Business and consumer confidence remain subdued

After last week’s bumper crop of Australian data, things were much quieter this week. The monthly NAB business survey suggested business conditions remained relatively subdued in November while the Westpac-Melbourne Institute measure of consumer confidence fell in December, with both readings suggesting that the fourth quarter is unlikely to show a marked break from the subdued outcome painted by the Q3 GDP readings.

We also look at the latest data from the labour account which shows the growing importance of the health care sector as a source of employment growth. This week’s readings include the new RBA quarterly bulletin, the Productivity Commission on boosting Australia’s economic performance, and the international debate over business concentration and productivity.

This week the last AICD’s Leaders Pulse of the year is asking respondents about the key economic, political and governance developments that shaped 2019. It should only take a few minutes and it would be interesting to know how members rank some of the big events of the year. If you can find the time, please could you take part in the survey here.

What I’ve been following in Australia . . .

What happened:

The NAB monthly business survey for November reported business conditions unchanged at plus four index points (upwardly revised from October), while business confidence fell by two points to zero index points.

Business conditions for the mining, construction and transport and utilities sectors all declined in the month, the wholesale sector was flat and there was an increase for manufacturing. Business confidence decreased in all industries in November except for retail and wholesale, which both saw slight increases.

Why it matters:

According to NAB economists, the results of the November business survey suggest that business conditions are stabilising but doing so at a relatively low level – one that is consistent with ongoing weakness in GDP growth (especially private demand) and which suggests that Q4 looks likely to bring little improvement from last week’s soft Q3 GDP reading. Forward looking measures (forward orders and capacity utilisation) as well as business confidence also softened in November, suggesting no sign of a significant recovery in conditions in the near term.

What happened:

The Westpac-Melbourne Institute Index of Consumer Sentiment (pdf) moved deeper into negative territory in December, falling to 95.1 from 97.0 in November.

All components of the consumer sentiment index recorded declines in the month while the Westpac-Melbourne Institute Unemployment Expectations rose to a two and a half year high, indicating increasing pessimism about the future health of the labour market.

Why it matters:

Consumer sentiment index has now been below the 100 level (indicating that pessimists outnumber optimists) for the whole the second half of 2019. That aligns both with the weak consumption numbers in last week’s GDP report and the flat retail sales figure for October. It also suggests little sign of any imminent turnaround in household spending in the fourth quarter.

What happened:

The ABS quarterly data on residential property prices increased by 2.4 per cent in the September quarter of this year, while prices were down 3.7 per cent over the year.

Prices rose strongly in Sydney and Melbourne (up 3.6 per cent over the quarter in both cases) and increased more modestly in Brisbane (0.7 per cent) and Hobart (1.3 per cent) but fell in the other capital cities.

Why it matters:

The Q3 increase was the first positive quarterly growth since the December quarter of 2017 and the strongest quarterly result since the December quarter of 2016. The ABS quarterly numbers are telling the same story (albeit with a lag) as the monthly CoreLogic results reported last week: that easier monetary policy appears to have reinvigorated the housing market in Sydney and Melbourne, even if it’s struggling to gain traction elsewhere in the economy.

What happened:

The ABS released the September 2019 quarterly labour account estimates. The total number of filled jobs grew by 0.6 per cent over the quarter (seasonally adjusted) and rose 2.4 per cent over the year, reaching 14.4 million1. Annual job growth was strongest in the health care and social assistance category (up 8.2 per cent), followed by utilities, mining and wholesale trade. Job growth was negative in the information, media and telecommunications, agriculture, construction, retail trade and financial sectors.

By the number of filled jobs, health care and social assistance now accounts for the greatest share of jobs in the Australian economy, at 13 per cent of all filled jobs. The retail sector (with a 9.7 per cent share) is in second place.

