Economy begins to buckle from rate hikes

Economy breaking

The labour force figures were soft again for January.

Employment went backwards for a second month, with full-time employment declining by -43,300, and monthly hours worked falling -2.1 per cent.

The number of unemployed persons has been rising consistently now since October last year.

Overall, 523,200 unemployed is not yet a disaster, but the figure is set to rise now as the 325 basis points of monetary tightening flows through to mortgage repayments, and as the economy slows, with immigration running at record highs. 

The unemployment rate dipped to below 3½ per cent in 2022, but the lows for the cycle look to have been around July to October last year.

The unemployment rate increased from 3.5 per cent to 3.7 per cent in January, but even this softer figure was flattered by another significant drop in the participation rate.

This mirrors what Roy Morgan Research also found, which was a spike in the unemployment rate last month to the highest level since March 2021.

The underutilisation rate increased again to 9.8 per cent, and with a surge of arrivals due in February we should expect the number of unemployed persons to rise over the remainder of 2023.

Forecasts under pressure

The Reserve Bank of Australia previously forecast that the unemployment rate would likely rise to around 3¾ per cent by the end of the year.

But we were pretty much there already in January, and the latest interest rate hikes haven't even had time to take hold yet,

Overall, the figures were much softer than market expectations, and bond yields dropped accordingly.

Mortgage arrears lifting

Arrears begin to rise

Nothing generates social media excitement quite like people being unable to make a mortgage repayment...and here we are again.

In December we got the first meaningful lift in mortgage arrears for this cycle.

Low-doc and non-confirming arrears have seen a decent lift and are at their highest levels in nearly a year.

Prime SPIN 30+ day mortgage arrears were still below 1 per cent in December, but are now rising materially according to the latest figures from S&P Global.

The increase was fairly uniform across the states, but the biggest mover was the state which experienced the longest lockdowns, and in turn small business failures: Victoria.

Victoria saw its 30-day arrears rise to a 17-month high of 1.22 per cent.

Interest rates have since been lifted further, so arrears will of course rise further in 2023. 

Rents increase by a record 2.4pc in January

Asking rents rocketing

SQM reported that vacancy rates fell back from December's Christmas mini-spike, returning to a record low of just 1 per cent in January.

Source: SQM Research

If we plot the trend for the past six months, we can see that the declines are now largely being driven by Sydney and Melbourne, as immigration returns to the major capital cities. 

Sydney's asking rents increased by 30 per cent from a year earlier, while Brisbane and Melbourne each saw asking rents up 25 per cent.

There were also punchy increases in rental prices in Adelaide and Perth.

Source: SQM Research

Rental vacancies have continued to decline in February, and as such will notch record lows in next month's figures.

Rent only comprises around 6 per cent of the CPI basket in Australia, but still the extremely tight lending settings for landlords are going to be a net negative for bringing inflation down in 2023.

The outlook for the next few months is for market conditions for renters to deteriorate further, with permanent migrants now beginning to arrive, and with international student visas being processed in record numbers...and at a record speed to boot.

A further 50,000 Chinese students have effectively been ordered to return to Australia immediately, adding to rental market pressures, especially in the context of their being only 31,500 rental vacancies nationwide in January.

This should all help to take pressure of labour costs in 2023; the NAB survey showed that pressures were still running high in the recreational and personal services sector, including hospitality.

Unemployment to rise

Roy Morgan's latest consumer confidence reading showed the confidence reading plunging to 78.1, the lowest level since the early days of lockdown in April 2020. 

The news wasn't much better for unemployment, with Roy Morgan's broader definition of unemployment seeing the January 2023 unemployment rate rising to 10.7 per cent, the highest level since the JobKeeper stimulus package ended all the way back in March 2021. 

Source: Roy Morgan

Westpac's consumer sentiment survey also showed unemployment expectations as now rising, with consumer sentiment back at around the lowest levels we'll see outside of a full blown recession, plummeting to a reading of just 78.5.

Unemployment expectations are now significantly higher than a year earlier at a reading of 119.4 (up from 102.8 in February 2022).

The beatings will continue until morale improves...

