State & territory economic performance report

• How are Australia’s states and territories performing? Each quarter CommSec attempts to find out by analysing eight key indicators: economic growth; retail spending; equipment investment; unemployment; construction work done; population growth; housing finance and dwelling commencements.
• Just as the Reserve Bank uses decade averages to determine the level of “normal” interest rates; we have done the same with the economic indicators. For each state and territory, latest readings for the key indicators were compared with decade averages – that is, against the “normal” performance.
• Western Australia remains the top-performing economy in the nation, but only just, ahead of the Northern Territory and NSW. NSW has been the big improver, up from fifth to third.
• The ACT has been pushed back from the third-best performing economy to sixth, behind Queensland and Victoria. There is then a gap to South Australia and another gap to Tasmania with both states still under-performing other economies.
• Western Australia comes out on top on only two of the eight criteria – retail spending and housing finance.  Western Australia is now second on three indicators, third on two indicators and seventh on unemployment.
• The Northern Territory has consolidated second place with the main improvements occurring in business investment. NSW jumped from fifth to third-best performing economy due especially to top rankings on population growth and dwelling starts.

Labour force

• Jobs down: Employment fell by 22,600 in December after a revised 10,500 gain in jobs in November (previously reported as a 21,000 increase in jobs). Full-time jobs fell by 31,600 in December and part-time jobs rose by 9,000.
• In the 2013 calendar year just 54,600 jobs were created, marking the weakest result for a calendar year since 1996. Part time employment lifted by almost 122,100 workers over 2013 compared with 67,500 full-time jobs lost.
• Jobless rate edges higher: The unemployment rate edged up from by less than 0.1 per cent 5.8 per cent in December. (Actually the rise was only from 5.77 per cent to 5.85 per cent). The participation rate eased from 64.8 per cent to 64.6 per cent.
• Hours worked. The number of hours worked was unchanged in December after falling by 0.7 per cent in November. Hours worked are up 0.3 per cent over the year.
• Unemployment across states and territories: NSW 5.8 per cent (5.9 per cent in November); Victoria 6.2 per cent (6.2 per cent); Queensland 5.9 per cent (5.7 per cent); South Australia 6.7 per cent (6.8 per cent); Western Australia 4.7 per cent (4.3 per cent); Tasmania 7.7 per cent (7.7 per cent); Northern Territory 4.2 per cent (4.4 per cent); ACT 4.0 per cent (4.1 per cent).

What does it all mean?

Jobs growth sluggish for 2013.

First and foremost it should be said that the unemployment figures are largely backward looking, highlighting the sluggishness in the broader economy in the lead up to and just after the election last year. More timely figures on consumer and business confidence, retail sales, lending finance and housing activity have been more upbeat suggesting that activity levels have firmed over recent weeks.

There is no doubt that over most of 2013 trading conditions were tough for businesses and as a result employers were not keen to take on additional staff. The pickup in in consumer and business confidence is translating into more activity. The $64 question is how quickly does this turnaround the labour market?

While employers are not out there significantly firing workers they are not adding to the workforce. Rather businesses have been in a holding pattern, awaiting an improvement in conditions and managing staff hours. A broader view of the labour market data shows that businesses are still more inclined to hire part-time workers and contract staff than take on full-time staff. Part time employment lifted by almost 122,100 workers over 2013 compared with 67,500 full-time jobs lost. In fact Full time job losses have occurred in ten out of the 12 months in 2013. The people getting jobs probably prefer full-time work to part-time work, and the loss in income has had an indirect hit on discretionary retail spending.

Interestingly hours worked has lifted by just 0.3 per cent over the past year. Employers may be getting part time jobs but certainly not working the hours they would like

The pickup in consumer and business confidence has started to translate into more activity. And in turn it will take a few more months to translate to improve business profitability and result in a lift in hiring. The latest results are more of a snapshot on how the economy looked 4-5 months ago. Clearly it takes time to take on new staff, from the start of the interviewing process to when the new starters finally commence work. But given the fact that the economy is crawling off a low base while also trying to adjust to the structural imbalances from the pullback in mining investment, it is likely the jobless rate will probably edge towards 6.0 per cent over the next few months.

While the Reserve Bank would be disappointed and concerned with the sluggishness in the labour market, policymakers would have to be pleased at the way the overall economic recovery is panning out. The housing recovery continues to gather momentum, while rising wealth levels is supporting confidence and in turn spending. In addition the lower Australian dollar should provide a boost to exports in coming months and help to alleviate the risks surrounding the rebalancing of the economy. The key area of concern is likely to be how quickly the labour market recovers. As such we expect the Reserve Bank to maintain an easing bias over the next few months, but further rate cuts are unlikely to be required. Cash rates have probably bottomed.

Labour market participation falling.

Changes in labour force participation may reflect cyclical changes related to the economic cycle, or structural changes such as demographic trends.  The part rate was on a structural upward trend until late 2010.  This essentially reflected two factors: (i) increased participation by women in the workforce; and (ii) an increase in participation of people aged 55 and over (i.e. workers delaying retirement).

The part rate has recently been falling.  Over the year to September 2013, the part rate fell by 0.5pts.  During that same period, the unemployment rate rose by just 0.3pts.  Over the year, 95k jobs were created.  The rise in the unemployment rate was capped due to the drop in labour force participation.

Currently, the biggest single influence on the part rate is the ageing of the population.  This is structural.  With an increase in longevity, there has been a consequent rise in the number of persons aged 65+ as a share of the working‑age population.  And the rate of increase has accelerated in recent years.  The 65+ cohort has a much lower participation rate.  Unless there is an offsetting increase in the part rate of other age cohorts, the aggregate part rate will naturally fall as the proportion of persons 65+ to the population rises.  They are neither working nor looking for work – they are retired.

