The most recent economic data out of Australia suggest a muddy picture. The consumer side of the economy is now responding strongly to low interest rates, with housing construction activity strengthening and retail sales lifting. While the labour market data is ultimately a lagging indicator, it does point to weakness elsewhere.
For now, the cyclical improvement in the household side of the economy is doing enough to keep growth reasonable and the RBA cash rate at 2.5%. But it is way to early to suggest that the next move in rates will be up any time soon and the Bank is likely to remain dovish.
It's extraordinary that the loss of jobs in the last 6 months has actually been larger than the first 6 months of 2009 at the height of the collapse of financial markets. The unemployment rate jumped much quicker in that period, as many stayed in the workforce. This time around, labour force participation has dropped by 0.6ppt.
There are signs from leading indicators of the labour market like job vacancies that conditions are stabilising, although there isn't a sign of a turnaround at this stage.
Monetary policy and rising asset prices have been able to offset the drop in employment from the consumption perspective, with retail sales lifting in the last 3-4 months. Growth of ~3.8%YoY is hardly explosive, but is an improvement from mid-year.
Mortgage borrowing and house prices have been strengthening strongly for sometime, but this has taken another leg up in the last couple of months. Investor interest in particular has exploded, although there is also a noticeable improvement in owner-occupied housing as well.
Thankfully this is also translating into stronger construction plans, rather than purely into higher house prices. Medium-density housing had been driving most of the gains, although in the last month there has been a noticeable increase in detached houses as well.
If this were a traditional cycle, it could be argued that monetary policy settings may need to be changed in the not too distant future. In October 2009, the RBA raised rates after seeing a similar improvement in these indicators, although employment growth had been better then than it has been recently.
The problem this time around is that as the labour market data show, the end to the boom in business investment is proving to be more corrosive to labour markets than the financial crisis was. Furthermore, end of the investment boom is likely to last much longer than the crisis, with the fiscal policy response also very different. With businesses assessment of conditions and investment plans still patchy, this still looks like a significant drag on activity.
