Australian Economic Developments (AiG)

Ai Group hosted its 13th Annual Economics Forum this week in Sydney with three guest speakers: Harley Dale (HIA), Dr Michael Wesley (ANU), and Dr Philip Lowe (RBA). Dr Lowe noted that the interest rate cuts seen over the past 18 months were operating broadly as the RBA had expected and were contributing to stronger asset prices, rising consumer confidence, and improved housing affordability – the HIA/CBA Housing Affordability Index increased by 5.5 per cent in the December 2012 quarter to be 18.4 per cent higher over the year. Taken together with the minutes of the March Monetary Policy Meeting released earlier in the week, Dr Lowe’s speech was generally interpreted by market economists as suggesting that the RBA is likely to keep interest rates on hold in the near term while it waits to assess how past interest rate cuts will affect economic activity over coming months.

Detailed labour market data released this week showed considerable variation in labour demand across industries, plus some significant reversals in the employment trends that were evident in 2012; most notably a welcome recovery in construction employment but another decline in manufacturing employment after a period of relative stability. In aggregate, national employment increased by 104,000 in the three months to February, taking annual employment growth to February to 197,300, or 1.7 per cent p.a. This represents an acceleration in employment growth, from around 150,000 new jobs added in the 2012 calendar year and just 50,000 in the 2011 calendar year. Actual hours worked by all employees grew by 0.6 per cent in the three months to February 2013, to be 1.4 per cent higher than a year earlier. Average work hours per week declined slightly to 34.1 hours per week, compared to 34.2 hours in February 2012.

Looking across the major industry groups, employment grew in three of our top five industries in the three months to February 2013 (health, construction and education), but declined in two of them (retail and manufacturing). This distribution of employment reflects recent demand trends more generally in the Australian economy, with manufacturing and retail coming under intense pressure from the high Australian dollar and changing spending preferences among Australian consumers. Employment demand among the largest services sectors is still growing strongly (most notably health, education and professional services), but some others, such as financial services, are shedding labour, despite good performance in recent quarters in terms of output and profitability. Interestingly, although mining is now Australia’s largest sector in terms of value added output (producing around 11 per cent of all output in 2012), it directly employs just 2.3 per cent of the workforce, so its solid jobs growth rate of 6 per cent p.a. equated to an additional 15,000 new jobs in the year to February 2013.

The construction sector is seeing a welcome recovery in job numbers nationally, with 19,000 jobs added in the three months to February (and 43,000 added in the six months to February). This reverses about two-thirds of the 64,000 jobs lost in construction over the twelve months to August 2012. It suggests this industry may have turned the corner, with labour demand now starting to pick up.

International economic developments:

Broadly speaking, the run of international economic releases has continued to be more positive than it was over the second half of 2012, with the RBA noting this week that ‘risks to the global outlook appeared more balanced than they had been in the previous year, although vulnerabilities remained, particularly in Europe’. Much of the international data released this week centered on the United States, with sentiment measures keenly watched for early indications of how recently announced budget measures, including a rise in payroll tax and budget spending cuts, have affected household and business sentiment – last month the Congressional Budget Office estimated that the $US85 billion ($81.8 billion) in federal budget cuts, which began on March 1, would cost the economy about 750,000 jobs by the end of the year.