Until recently, an increase in the part rate of persons aged 55+ in the workforce meant that the aggregate part rate was trending higher.  It more than offset an increase in the number of persons aged 65+ as a share of the working‑age population.  55+ year olds stayed in the workforce due to better healthcare and a structural shift in the composition of employment towards less manual intensive labour.  But it looks like most of that structural lift in the part rate of the “older” cohorts has now been exhausted.  And in the last year, the part rate of 60‑64 year olds has actually decreased.

Why?  Some ‘older’ workers stayed in the workforce longer than they originally intended as a result of the GFC hitting asset values and thus eroding retirement funds.  These workers who were approaching retirement were forced to delay retirement to rebuild worth and wait for a recovery in asset prices.  We are now seeing some of those workers exit the labour force due to both the recovery in equity prices and to a lesser extent, house prices.  As a result, the overall part rate of 60‑64 year olds has drifted lower.

There has also been a noticeable decrease in the part rate of younger people in recent years.  Over the past five years, the part rate of persons entering the labour market (i.e. 15‑19, and to a lesser extent 20‑24), has trended lower.  But during the last two years, the part rate of these “younger persons” fell more sharply than in the previous three years.    We suspect that this is primarily due to cyclical factors.  In general, younger people have more flexibility around career and work‑related decisions.  They are more likely to tactically change or adapt their decisions around work when conditions in the labour market change.  Tertiary education becomes more attractive to young people when the employment market is soft and thus job opportunities are more limited for school leavers.  This has been the case recently.

The third group, or the middle cohort, are those in their “prime” working age.  These are persons aged 25‑54.  Most people aged 24‑55 have finished tertiary study and are not retired or approaching retirement.  As a result, the part rate is significantly higher and less volatile for this cohort.  Over the last year, the part rate has fallen marginally for this group and this looks cyclical.  It is likely to reflect a small number of discouraged workers leaving the workforce due to a soft jobs market.  This is normal.

Demographic influences mean that the part rate has peaked and will trend lower over time as the proportion of the population over 65 increases.  In the short term, the recent trend is expected to continue.  The aggregate decrease in the part rate by structural forces is likely to be magnified by the small cyclical impact of a soft labour market.  The combination of these two factors will limit the overall rise in the unemployment rate.  We think the unemployment rate is likely to peak at around 6%

State & territory economic performance report

• How are Australia’s states and territories performing? Each quarter CommSec attempts to find out by analysing eight key indicators: economic growth; retail spending; equipment investment; unemployment, construction work done; population growth; housing finance and dwelling commencements.
• Just as the Reserve Bank uses decade averages to determine the level of “normal” interest rates; we have done the same with the economic indicators. For each state and territory, latest readings for the key indicators were compared with decade averages – that is, against the “normal” performance.
• Western Australia remains the top-performing economy in the nation with no slippage in the ranking over the past three months. The ACT has maintained its position as the second-best performing economy. But the big changes have been below with now little to separate Northern Territory, Queensland, NSW and Victoria, although in that order. There is then a gap to South Australia and another gap to Tasmania with both states clearly under-performing other economies at present.
• Western Australia comes out on top now on only one of the eight criteria – retail spending.  Western Australia is still second on five of the eight indicators, third on unemployment and fourth on dwelling starts.
• The jump in the rankings of Queensland to equal fourth is due to improvements in business investment, unemployment, housing finance and dwelling starts. The Northern Territory has lost ground in dwelling starts, population growth and business investment.

Labour force

• 

  The unemployment rate rose 0.1 per cent in August.

  Jobs & jobless rate: Employment fell by 10,800 in August after falling by a revised to 11,400 jobs in July (previously reported as a 10,200 loss in jobs).

• The unemployment rate rose from 5.7 per cent to 5.8 per cent in August – a fresh four year high. The participation rate fell from 65.1 per cent to 65.0 per cent. Full-time jobs fell by 2,600 in August after falling by 7,300 in July. Part-time jobs fell by 8,100 in August after falling by 4,200 in July.
• In the first eight months of 2013 part time jobs have risen by 66,100 while full time jobs have risen by just 5,700.
• Hours worked at record highs. The number of hours worked rose by 0.1 per cent in August to be up 2.0 per cent over the year to August.
• Unemployment across states and territories: NSW 5.9 per cent (5.7 per cent in July); Victoria 5.7 per cent (5.7 per cent); Queensland 6.0 per cent (5.9 per cent); South Australia 6.8 per cent (7.1 per cent); Western Australia 5.0 per cent (4.6 per cent); Tasmania 8.3 per cent (8.2 per cent); Northern Territory 5.5 per cent (5.4 per cent); ACT 3.7 per cent (3.7 per cent).

What does it all mean?

• 

  Sate of the states, July 2013

  How are Australia’s states and territories performing? Each quarter CommSec attempts to find out by analysing eight key indicators: economic growth; retail spending; equipment investment; unemployment, construction work done; population growth; housing finance and dwelling commencements.

• Just as the Reserve Bank uses decade averages to determine the level of “normal” interest rates; we have done the same with the economic indicators. For each state and territory, latest readings for the key indicators were compared with decade averages – that is, against the “normal” performance.
• Western Australia remains the top-performing economy in the nation with little slippage in the ranking over the past three months. However the big change has been the lift in the ranking of the ACT to second while the Northern Territory economy has slipped to third strongest. There has been little change in the ranking of other states with South Australia and Tasmania under-performing other economies at present.
• Western Australia comes out top on three of the eight criteria – housing finance, retail spending and equipment investment. Western Australia is still second on three of the eight indicators, third on dwelling starts and fifth on unemployment.
• The switching in the rankings of the Northern Territory and the ACT is largely due to weakening in the performance of the job market in the Northern Territory and improvement in the job market in the ACT. NSW is the fourth strongest economy from Victoria and Queensland. Then there is a gap to South Australia and then another gap to Tasmania.

