. We are well into the first half of the 2016/17 budget year and wages are growing below growth assumptions, participation was forecast to remain at 65% – it’s now fallen to 64.5% and employment was forecast to grow at 1.75% and so far, on a seasonally adjusted basis, employment has fallen by -0.21%. It’s going to take quite a shift in activity to see these trends reverse and accelerate higher by the end of the financial year.

The household budget/income seems vulnerable right now:-

  • Employment has started declining
  • The ongoing shift from FT to PT employment will likely result in lower household income
  • Continued slowing wage growth, where real wages are not increasing fast enough (on aggregate) to sustain the same level of disposable income

The other important source of spending growth in the economy is credit – and private sector credit (driven by business) is not accelerating. This suggests lower private sector growth and employment growth in the near term.

None of this would be a problem, except that we are more indebted than ever before – and we are now also looking down the barrel of rising interest rates. Rising mortgage interest rates will impact those households with variable rate mortgages. If deposit rates also rise, then it will help those with some interest income.

Wage growth in Australia keeps slowing – Sept 2016

The Wage Price Index data for the Sept 2016 quarter shows that wage growth in Australia has yet again slowed to its lowest level since the data was first collected.

The annual nominal growth in total hourly rates of pay excluding bonuses (seas adj) for the year to Sept 2016 was +1.88%. Growth in the latest quarter was +0.4%. This includes both public and private sector hourly rates of pay. The public sector wage price index is growing at a faster rate than that of the private sector, but is clearly also slowing:-

Source: ABS

In real terms, the change in the Wage Price Index is much lower and is barely positive. Annual growth is +0.14% and the latest quarter growth is +0.05%:-

Source: ABS (deflated using trimmed mean CPI)

Since late 2012, the wage price index in real terms, has been flat – growth in hourly rates of pay have (barely) kept pace with growth in core CPI.

Source: ABS

This most likely means that disposable income has not kept pace with CPI growth. For disposable income to remain constant in real terms, wages growth must actually exceed CPI in order to account for the impact of taxation. The chart above clearly shows that real total hourly rates of pay have been flat since the end of 2012.

The slight uptick that is obvious from June 2015 is the result of core CPI falling, rather than wage growth picking up.

Implications for growth

Putting this into context of where spending growth will come from (debt and/or income), highlights that we might expect private sector demand growth to come under pressure in the near term.

Wage growth is just barely ahead of core CPI and most likely, disposable income has been falling (slightly) over the last few years. There has been “relief” for those managing a mortgage because variable rates have gone down. But on the flip side, low rates have hurt those relying on interest income. Globally, interest rates have started rising and, if this continues, this will place greater pressure on spending by indebted households where disposable income/wage growth has not kept pace with inflation.

The other important source of spending growth, credit creation, has recently started showing clear signs of deceleration. This is an early warning sign that private sector growth in Australia may slow further. Read more about the credit impulse in Australia – Sept 2016.

Growth may be increasingly reliant on increases in government spending. At the same time, government borrowing rates have already started rising. The other issue for the government is the ongoing slow-down of wages growth and what it means for the budget. The 2016/17 budget assumptions had the wage price index growth accelerating to 2.5%. We end the first quarter of the financial year well below that assumption.