– February 2021 INSIGHTS BY THE CURVE TEAM –
- The economic recovery has continued strongly despite some hiccups with covid lockdowns.
- A transition from government led growth back to consumers and businesses will begin in the middle of the year.
- Plentiful cheap funding from the RBA and high levels of household savings provide an impetus for business and consumer led growth, but it is not guaranteed.
- Although the outlook is much improved, there is still uncertainty with Covid.
Australian Economic Highlights
- Growth bounced back in the third quarter. GDP increased 3.3% over the quarter, leaving the economy 3.8% lower than this time last year. The RBA have upgraded their forecasts for growth in their latest Statement on Monetary Policy. GDP is expected to return to pre-Covid levels by the middle of the year and grow by 3 ½ per cent in 2021 and 2022.
- Inflation continued to recover over Q4, up 0.9%, which was the same read for the annual rate. Childcare continued to be an outsized factor following the unwinding of free childcare. Inflation will be coming off a low base so may appear high in the near term, but sustained upward pressure is still a way off given the RBA’s forecasts for unemployment.
- Employment continues to recover strongly. Over December another 50 000 jobs were added leaving the unemployment rate at 6.6%. Remarkably, the participation rate is higher than pre-Covid levels, being at 66.2%. Another 112 000 full time jobs are needed to recover to pre-Covid levels, while there are 24 000 more part time employees than pre-Covid. The RBA expects unemployment to have peaked and decline to 5 ½ per cent by the end of 2022.
- The ANZ Job ads continue to surge in line with employment. They were up 2.3% over January, which is 5.3% higher than pre-Covid levels.
- Business confidence and conditions have strangely been uncorrelated over December and January, but both have rebounded very strongly and are above long run averages. Confidence fell from 13 to 5 in December but has since recovered to 10 as Covid fears alleviated. In contrast to this, conditions were up from 8 to 16 in December then levelled out to 7 in January.
- After reaching lofty heights in November, December consumer confidence levels dropped 4.5% following lockdowns in Sydney and the border closures towards the end of the month. Confidence stands at 107, which is still 14.6% higher than last year. It will remain vulnerable to Covid induced lockdowns, but with income levels high and vaccine distribution imminent there is plenty of scope for sustained levels of high confidence.
- Retail sales were volatile over November and December. Retail sales were up 7.1% for November off the back of a 22.5% rise in Victoria. This has since levelled out following a 4.2% fall in December. They remain a strong point for the economy, being up 6.4% in real terms on last year. Uncertainty with lockdowns, income levels as government spending eases and the potential for spending to switch to services as economies open up mean retail sales will likely continue to be volatile.
- Low interest rates and the Government’s homebuilder scheme has led to a sharp rise in housing finance approvals. Overall new housing finance is up 31.2% on last year following rises of 8.6% in December and 5.6% in November. Refinancing is part of the story, but more significant is first home buyers, whose approvals are up 56.6% on last year. The approvals are yet to flow through to overall credit growth, as the pace of repayments outstrips new approvals and others forms of credit remain sluggish.
- Australia’s trade surplus yo-yoed over November and December. It dipped in November as imports shot up 9.3%, then bounced back over December to be $6.8 billion up from $5 billion. The main influencers continue to be strong demand for our metal ore exports, which contributed to a 2.8% rise in exports over December. Imports have also fluctuated as domestic demand has been unpredictable with lockdowns. Imports and export values remain below pre-Covid levels.
- The end of the $25 000 grants under the HomeBuilder scheme has sparked a surge in building approvals. They were up another 10.9% in December, leaving them 22.8% higher than last year and 57% higher than the Covid lows. $15 000 grants are available until the end of March, so approvals are set to remain strong at least until then.