Western Australia still on top; then the ACT and Northern Territory

• Western Australia remains Australia’s best performing economy, while ACT is now second strongest from the Northern Territory.
• Western Australia leads the way on retail trade, equipment investment and housing finance. It is second strongest on economic growth, construction work done and population growth; and finished third on dwelling starts and fifth on unemployment.
• The ACT economy is now the second strongest economy with the main strengths being housing finance, equipment investment and population growth. The ACT is now third strongest on unemployment, up from eighth in the past report.
  • The Northern Territory finished first on three indicators: economic growth; dwelling starts and construction work done and was second strongest on retail trade. But the job market has weakened over the past three months and it now ranks seventh on this indicator rather than first.
  • There is still little separating NSW, Victoria and Queensland in terms of relative economic performance. NSW is strongest on unemployment, and third strongest on population growth. Victoria is second strongest on housing finance and unemployment. And Queensland has high rankings on economic growth, equipment investment, construction work done and retail spending. But it lags on population growth and dwelling starts.
  • There is then a gap in the rankings to South Australia. While the state is middle ranking on unemployment and construction work, it lags on economic growth, retail spending and equipment investment.
  • Tasmania remains locked at the bottom of the Australian economic performance table. Tasmania lags all other economies on all of the eight indicators. The economy is still growing – economic growth and retail spending are growing faster than ‘normal’ or decade-average levels. But stagnant population growth is reducing activity in home building and home purchase, as well as commercial and engineering construction and business investment.

How was performance judged?

• Each of the states and territory economies were assessed on eight key indicators: economic growth; retail spending; equipment investment; unemployment, construction work done; population growth; housing finance and dwelling commencements.
• The aim was to find how each economy was performing compared with “normal”. And just like the Reserve Bank does with interest rates, we used decade-averages to judge the “normal” state of affairs. For each economy, the latest level of the indicator – such as retail spending or economic growth – was compared with the decade average.
• While we also looked at the current pace of growth to look at economic momentum, it may yield perverse results to judge performance. For instance retail spending may be up sharply on a year ago but from depressed levels. Overall spending may still be well below “normal”. And clearly some states such as Queensland and Western Australia consistently have faster economic growth rates due to historically faster population growth. So the best way to assess economic performance is to look at each indicator in relation to what would be considered ‘normal’ for that state or territory.
• For instance, the trend jobless rate in the ACT of 3.7 per cent is lower than all economies. But compared with its ‘normal’ or decade-average rate of 3.4 per cent, the jobless rate is actually higher in percentage terms than NSW and Victoria, thus restraining activity in the retail sector. Trend measures of the economic indicators were used to assess performance rather than more volatile seasonally adjusted or original estimates.

Retail trade

• The measure used was real (inflation-adjusted) retail trade in trend terms with March quarter data the latest available. If monthly retail trade was assessed instead (May data available), there would be no change in the rankings. This provides added confidence about the overall results on consumer spending.
• Western Australia retains top spot on the retail rankings with spending in the March quarter 25.2 per cent above decade average levels. Solid population growth, a lift in home purchases and firm wage growth underpin the relative strength in consumer spending.
• Northern Territory was next strongest, again courtesy of low unemployment, with spending just under 19 per cent above decade-average levels.
• Queensland was next strongest, with spending 15 per cent above decade averages, followed by Victoria (up 11.5 per cent).
• Tasmania has the weakest result on retail spending, up just 2.7 per cent on the decade average (but up from 1.4 per cent in the December quarter), and below South Australia with growth of 6.6 per cent.
• In terms of the monthly retail trade series, Western Australian spending is 4.3 per cent higher than a year ago, just in front of Queensland with 4.2 per cent growth, the ACT with 3.4 per cent growth and NSW, up 3.2 per cent. At the other end of the scale, Tasmanian spending is 1.9 per cent down on a year ago and South Australian spending is lower by 1.0 per cent.

Equipment investment

• Western Australia continues to be well above other states and territories when it comes to equipment investment. Spending in the March quarter was almost 75 per cent above “normal” – or decade-average levels but down from 103.2 per cent in the December quarter. Next placed were the ACT (up 36.6 per cent) and Queensland (up 33.4 per cent) followed by NSW (up 15.7 per cent), Victoria (up 5.2 per cent) and Northern Territory (up 4.5 per cent).
• By contrast, new equipment spending in South Australia was in line with its decade-average while Tasmania had business investment 1.3 per cent below its longer-term average in the March quarter.
• On a shorter-run analysis, equipment investment in the March quarter was lower than a year ago in five of the state and territory economies. Currently equipment investment is down on a year ago in Tasmania (down 33.6 per cent), Northern Territory (down 26.9 per cent), South Australia (down 15.5 per cent), NSW (down 6.2 per cent) and Victoria (down 0.1 per cent). By contrast new equipment investment in the ACT is up 50.4 per cent on a tear earlier followed by Queensland (up 10.4 per cent) and Western Australia (up 0.1 per cent).

Unemployment

• NSW and the ACT arguably have the strongest job markets in the nation. While its trend unemployment rate of 5.5 per cent is not the lowest in the nation, the NSW jobless rate is just 5.1 per cent above the “normal” or decade average level.
• In the ACT, trend unemployment has fallen from 4.5 per cent to 3.7 per cent over the past four months but this is 9.3 per cent above its decade average rate of 3.4 per cent.
• In Victoria the 5.7 per cent jobless rate is 9.2 per cent above its decade average.At the other end of the scale Tasmania’s 8.1 per cent jobless rate is the highest in the nation and up 36 per cent on the decade average. The Northern Territory job market is next weakest – a significant turnaround over the last report. In the past six months the jobless rate has lifted from 4.0 per cent to 5.3 per cent and it is now 23 per cent above its decade average level of 4.3 per cent.

Construction work

• The measure used for analysis was the total amount of residential, commercial and engineering work actually completed in trend terms in the March quarter.
• In all states/territories except Tasmania construction work is higher than decade averages. And there remains a large gap between the strongest states (the resource states) and weakest states (Tasmania).
• In Tasmania, overall new construction work completed is 3.5 per cent below its decade average. By contrast construction work done in Northern Territory was almost 80 per cent above its decade average followed by Western Australia (up 66 per cent) and Queensland (up almost 53 per cent).
• Next weakest to Tasmania is Victoria where construction work is 15.8 per cent above decade averages, followed by NSW (up 19.4 per cent on the decade average).
• In terms of annual growth rates, Northern Territory construction work done in the March quarter was up 55.7 per cent on a year ago, followed by Queensland (up 7.7 per cent) and NSW (up 6.4 per cent). Four of the states and territories had weaker construction work than a year ago.

