Why is the market so negative on 2020?

Chris Rands

Yarra Capital Management

The Australian Bureau of Statistics (ABS) released its November 2019 labour force numbers, which include employment and unemployment data. The figures were better than the market expected as the unemployment rate fell back to 5.2%. Looking ahead, it would appear our outlook for 2020 isn’t as negative as the market is making out. Here’s why.

Business Intentions – The best lead indicator

One of our preferred indicators for forecasting the direction of the unemployment rate is the NAB Monthly Business Survey, focusing on the employment intentions category. Chart 1 shows this index compared to the year-on-year (YoY) change in the unemployment rate (lagged by four months). While the past 12 months have seen a large step down in employment conditions, from +10 to around flat, this has now begun to stablise and points to an unchanged unemployment rate at the beginning of 2020 compared to 2019.

Chart 1 - NAB Monthly Business Survey and YoY change in Australian unemployment rate

Source: Bloomberg, Nikko AM

While chart 1 shows the YoY change in the unemployment rate, to see the outright unemployment rate we just need to look back at what the rate was at the start of 2019. At that point in time, the unemployment rate was around 5.0 - 5.2%, having increased slightly from the end of 2018. Using the current level of NAB business conditions we can assume that the unemployment rate will be relatively unchanged in the low 5% range to kick off the first few months of 2020 (as this keeps the YoY change stable).

Chart 2 - Australian unemployment rate

Source: Bloomberg

If we look a little further forward we can attempt to get a feel for business conditions to help determine where employment could go. While the NAB Monthly Business Surveys fell rapidly through 2019, which drove the deteriorating outlook for the unemployment rate, they have since started to show signs of stabilising.

Chart 3 - NAB business conditions

Source: Bloomberg

Looking at the series, the sectors that went into negative territory were retail trade, wholesale trade, transport, construction and manufacturing. From June to September each of these sectors has improved. Furthermore, both retail trade and construction have bounced after very consistent declines since the middle of 2018 when house prices begun to decline. Given these are two of the most rate sensitive parts of the economy, there could be some upside for business conditions next year, especially if the trade situation between US and China improves.

Our forecast would be to pencil in slightly improved business sentiment next year as global sentiment has begun to improve since the nadir in August, and the effect from RBA rate cuts should begin to improve how businesses see the economy.

Chart 4 - NAB business conditions: construction and retail trade

Source: Bloomberg

Table 1 - NAB business conditions

Source: Bloomberg, Nikko AM

In addition to this outlook based on business conditions, it is also important to note that 2019 has been a strong year for employment producing just under 250,000 jobs.

Chart 5 shows that through the first 11 months of 2019, the employment outcomes have been almost exactly the same as 2018, with very similar levels of full-time and part-time employment. The main difference is that this time last year the market was talking about interest rate hikes, whereas now it’s focusing on interest rate cuts and quantitative easing.

Chart 5 - Employment by year – though the first 11 months

Source: Bloomberg, Nikko AM

Additionally, we have seen total hours worked (a good alternative measure for GDP) continuing to increase, showing around average levels of growth. This points towards a 2% GDP outcome to kick off 2020.

Chart 6 - Australian hours worked - aggregate

Source: Bloomberg

Chart 7 - Hours worked – YoY growth

Source: Bloomberg

While some of the forward indicators (such as job ads and job vacancies) have slowed, this has not yet been reflected in the outright levels of employment. Overall, when you look at the data it’s hard to see what the market is so concerned about in terms of current employment figures. While it’s true that employment isn’t ‘booming’, there are still respectable levels of growth and the potential for improved business conditions based off RBA cuts, rising house prices and the possibility for an improvement in the US/China relations. All this suggests that employment should go sideways from here. Further, we think it would be prudent for the RBA to wait and see how the recent rate cuts flow through to the economic data as further house price increase could soon start to turn sentiment, especially in the retail sector.

Separately, it is also interesting to look at what the Reserve Bank of Australia (RBA) sees as the non-accelerating inflation rate of unemployment (NAIRU) as it looks like the market is being set up for some unrealistic expectations. The RBA recently stated that they thought 4.5% is where the economy would reach full employment and hence cause faster wage increases. We observed that some analysts were suggesting that while the employment figures were good, the fact that the RBA sees NAIRU at 4.5% means they will continue cutting.

Chart 8 - Australian unemployment rate

Source: Bloomberg, Nikko AM

From an historical perspective though, the level of NAIRU has rarely been achieved in the Australian economy. The below table sets out the number of months the economy has achieved an employment rate below 4.5%, 5% and 5.5% since 1978.

Table 2 - Employment rates

Source: Bloomberg, Nikko AM

Over the past 40 years we have only seen an unemployment rate below 5% in 8% of outcomes and less than 4.5% in 4% of outcomes. There is actually only one period when the economy achieved less than 4.7% unemployment on a sustained basis, which was 2006 to 2008. It is starting to look like the RBA will be trying to replicate a once-in-a-four-decade outcome.


While the market has been concerned about the prospects of a rising unemployment rate, so far there has been little evidence of a wholesale slowdown in the employment market. Forward indicators, such as job ads and job vacancies, have begun to show some worrying signs; however we think there are reasons to believe there could be some upside in business intentions, which would subsequently flow through to stronger employment outcomes. If this is true, then the RBA will be able to move monetary policy to a more neutral bias than the market currently believes, delaying the path of rate cuts and the potential implementation of QE.

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Chris Rands
Chris Rands
Co-Portfolio Manager, Fixed Income
Yarra Capital Management

Chris is responsible for portfolio management, including portfolio construction and trading for various Australian fixed income portfolios including the Nikko AM Australian Bond Fund at Yarra Capital Management (Nikko AM was acquired by Yarra...

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