Key insights from the week that was.
This week we have received significant economic and policy updates from across the globe. From these, it is evident that Australia and New Zealand are both in a good position to rebound.
Beginning at home in Australia, this week’s August labour force update delivered a significant upside surprise, with 111k jobs created in the month and a 0.7ppt decline in the unemployment rate. This result leaves the unemployment rate at 6.8%, almost a full percentage point below our and the market’s expectation for August ahead of the release.
The gain for hours worked was materially lower than for employment, coming in at just 0.1%. However, this was due to a deep decline in hours worked in Victoria (-4.8%); the other states meanwhile experienced a 1.8% gain.
July and August’s employment gains mean the RBA’s 10% unemployment rate forecast for end-2020 is unlikely to be seen. To see such an outcome now, 400-500k jobs would have to be lost by December. This seems improbable, particularly with government support running into 2021. Westpac still anticipates however that the unemployment rate will rise to around 7.8% in late-2020/ early-2021 and that, come end-2021, it will still be elevated at around 7.5%.
The RBA is mindful of the economic damage of an extended period of high unemployment and so continues to make clear their willingness to support the real economy as long as necessary. Notably, in the September meeting minutes there was a clear focus on the state governments and the support they can offer the economy during a recession, particularly by borrowing to invest in infrastructure. Keeping borrowing rates low aids this opportunity.
Westpac Economics also made a significant revision to a key forecast this week. Previously we had anticipated a 10% decline in national house prices from April 2020’s peak to June 2021. Now however, we believe that decline is likely to be limited to about 5%, with 2.7% of that decline already seen. There are two key justifications for this view change, as highlighted by Chief Economist Bill Evans.
First is the benefit that has come to households in 2020 from lower interest rates, particularly as a result of the sharp drop in fixed rates to levels well below variable. Second are the upward revisions we have recently made to our growth and labour market views. Combined, these factors will support affordability, minimising further declines in 2020-21 and laying the foundation for a strong rebound in prices to new historic highs.
Turning to New Zealand, Q2 GDP came in in line with our NZ team’s expectations. GDP jolted 12.2% lower in the three months to June because of the lockdown measures implemented to stop COVID-19. All of the Q2 detail is available in their bulletin. But what needs to be emphasised here is that, while NZ’s lockdown was one of the strictest in the world, it was also highly successful, allowing the economy to rapidly restart. Our NZ team continue to anticipate a strong rebound over the second half of this year, leaving GDP within 5% of its pre-COVID trend. However, continued border closures will limit further gains in 2021.
On to the US and UK. From monetary authorities in both jurisdictions this week came clear guidance that policy will remain extraordinarily accommodative as far as the eye can see.
From the Bank of England, there was a commitment to assess the potential benefits of a move to negative interest rates. While the FOMC did not signal a clear intent to investigate the use of another policy instrument, their revised forecasts and qualitative guidance made clear that policy would remain at least as accommodative as it is currently for an extended period. Indeed, the median view of the Committee is that the federal funds rate will remain on hold till at least end-2023, at which time the unemployment rate would still be above its pre-COVID level and inflation only getting back to 2.0%yr. The statement only made a commitment to sustain purchases of US Treasury and mortgage-backed securities at their current monthly pace of around $80bn and $40bn respectively over coming months. However, the continued inclusion of the phrase “at least” with reference to the current pace makes clear the Committee’s concern over downside risks and implies that a partial then full tapering of asset purchases is also a long way off.
Combined with a broad-based recovery in the global economy, highly-accommodative FOMC policy supports our view that the Australian dollar will continue to rally to USD0.75 end-2020 and USD0.80 end-2021, a rate it is likely to sustain to mid-2022.