Population growth

• To assess population performance we looked at the current annual growth rate and compared it with each economy’s decade-average growth pace. And the good news is that population growth is above ‘normal’ in six states or territories while growth has also picked up in five jurisdictions over the past quarter.
• Western Australia is the clear leader in population growth. Not only is the annual growth rate of 3.47 per cent the strongest in the nation, it is also almost 46 per cent above the decade average. But the actual leader in the rankings is the ACT. Annual population growth of 2.31 per cent is the highest in 21 years and is almost 57 per cent above “normal’.
• In NSW current annual population growth of 1.25 per cent is 18 per cent above the decade average.
• At the other end of the leader-board is Tasmania where the annual population growth of 0.08 per cent is the weakest in over 11 years and a massive 90 per cent below the decade average rate of 0.77 per cent.

Housing finance

• The measure used was the trend number of housing finance commitments and this was compared with the decade-average for each respective state and territory.
• Housing finance is not just a lead indicator for real estate activity and housing construction but also is a useful indicator of activity in the financial sector. It would be useful to compare figures on commercial, personal and lease finance, but unfortunately trend data is not available for states and territories.
• In all but three states and territories, trend housing finance commitments are below decade averages – an improvement on the previous report when all economies had activity below decade averages. And encouragingly commitments in May were above year-ago levels in all but the Northern Territory.
• In the strongest state of Western Australia, the number of housing finance commitments was 10 per cent above the decade-average level and commitments in May were 16.5 per cent higher than a year ago.
• Victoria was in second spot for housing finance, with the number of commitments 2.3 per cent above the long-term average. And importantly the market has momentum with home lending 5.7 per cent higher than a year ago in trend terms to a 42-month high.
• The ACT remains in third spot on housing finance, up 1.4 per cent on the decade average followed by NSW (down 4.4 per cent).
• Tasmania is the weakest economy for housing finance with trend commitments 27.7 per cent lower than its decade average, but encouragingly commitments were up 4.9 on a year ago. Next weakest was the Northern Territory with trend commitments down 23.8 per cent on the decade average.

Dwelling starts

• The measure used was the trend number of dwelling commencements (starts) with the comparison made with the decade-average level of starts. Starts are driven in part by population growth and housing finance and can affect retail trade, unemployment and overall economic growth. However any over-building or under-building in previous years can affect the current level of starts.
•  The outlook for housing construction has improved, underpinned by state government grants for new construction and low interest rates. Dwelling starts are above decade averages in five of the states and territories and again starts in five states and territories are above levels of a year ago.
• The Northern Territory is in the strongest position for new housing construction, with starts almost 54 per cent above decade averages. In addition in the March quarter the number of dwellings started was 27 per cent higher than a year earlier, although down from the 61.6 per cent annual growth in the December quarter.
• In second spot was NSW, with starts over 16 per cent above decade averages. And there is plenty of momentum with starts in the quarter up 33.4 per cent on a year ago – the best growth in three years. In Western Australia, dwelling starts in the March quarter were up 11.2 per cent on the ‘normal’ or “decade average” level with starts in Victoria up almost 6 per cent and ACT starts still 2.3 per cent above decade averages.
• At the other end of the scale, Tasmanian dwelling starts were 38.6 per cent below decade averages, while starts in the March quarter were 25 per cent down on a year earlier. Next weakest was Queensland (down 20.5 per cent), followed by South Australia (down 12.5 per cent). However encouragingly Queensland starts were higher than a year ago, albeit modestly, up just 2.3 per cent. And South Australian starts in the March quarter were up 14.4 per cent over the year.

Other indicators

• Real wages were positive in all economies in the March quarter except for the Northern Territory. Strongest growth occurred Tasmania at 2.2 percentage points, followed by Western Australia (1.3 percentage points) and the ACT (1.2 percentage points).
• Even using “underlying” inflation than “headline” inflation, real wages are growing on average by around 1.0 percentage points.
•  Home prices are now higher than a year ago in all but Hobart (down 1.8 per cent). Strongest growth in home prices was in Darwin (up 6.1 per cent) followed by Perth (up 6.0 per cent) and Sydney (up 5.6 per cent).

Implications and outlook

• The good news is that economic performance didn’t become more polarised in the past three months. While Western Australia is still the best performing economy, it has seen some slippage in indicators such as unemployment. The Northern Territory also lost ground but the ACT lifted in the performance rankings courtesy of strong population growth, driving housing activity and leading to a stronger job market.
• There has been little change in the performance rankings of the three largest states: NSW, Victoria and Queensland.
• Tasmania remains at the bottom of the relative economic performance rankings. The economy is growing in a number of key areas such as demand for home loans but there isn’t enough momentum to catch the other state and territory economies. Encouragingly real wage growth is strong and this could serve to lift retail spending and consumer spending, boosting prospects for the business sector.
• In South Australia, government infrastructure spending is providing valuable support for the economy. Encouragingly new home loans are up 9.5 per cent on a year earlier to the highest levels in 40 months.
• All economies should lift once the uncertainty of the Federal Election is finally out of the way later in 2013.
• While new investment in mining and engineering construction is easing, the housing sector is providing a source of new growth, especially in regions where population growth is strongest.

• In July part-time jobs rose by 4,800 after rising by 6,400 in June. Full-time jobs rose by 9,200 after sliding by 34,800 in June.
• The unemployment rate eased from an upwardly revised 5.3 per cent to 5.2 per cent in July. The participation rate eased from 65.3 per cent to 65.2 per cent.
• The number of hours worked rose by 0.8 per cent in July to be 0.2 per cent lower in annual terms.
• Unemployment across states and territories: NSW 5.2 per cent (5.1 per cent in June); Victoria 5.4 per cent (5.5 per cent); Queensland 5.8 per cent (5.3 per cent); South Australia 5.4per cent (6.4 per cent); Western Australia 3.6 per cent (3.5 per cent); Tasmania 6.5 per cent (7.4 per cent); Northern Territory 4.1 per cent (4.1 per cent); ACT 3.7 per cent (3.6 per cent).