The private sector accounted for about 96 per cent of all jobs growth over the past year, with filled jobs in the private sector up by 2.8 per cent while the number of filled jobs in the public sector only increased by 0.6 per cent. The public sector’s share of all filled jobs has eased from about 15.5 per cent in the September quarter of 2010 to 14.6 per cent now.

Why it matters:

According to the ABS, the labour account is the best source for industry employment and job data. Unlike the labour force data, which is based on how employed people describe the business they work in, the labour account is drawn from how businesses have been officially categorised. This matters because workers can sometimes report the business activities relevant to their job, rather than the actual industry of the business that pays their wages (the ABS gives the example of an employee of an engineering construction business who is working on a coal mine site and therefore incorrectly describes their industry of employment as coal mining instead of construction).

The data also provide an overview of Australian job growth over the past quarter century. The sector with the largest increase in employment share was health care and social assistance, with its industry share rising from 8.6 per cent in 1994 to 13 per cent in 2019. There was also a sizable increase for professional, scientific and technical services, up from 4.7 per cent to 8.7 per cent over the same period. By far the largest fall in industry share was recorded in manufacturing, down from 13.4 per cent to 6.3 per cent.

More generally, there has been a marked divergence in the job performance of goods- and services-producing industries. In 1994, the share of filled jobs was split roughly equally between the two, while by 2019 the split was about 39 per cent in goods industries and 61 per cent in services industries.

What I’ve been reading: articles and essays

The RBA has published the December edition of its quarterly bulletin. I’ve not yet had time for a detailed read, and as usual there’s a huge among of content here, but the following articles caught my eye:

• David Jacobs on how global financial conditions influence Australia. The key message here (and one that has also featured in several speeches by RBA Governor Lowe) is that several structural developments have driven down global interest rates. All else equal, that would tend to send global capital flowing into Australia, putting the dollar under upward pressure. The need to offset that pressure (which would compromise the central bank’s employment and growth objectives) has seen the RBA choose to operate with a lower cash rate.
• Ivan Roberts and Brendan Russell on long-term trends in China’s growth. They reckon that a slowing working-age population, reduced incentives to invest and subdued productivity growth will contribute to a marked slowdown, meaning that China’s period of ‘above normal’ growth is now over.
• Kellie Belrose and David Norman on the nature of Australian banks’ offshore funding. The authors find that offshore funding accounts for around one-third of the major banks' total funding, evenly split between deposits, short-term and long-term debt. (They also note that a significant portion of this is raised by New Zealand subsidiaries and as such doesn’t pose the same level of rollover risk as other foreign funding.) Excluding New Zealand activities, these offshore borrowings are mostly used to fund short-term or liquid foreign assets, but about one-quarter of offshore funding is used to write Australian-based assets. This creates rollover risk were foreigners to refuse to renew this funding during periods of market stress, although the piece argues that there are several factors mitigating this risk including significant holdings of high-quality liquid assets that could be used to meet a foreign funding shortfall and the use of exchange rate hedging.

Productivity Commission Chair Michael Brennan gave a speech on Economic Knowledge and the State. After noting Australia’s strong past performance over the past three decades - a real GDP per capita GDP performance that has exceeded that of all the G7 economies, among the strongest fiscal position and the most redistributive tax transfer system in the OECD, high average net wealth and low wealth inequality by OECD standards, and a high life expectancy achieved for a health spend that is modest as a share of GDP – he turned to what might be done to boost Australia’s current performance. Here the focus was on improving the dynamism of the economy ‘through increased entrepreneurship, the generation of new products and new business models.’ Brennan also highlighted the importance of understanding the important role played by large, dense cities and identified ‘zoning, stamp duty, road user charging, public transport reform and quality infrastructure provision’ as ‘vital elements of a contemporary reform agenda.’

Last week, I linked to a Steve Grenville piece in the AFR making the case for fiscal stimulus. Chris Richardson and Stephen Smith take a different view, emphasising the case for building up a greater fiscal buffer to provide some ‘recession insurance.’ (I’ve noted before that in the context of monetary policy, the RBA considered and then rejected the case for holding back rate cuts as insurance in favour of reducing the risks of a negative shock by strengthening the starting point for the economy.)