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Rental crisis gathers pace

Rentals mayhem

Over the past week there have been articles with subjects ranging from renters moving into tents, living in their cars, checking out defunct student digs, and landlords advertising squash courts for rent as places to live...among others.

With population growth running at record highs of around 500,000 per annum - and with a rapid-fire 325 basis points of monetary tightening already having been delivered - it's surely gotta be time to reboot the lending settings and remove the nanny state assessment buffers. 

Instead of responding, the rental supply is actually declining as most prospective landlords can't service under current policy settings. 

Build to rent launch

In other news, as expected Mirvac reported in its ASX market update a 62 per cent drop in net profit for the December half-year, as demand for new property has plunged.

Overall, new dwelling supply in Australia is set to drop away over the next couple of years. 

Interestingly Mirvac has delivered a couple of build-to-rent projects to the market over the past year, including one tower block in Olympic Park in Sydney.

Research from Charter Keck Cramer showed that the cost of renting a 2-bedroom unit therefrom is 27 per cent higher than renting from a private landlord...to some degree mirroring what happened previously in London. 

Boral's energy costs were up 54pc in 2022

Boral laments energy costs

Boral reported a strong 53 per cent increase in NPAT to $56.8 million over the 6 months to December 2022, thanks in part to strong cost discipline in the challenging inflationary environment.

Source: ASX, Boral

Over the remainder FY23 Boral aims to maintain a strong cost focus. 

Boral's energy costs were up by a brutal 54 per cent in the December 2022 half versus the prior year comparative period, while cartage costs were also up 20 per cent year-on-year due to driver and truck shortages.  

Source: ASX, Boral

Energy price conditions have eased

The driver and truck shortages should be righted now that population growth is running at full tilt, but you can understand the concern around energy prices.

Ironically, the ALP won its election campaign on providing $275 cheaper energy bills for households by 2025 due to its plans to increase renewable energy sources - but to say that global events have overtaken matters would be something of an understatement. 

The AEMO reported that wholesale electricity prices pulled back dramatically by 57 per cent from excruciating highs of $216/MWh to $93/MWh between the September and the December quarters last year.

East coast gas prices also fell from $26/GJ to $17.79/GJ.

Source: AEMO

Energy price conditions have eased more generally following the Federal Government's intervention in the electricity market in December, which have seen futures for the next two years significantly cut.

Source: AEMO

From an inflation perspective this will obviously in time bring good news, as inflation will start to fall over the medium term. 

But you can understand the angst of listed companies because energy prices are still well above 2021 levels and are cutting into profit margins. 

Electricity price offerings for households were 20 to 30 per cent higher over the past year, and in the short-term households are expected to come under further pressure with Energy Australia, Origin, and AGL all expected to increase gas rates over February and March. 

International travel resumes in earnest for Aussies

Holiday time

There was a 20 per cent surge in tourism imports, with more Aussies heading off overseas in December for their summer break.

It was comfortably the biggest result for tourism debits since February 2020, at $3.7 billion.

International students are now expected to come back in to the country in droves from February, which will help to continue addressing labour supply issues.

Total exports were still very strong in December at $57.8 billion, but have eased a fair amount from last year's highs, with the export values of coal, iron ore, and natural gas now all down from their respective peaks (although the annualised figures still look strong!).

Import spending fell back -3.2 per cent in the fourth quarter of 2022, in part due to declining fuel prices.

An exception was car imports, which have increased quite sharply as supply chain issues have eased. 

Overall, this resulted in a modest decline in the monthly international trade surplus, to $12.2 billion.

The wrap

The Federal Budget will come storming back towards surplus this year on the back of the past year's record high exports and lately the lowest unemployment rates in around 50 years, leading the Treasurer to hint at cost of living relief measures to be announced in the May budget.

It'll be interesting to watch how population flows play out over the course of 2023.

Aussies are now able to travel more freely again as evidenced in the December tourism figures, but at the moment the net demographic flows seem to be mainly inbound, with population growth thought to be running at record highs at an annual pace of up to +500,000.

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James Foster reviewed the trade figures in more detail here.