What does it all mean?

• The latest employment figures are certainly encouraging – a pickup in jobs across the economy. However given the job losses in the prior month it suggests that the labour market is effectively treading water. In recent times there has been an array of high profile job losses in key industries like manufacturing, transport and housing. But it does seem like a fare proportion of Aussie businesses are holding onto existing staff or hiring new staff, positioning themselves for the pickup in growth and investment over the coming year.
• Over the past year the missing ingredient in the domestic economy has been confidence, however the last month may just prove a real catalyst for a turnaround in confidence. Rate cuts, stronger retail sales data, a pickup in housing activity, rising share markets and the latest employment figures should provide a great deal of encouragement to policymakers, households and businesses. More people in jobs will mean more spending across the economy and more tax receipts for the government.
• What is clear is that the labour market is healthy without shooting the lights out. Yes, it was encouraging that employment grew but more forward looking indicators like job advertisements have suggested that further labour market gains may be more circumspect. In fact internet and newspaper job advertisements have fallen for four consecutive months, suggesting job gains will be less robust in the next few months.
• Still, Australia’s job market remains healthy, supporting growth in the broader economy. And it is still the case that an extra 98,600 odd workers now have jobs compared with the start of this year. And that means more latent spending power. Of course in the current environment people are still more likely to be saving rather than spending – however as confidence improves activity levels will pick up.
• The deep rate cuts in recent times will help to support activity in coming months and provide businesses with a bit more breathing space – especially given that trading conditions are difficult. In addition the Federal Government handouts will provide a short-term lifeline for businesses. As a result it is more likely that businesses will hold onto current staff rather than culling their existing workforce.
• The jobs data will provide another degree of comfort for the Reserve Bank. An array of indicators has suggested that activity levels have bottomed out and showing modest signs of improving. And while policymakers will want to get a better gauge of the impact from the recent stimulatory further rate cuts still remain on the cards. The Central Bank will be more focused on the current situation in Euro Zone and the slowdown in China. CommSec expects another quarter of a per cent rate cut before the end of the year.

What do the figures show?

• Employment rose by 14,000 in July after a revised fall of 28,300 in June (previously 27,000) Economists had expected 10,000 jobs to be added. In July part-time jobs rose by 4,800 after rising by 6,400 in June. Full-time jobs rose by 9,200 after sliding by 34,800 in June.
• The annual employment growth rate rose 0.4 per cent to 0.6 per cent in July. The working age population rose by 22,300 in July after lifting by 19,500 in June. The working age population grew by 1.26 per cent over the past year.
• The unemployment rate eased from an upwardly revised 5.3 per cent to 5.2 per cent in July. The participation rate eased from 65.3 per cent to 65.2 per cent.
• The number of hours worked rose by 0.8 per cent in July to be 0.2 per cent lower in annual terms.
  Unemployment across states and territories: NSW 5.2 per cent (5.1 per cent in June); Victoria 5.4 per cent (5.5 per cent); Queensland 5.8 per cent (5.3 per cent); South Australia 5.4per cent (6.4 per cent); Western Australia 3.6 per cent (3.5 per cent); Tasmania 6.5 per cent (7.4 per cent); Northern Territory 4.1 per cent (4.1 per cent); ACT 3.7 per cent (3.6 per cent).
• Queensland recorded the bulk of the job gains in July (+6,200), followed by NSW (+3,300), South Australia (+2,100), Tasmania (+900). Jobs fell the most in Western Australia (-4,200) followed by Victoria (-3,800). In trend terms employment rose in the ACT (+400) and was flat in the Northern Territory.

What is the importance of the economic data?

• The Labour Force estimates are derived from a monthly survey conducted by the Bureau of Statistics. The population survey is based on a multi-stage area sample of private dwellings (currently about 22,800 houses, flats, etc.) and a sample of non-private dwellings (hotels, motels, etc.). The survey covers about 0.24 per cent of the population of Australia and includes all people over 15 years of age, except defence personnel.
• If more people are employed, then there is greater spending power in the economy. But at the same time companies may adjust the work hours of employees. If employees work less hours, and therefore get paid less, then spending power in the economy is reduced.

What are the implications for interest rates and investors?

• The rate cuts in recent times will help to support activity in coming months and provide businesses with a bit more breathing space – especially given that trading conditions are difficult. However the downside risks to global growth – particularly the slowdown in China and ongoing Euro zone debt concerns – will ensure businesses still show a level of cautiousness.
• CommSec is pencilling in a further quarter per cent rate cut before year end.

What does it all mean?

What do the figures show?

Labour force

• Employment rebounded in March, lifting by 37,800 people. Economists had tipped job gains of 20,000 (range from +5,000 to +30,000 jobs). The February result was revised to show job losses of 8,600 people (previously – 10,100). Full-time employment rose by 32,100 in March (February jobs were up by 50,400) and part-time jobs rose by 5,700 (February jobs fell by 58,900).
• The unemployment rate eased from 5.0 per cent to 4.9 per cent. The participation rate rose from 65.7 per cent to 65.8 per cent.
• Over the past four months employment has lifted by 44,100 or just over 11,000 jobs per month – below the growth rate of new entrants. And trend job growth in March was 8,600. Overall it is clear that employment is growing at a more sustainable pace.
• Average hours worked rose by 0.8 per cent in March after lifting by 1.2 per cent in February.
• NSW has the highest unemployment in the nation at 5.8 per cent. Across the states and territories unemployment rates in March were: NSW 5.8 per cent (4.9 per cent in February); Victoria 4.5 per cent (5.0 per cent); Queensland 5.5 per cent (5.6 per cent); South Australia 5.4 per cent (5.8 per cent); Western Australia 4.2 per cent (4.2 per cent); Tasmania 5.6 per cent (5.6 per cent); Northern Territory 2.4 per cent (2.4 per cent); ACT 3.2 per cent (3.3 per cent).
• Employment rose most in Western Australia (up 12,900) followed by Queensland (up 11,900), South Australia (up 7,400), Victoria (up 6,500), and Northern Territory (up 800), Tasmania (up 700), ACT (up 100). Jobs fell 5,200 in NSW.
• The working age population rose by 18,900 in March after lifting by 19,200 in February. The working age population grew by 1.66 per cent over the past year – the smallest gain in over five years.

