– JULY 2021 INSIGHTS BY THE CURVE TEAM –
- Governor Lowe had a busy week following the decision on yield curve control (YCC) and quantitative easing (QE), articulating the reasons behind their decision and delivering a speech on the employment outlook.
- He made it abundantly clear that employment outcomes hold the key to the outlook for monetary policy.
- How quickly Australia gets covid under control and what that means for international border policy will prove pivotal to employment outcomes.
- While the 2024 timeline for rate hikes is still the central scenario it is not set in stone according to the Governor.
Australian Economic Highlights
- Australia’s GDP recovered to be above pre covid levels in Q1. The economy was 1.1% higher than last year following a 1.8% rise in Q1. Investment was the predominant driver in Q1, with a 5.3% rise off the back of dwelling investment fuelled by the HomeBuilder scheme. Consumption is now flat on last year’s levels.
- Inflation underwhelmed in Q1, up only 0.6% when 0.9% was expected. It leaves the annual rate at 1.1%, which will spike next quarter as the drop over Q2 last year induced by Covid is removed from the annual figure. HomeBuilder grants over Q1 contributed to subdued Q1 prices and is expected to wane on the index for some time as grants are received and projects begin.
- Unemployment fell sharply in May after a jump in total new jobs of 115,200. There were strong gains in full time employment, which was up 97,500 with part-time growth accounting for the remaining 17,700. The fall in unemployment was made more remarkable by a slight lift in the participation rate after a fall last month.
- June was another strong month for ANZ Job ads with a further rise of 3%. This adds to the already high level of jobs vacancies. Adding some context was RBA Governor Lowe’s comment that 250,000 visa holders with the right to work have left the country since March last year meaning plenty of jobs need workers to replace the vacancies created.
- After hitting record highs, virus fears have hit business confidence with the index slipping 9 points in June after a 4 point drop in May. NSW was the hardest hit with the survey taken during the upswing in new covid cases. QLD also fell heavily after recording cases over the month. Confidence was also down mildly elsewhere. Business conditions also gave up the surge from the previous month to a record high, dropping back 10 points to 35. There were falls across the main sub indices with profitability, trading conditions and importantly the employment index all lower. The key here is context with both the conditions and confidence indices still well above long run averages. How they move from here will hinge on the duration of the lockdown in NSW and containment of the outbreak.
- Consumer confidence faded further in June to be down nearly 10% over the past two months. Melbourne lockdown was flagged as the main driver behind the fall. If that was the case and if the weekly ANZ-Roy Morgan updates are any guide, confidence will take another hit in the months ahead. Of note was the unemployment index which jumped during the month while expectations for economic conditions for the next 12 months fell heavily.
- Retail sales drifted higher again in May with the 0.4% increase leaving sales 7.7% higher than a year ago as the base effect from the initial covid lockdown starts to fade. Next month should see the annual figures normalise. Supermarket sales continue to benefit as more people eat in.
- New housing finance commitments continue to surge to new highs with another 4.9% increase in May. As prices rise and affordability is stretched investors are coming back into the market and first home buyers are fading. The value of owner occupier commitments were only up 1.9% for the month while investor commitments were up 13.3%.
- The trade surplus jumped again in May as a 6% gain in exports outpaced the 3% growth in imports, both of which are a good sign for the economy. The net difference saw the trade balance jump to $9.7 billion, which if sustained in June, will help exports add to growth in the second quarter.
- Dwelling approvals continue to fall in the wake of the end of the homebuilder stimulus program. Total approvals were down a further 7.1% in May following April’s revised 8.6% (previously -5.7%) decline. Private housing approvals provided the drag once again which was to be expected, falling 10.3% over the month.