Positive Outlook: Westpac IQ Reports Continued Resilience in Labour Market
As per the January Westpac-MI Consumer Sentiment survey, it appears that Australian consumer sentiment took a turn for the worse over the holiday season. After a 2.0% decline in December, the headline index dropped by 0.7% to 92.1 in January. However, most of the sub-indexes did not deteriorate during the month, with positive movements in the one-year outlook for family finances, the one-year and five-year outlook for the economy, and the willingness to purchase major household items. The headline decline in January was mainly due to households’ assessment of their finances compared to a year ago, with a significant 7.8% decrease, reversing gains made in December. The lingering impact of cost-of-living pressures is evident in the partial reversal of gains from 2024 over December and January, as well as the overall subpar level of the indexes, affecting current spending and consumer confidence.
Despite the strong official labor market data at the end of 2024 showing a tight labor market throughout the year with little change in slack measures, it was surprising to see that consumers’ fears of job losses worsened in January. The next update on wages will be closely monitored for potential risks to inflation as the supply of labor matches demand. It is anticipated that wages growth will continue to decrease throughout 2025, aligning with the goal of inflation returning to target. The potential start of the 100 basis points of RBA rate cuts forecasted by the end of the year is viewed to be in May, with a possibility of an earlier start based on the strength of the upcoming quarterly inflation report at month-end. Westpac’s Chief Economist, Luci Ellis, also examined Australia’s floating exchange rate and productivity as key medium-term issues during the week.
Looking offshore, market participants have been busy between New Year’s and President Trump’s upcoming inauguration. December’s nonfarm payrolls reporting a 256k gain surpassed market expectations by a large margin, with the unemployment rate ticking down to 4.1% due to a significant rebound in household employment. Despite the discrepancy between nonfarm payrolls and household employment gains in 2024, the wage growth remains mild, with annual growth of 3.9% in December historically consistent with consumer inflation at target. The CPI report for December also supports the continuation of rate cuts through 2025, displaying a slowdown in core inflation from 0.3% to 0.2% and a decrease in the annual rate from 3.3% to 3.2%.
In the UK, the CPI showed promise in December, with headline inflation easing to 2.5% year-on-year, aligning with the Bank of England’s forecast. The deceleration of services inflation and the conducive trend in both services and goods inflation suggest possible additional rate cuts in 2025 to aid in the recovery of activity growth. China’s Q4 GDP data was recently released, meeting the authorities’ 5.0% target for the year, driven by an acceleration in annual growth from 4.6% to 5.4% in Q3 to Q4. The results highlight resilience in China’s economy but also indicate a need for significant policy support in the coming months to sustain growth and deliver promised welfare gains.