What is the importance of the economic data?

• The Labour Force estimates are derived from a monthly survey conducted by the Bureau of Statistics. The population survey is based on a multi-stage area sample of private dwellings (currently about 22,800 houses, flats, etc.) and a sample of non-private dwellings (hotels, motels, etc.). The survey covers about 0.24 per cent of the population of Australia and includes all people over 15 years of age, except defence personnel.
• If more people are employed, then there is greater spending power in the economy. But at the same time companies may adjust the work hours of employees. If employees work less hours, and therefore get paid less, then spending power in the economy is reduced.

What are the implications for interest rates and investors?

• CommSec believes that official rates will stay on hold for the next three months. We still believe rates will rise – but gradually – pencilling in rate hikes in August and November.
• Overall, the job market is healthy, pointing to strong housing and retail spending in the second half of 2011.
• The main constraint on the economy is jobs. If the Government isn’t proactive in boosting labour supply it will be held responsible for mining and engineering projects that don’t go ahead, any delays in rebuilding in Queensland and if wages start to accelerate, boosting interest rates.

Short-term interest rates converged once the European Central Bank (ECB) began to set monetary policy for the entire eurozone. Over time, inflation declined in the periphery, which brought down long-term bond yields and reduced the risk premium for peripheral markets. Further economic benefits followed as the “one-size-fits-all” eurozone policy benefited the periphery more than the core. Interest and exchange rates were invariably too high for Germany, for instance, which meant that its export sector struggled.

The eurozone debt crisis of 2010 has upended this situation. Faced with steep unemployment, broken banking sectors and indebtedness, economies in the peripheral south and west such as Greece, Ireland and Spain are enduring the deepest recessions of the financial crises.

At the same time, economies in the centre such as Germany, France, the Netherlands and Belgium are enjoying stronger growth. Germany is the standout; buoyant activity there is, in fact, masking weaker performances at the periphery in overall measures of eurozone activity.

German exports are more competitive because, after the asymmetric impact of the financial and sovereign debt crises of 2010, eurozone interest rates have been kept low to support struggling peripheral member states and the euro fell. This is, however, just one aspect of the reversal of core-periphery fortunes. As the table below shows, a range of political and economic factors are combining to reinforce the continued outperformance of core Europe.

Periphery or core?

Still partly the preserve of national governments, fiscal policy has become the weak point of the eurozone experiment. At the periphery, large public deficits exacerbated by banking sector bail-outs have led to unavoidable and painful austerity measures, which have caused sovereign spreads to rise precipitously for Greece, Ireland and Portugal.

When the euro was introduced on 1 January 1999, sovereign bond spreads in the periphery converged to record lows. From 2001, the average spread over German government bonds stayed within a 10-basis point range until 2007 (based on an unweighted average of bonds from Portugal, Italy, Ireland, Greece and Spain). It was at this point the prevailing forces that had favoured all countries in the eurozone first showed signs of abating. As we now know, the credit crunch caused a serious de-convergence in sovereign spreads that remains with us.

There has been a positive correlation between higher peripheral sovereign spreads and funding costs in the aftermath of the credit crisis, suggesting that there is a meaningful spill-over effect from the public to the private sector. That increased cost of corporate funding is a significant headwind for companies in the periphery that reinforces my view that divergence will remain a defining theme in the eurozone for much longer than investors expect.

Divergent labour trends also seem here to stay. Peripheral countries face significant unemployment. Spain must deal with nearly 20% of its workforce being out of work. Ireland and Greece also have double-digit unemployment, which, in the case of Ireland, has encouraged an upturn in emigration. Part of the explanation is the fact that labour costs surged in peripheral countries during the good times (by more 30% in Ireland and Spain from 2000 to 2008), when wage indexation agreements were often a feature.

On the contrary, Germany’s unemployment rate (at about 7.5%) is less than the European average. Once “the sick man of Europe”, a perceived lack of competitiveness several years ago encouraged deep labour market reforms and collectively bargained minimum wages were effectively abolished. As a result, Germany controlled unit labour costs, meaning the economy became more competitive relative to its peripheral peers.

With strong demand for its high-quality capital goods as well as for premium auto brands like BMW, the German economy can be expected to benefit from further growth in emerging-market consumption for years to come. And the good feeling is not confined to the export sector; the domestic economy is also humming. The German consumer, so often a laggard historically, appears to be enjoying a welcome revival of confidence. If the Bundesbankers were still in charge of national monetary policy, they would be applying the brakes.

Structural change

Peripheral eurozone countries, meanwhile, must overcome major hurdles to be competitive again. This will become more apparent as competition from emerging economies intensifies. Without the safety valve of a floating exchange rate, their economies face “internal devaluations” (deflation) that could have painful social costs.

In terms of EU governance, the outlook is similarly polarised. The EU and IMF have already announced a 750 billion euro (A$985 billion) package to cover several years of deficit financing.

However, European leaders have been keen to respond to the accusation of “incremental reactive policymaking” in response to the sovereign crisis. As a result, the EU summit in March was expected to see policymakers deliver a “competitiveness pact”, designed to draw a credible line under the debt crisis.

Significantly, however, now that the negotiating power of peripheral states has been weakened, the architecture of the pact has been dominated by a vociferous Germany and France.