The ABS reported that there were a record 315,147 births registered in Australia in 2018, an increase of 1.9 per cent on 2017. The total fertility rate (TFR) last year was 1.74 births per woman, down from 2.02 in 2008. The replacement rate (the TFR at which a population exactly replaces itself from one generation to the next, without migration) is thought to be around 2.1. Australia’s TFR has been below this since 1976.

ABARES has released the December quarter edition of Agricultural Commodities. The new report notes that ‘the impact of drought continues to be felt across Australia's agricultural sector, contributing to a forecast third consecutive year of falling production’. If that forecast is right, that will be the first time in 63 years that Australia’s farm output has fallen for three consecutive years. Despite that hit, however, ABARES forecasts that the total value of agricultural production will remain just above $60 billion in 2019–20 as healthy levels of global demand and increased prices for almost all livestock products together help offset the adverse consequences of falling output.

A new Treasury working paper examines the impact of the reallocation of labour from lower to higher productivity firms in Australia. The authors find that the Australian economy, relative to its OECD peers, does a pretty good job of reallocating resources to high productivity firms. Less happily, they also find a declining probability that high-productivity firms will expand, and low-productivity firms will contract or exit, which they estimate accounts for about one quarter of the observed slowdown in labour productivity growth across the industries in their sample. Their findings also offer a possible explanation for the current period of sluggish wage growth, as the decline in the rate at which labour is being reallocated to high productivity firms implies that fewer high-paying jobs are being created now than in the past. Why the shift? The paper flags the need for more work, but suggests a few possibilities including a rise in the relative importance of firm-specific human capital due to the growing role of intangible capital (which would increase the costs of changing jobs for both firms and workers), demographic change such as population ageing, and higher barriers to labour market mobility and competition.

Two interesting pieces from Bloomberg’s Peter Orszag. Sticking with productivity as a theme, the first argues that the big debate (particularly in the United States) over whether governments should act to reverse rising industrial concentration needs to pay more attention to the rise of superstar firms and the contribution that rising productivity may make to greater concentration. The second looks at whether there is a carbon bubble in financial markets.

Related to the first of the Orszag pieces above, this Economic Letter from the Federal Reserve Bank of San Francisco proposes that rising concentration in US industries may have been a by-product of IT innovation which made it easier for large firms to enter new markets (for example, by allowing a large retailer like Walmart to manage distribution networks more effectively). Moreover, that initial rise in concentration appears to have been good for productivity growth. Complicating the picture, however, it’s also possible that increased competition between these large firms then contributed to lower profits, lower innovation, and hence lower productivity growth in the longer term.

December’s BIS quarterly review includes a helpful overview of recent (September – November) financial market developments including a boxed discussion on what happened in the US dollar repo markets back in September.

Martin Wolf writes on the legacy and lessons of Paul Volcker.

The OECD’s Chief Economist and the Director of the European Investment Bank’s Economics Department think that the current weak performance of investment (particularly but not only in Europe) is a product of several structural changes including the rebalancing of the Chinese economy towards a more consumption- and services-focused model, the restructuring of international trade due to a combination of digitisation, the rise of services and geopolitical risks, a lack of policy direction to address climate change, and the broader impact of digitalisation on finance, business models and value chains. They argue for a package that reduces policy uncertainty, rethinks fiscal policy and supports policies targeted at key structural challenges to boost capital spending.

Finally, two columns from Project Syndicate. Jim O’Neil writes on the growing threat to human wellbeing posed by antimicrobial resistance (AMR) and the relatively low level of public awareness around this. And Harold James asks what’s behind the crisis of democracy? James also wonders whether digital citizenship might offer one potential solution to declining engagement and participation.