Beyond the expected expansion of the European Financial Stability Facility lending capacity to 440 billion euros, the focus of change is away from austerity and more structural – debt brakes, an end to automatic wage indexation, increases to retirement ages and corporate tax harmonisation.

All of this points to further pain for peripheral Europe. While there may be investment opportunities for the agile, from an asset-allocation perspective I believe that investors in Europe can profit from concentrating the focus of their portfolios on the core eurozone economies that are benefiting from powerful and self-reinforcing trends.

DataStream. End Q3 2010

]]> Until recently, the defining theme of European economic monetary union since its introduction in 1999 was the convergence of the peripheral economies (ex-Soviet bloc and outlying countries) and core Europe (France, Germany, the UK and so on). The move to a single currency provided the impetus for fiscally weaker, less-competitive peripheral economies to catch up to the stronger, more-competitive core.

Short-term interest rates converged once the European Central Bank (ECB) began to set monetary policy for the entire eurozone. Over time, inflation declined in the periphery, which brought down long-term bond yields and reduced the risk premium for peripheral markets. Further economic benefits followed as the “one-size-fits-all” eurozone policy benefited the periphery more than the core. Interest and exchange rates were invariably too high for Germany, for instance, which meant that its export sector struggled.

The eurozone debt crisis of 2010 has upended this situation. Faced with steep unemployment, broken banking sectors and indebtedness, economies in the peripheral south and west such as Greece, Ireland and Spain are enduring the deepest recessions of the financial crises.

At the same time, economies in the centre such as Germany, France, the Netherlands and Belgium are enjoying stronger growth. Germany is the standout; buoyant activity there is, in fact, masking weaker performances at the periphery in overall measures of eurozone activity.

German exports are more competitive because, after the asymmetric impact of the financial and sovereign debt crises of 2010, eurozone interest rates have been kept low to support struggling peripheral member states and the euro fell. This is, however, just one aspect of the reversal of core-periphery fortunes. As the table below shows, a range of political and economic factors are combining to reinforce the continued outperformance of core Europe.

Periphery or core?

Still partly the preserve of national governments, fiscal policy has become the weak point of the eurozone experiment. At the periphery, large public deficits exacerbated by banking sector bail-outs have led to unavoidable and painful austerity measures, which have caused sovereign spreads to rise precipitously for Greece, Ireland and Portugal.

When the euro was introduced on 1 January 1999, sovereign bond spreads in the periphery converged to record lows. From 2001, the average spread over German government bonds stayed within a 10-basis point range until 2007 (based on an unweighted average of bonds from Portugal, Italy, Ireland, Greece and Spain). It was at this point the prevailing forces that had favoured all countries in the eurozone first showed signs of abating. As we now know, the credit crunch caused a serious de-convergence in sovereign spreads that remains with us.

There has been a positive correlation between higher peripheral sovereign spreads and funding costs in the aftermath of the credit crisis, suggesting that there is a meaningful spill-over effect from the public to the private sector. That increased cost of corporate funding is a significant headwind for companies in the periphery that reinforces my view that divergence will remain a defining theme in the eurozone for much longer than investors expect.

Divergent labour trends also seem here to stay. Peripheral countries face significant unemployment. Spain must deal with nearly 20% of its workforce being out of work. Ireland and Greece also have double-digit unemployment, which, in the case of Ireland, has encouraged an upturn in emigration. Part of the explanation is the fact that labour costs surged in peripheral countries during the good times (by more 30% in Ireland and Spain from 2000 to 2008), when wage indexation agreements were often a feature.

On the contrary, Germany’s unemployment rate (at about 7.5%) is less than the European average. Once “the sick man of Europe”, a perceived lack of competitiveness several years ago encouraged deep labour market reforms and collectively bargained minimum wages were effectively abolished. As a result, Germany controlled unit labour costs, meaning the economy became more competitive relative to its peripheral peers.

With strong demand for its high-quality capital goods as well as for premium auto brands like BMW, the German economy can be expected to benefit from further growth in emerging-market consumption for years to come. And the good feeling is not confined to the export sector; the domestic economy is also humming. The German consumer, so often a laggard historically, appears to be enjoying a welcome revival of confidence. If the Bundesbankers were still in charge of national monetary policy, they would be applying the brakes.

Structural change

Peripheral eurozone countries, meanwhile, must overcome major hurdles to be competitive again. This will become more apparent as competition from emerging economies intensifies. Without the safety valve of a floating exchange rate, their economies face “internal devaluations” (deflation) that could have painful social costs.

In terms of EU governance, the outlook is similarly polarised. The EU and IMF have already announced a 750 billion euro (A$985 billion) package to cover several years of deficit financing.

However, European leaders have been keen to respond to the accusation of “incremental reactive policymaking” in response to the sovereign crisis. As a result, the EU summit in March was expected to see policymakers deliver a “competitiveness pact”, designed to draw a credible line under the debt crisis.

Significantly, however, now that the negotiating power of peripheral states has been weakened, the architecture of the pact has been dominated by a vociferous Germany and France.

Beyond the expected expansion of the European Financial Stability Facility lending capacity to 440 billion euros, the focus of change is away from austerity and more structural – debt brakes, an end to automatic wage indexation, increases to retirement ages and corporate tax harmonisation.

All of this points to further pain for peripheral Europe. While there may be investment opportunities for the agile, from an asset-allocation perspective I believe that investors in Europe can profit from concentrating the focus of their portfolios on the core eurozone economies that are benefiting from powerful and self-reinforcing trends.

DataStream. End Q3 2010

The post Europe’s reversal of fortunes: core trumps peripherals appeared first on AdviserVoice.

• Employment fell by 10,100 people in February – the biggest decline in 18 months (since August 2009). Economists had tipped job gains of 20,000 (range from -10,000 to +35,000 jobs). The January result was revised sharply lower to show growth of 7,700 people (previously +24,000). Full-time employment rose by 47,600 in February (January jobs were down by 12,300) and part-time jobs fell by 57,700 (January jobs rose by 20,000).
• The unemployment rate was unchanged at 5.0 per cent. The participation rate fell from a downwardlyrevised 65.8 per cent to 65.7 per cent. The working age population rose by 19,200.
• Average hours worked rose by 1.1 per cent in February after falling by 0.8 per cent in January.
• Across the states and territories unemployment rates in February were: NSW 4.8 per cent (4.9 per cent in January); Victoria 5.0 per cent (5.1 per cent); Queensland 5.6 per cent (5.6 per cent); South Australia 5.8 per cent (5.4 per cent); Western Australia 4.2 per cent (4.6 per cent); Tasmania 5.6 per cent (6.4 per cent); Northern Territory 2.3 per cent (2.4 per cent); ACT 3.5 per cent (3.4 per cent).
• Employment rose most in NSW (up 22,400) followed by South Australia and Northern Territory (up 400). Jobs fell most in Queensland (down 22,100) followed by Western Australia (down 10,600), Tasmania (down 500) and Victoria and the ACT (both down 200).

What does it all mean?

• There are clear signs that the Aussie economy is losing momentum. Jobs are now falling, adding to data showing stagnant retail spending, weak housing market and contracting activity in manufacturing, services and construction sectors. Over the last three months employment has fallen by 2,300 people and this highlights that the recent weakness is not an aberration. In fact employment started to slow before the floods and cyclone hit.
• The rapid fire rate hikes and sluggish consumer activity is starting to show cracks in the labour market data. More and more businesses are telling us that conditions are tougher now than at the height of the global financial crisis and earlier this week the NAB business survey highlighted the weakness in business trading conditions. Profitability is being squeezed, the employment index remains weak and forward orders are being pared back – all a clear sign that businesses are finding times tough.

• The Reserve Bank had warned that the job market would slow, and clearly it got that one right. The central bank has also been anticipating a softening of conditions in the labour market going forward – in line with the weak growth forecasts for the first half of 2011. In fact the Reserve Bank expects the unemployment rate to only slide by 0.5 per cent over the coming two years. No doubt in the longer term an improvement in productivity and a pickup in skilled migration is what is needed to ensure that these forecasts are met. The jobs data gives the Reserve Bank further reason to stay on the interest rate sidelines.
• Not only did employment fall in the latest month but the January result was sharply downgraded. While the good news is that full-time jobs in the month, it is important that the figures are not taken too literally. It is hard to believe that full-time jobs would soar almost 48,000 just as part-time jobs were falling by almost 58,000. The volatility over the last few months means that trend estimates are probably more accurate and these show a slowdown in job creation.
• Again it’s hard to believe that Western Australian jobs would fall at the same time the unemployment rate was easing. Or that unemployment in Tasmania could fall from 6.4 per cent to 5.6 per cent in the space of a month.
• It is important to highlight that the data is backward looking, capturing how the economy was tracking around 4-5 months ago. And even more forward looking indicators like the job ads series suggest that while employment growth will remain a feature it is likely to be a less robust in the near term.
• Overall it is unlikely that the Reserve Bank will be pursuing further interest rate rises anytime soon. While CommSec had expected the next rate hike to take place in May, there is clearly an array of risks to our call. And if activity levels remain subdued over the next couple of months it is possible the anticipated May rate hike could be pushed out by a number of months.

What do the figures show?

Labour force

• Employment fell for the first time in 18 months in February, falling by 10,100 workers. Full-time employment rose by 47,000 after falling by 12,300 in January. Part-time employment fell by 57,800 after rising by 20,000 in January.
• The annual employment growth rate eased from 3.3 per cent to 3.0 per cent.
• The unemployment rate remained steady at 5.0 per cent. The participation rate eased from 65.8 per cent to 65.7 per cent.
• Average hours worked rose by 1.1 per cent in February after falling by 0.8 per cent in January. Over the year average hours worked rose by 2.3 per cent.
• NSW (up 22,400) led the job gains in February, followed by South Australia and Northern Territory (up 400). Jobs fell most in Queensland (down 22,100) followed by Western Australia (down 10,600), Tasmania (down 500) and Victoria and the ACT (both down 200).
• Across the states and territories unemployment rates in February were: NSW 4.8 per cent (4.9 per cent in January); Victoria 5.0 per cent (5.1 per cent); Queensland 5.6 per cent (5.6 per cent); South Australia 5.8 per cent (5.4 per cent); Western Australia 4.2 per cent (4.6 per cent); Tasmania 5.6 per cent (6.4 per cent); Northern Territory 2.3 per cent (2.4 per cent); ACT 3.5 per cent (3.4 per cent).
• The working age population rose by 19,200 in February after lifting by 19,000 in January. The working age population grew by 1.80 per cent over the past year – the smallest gain in 50 months.

What is the importance of the economic data?

• The Labour Force estimates are derived from a monthly survey conducted by the Bureau of Statistics. The population survey is based on a multi-stage area sample of private dwellings (currently about 22,800 houses, flats, etc.) and a sample of non-private dwellings (hotels, motels, etc.). The survey covers about 0.24 per cent of the population of Australia and includes all people over 15 years of age, except defence personnel.
• If more people are employed, then there is greater spending power in the economy. But at the same time companies may adjust the work hours of employees. If employees work less hours, and therefore get paid less, then spending power in the economy is reduced.

What are the implications for interest rates and investors?

• CommSec expects the jobless rate to ease to around 4.5 per cent over the coming year. But if the Federal Government was to provide a much needed boost to labour supply by lifting the migrant intake and easing work visa restrictions, the job market may not need to tighten as much as expected.
• We expect the job market to remain relatively healthy particularly in the second half of the year. However the job market may trend sideways for the next couple of months. Our equity media analysts maintain their hold rating on SEEK Limited
• We are hearing that global fund managers are looking to exit positions in Australia, concerned by our softer economy and uncertainty about proposed taxes on carbon and the resources sector. The high Australian dollar and softening in the job market are yet further reasons for investors to be looking at economies in the upswing phase with the key candidate being the United States. While we are not revising down our sharemarket forecasts, they are under review.