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Cliff Notes: Gauging Economic Strength at the Turn of the Year

Key insights from the week that was.

This week saw a number of key data updates globally, most notably consumer sentiment and the labour force survey in Australia and GDP for China. In Washington DC, Joe Biden was also sworn in as the 46th US President.

Beginning with Australian Westpac-MI consumer sentiment. Despite a near 5% decline in January in response to COVID-19 uncertainties, the Westpac-MI consumer sentiment index still printed at 107, some 15% higher than a year ago. All components of the headline index pulled back in the month. However, family finance expectations are still around long-run average levels and economic expectations well above. As a result, confidence in the labour market is likely to remain on an improving trend as COVID-19 uncertainties subside. At January, unemployment expectations were 6% below the November level and 11% lower than a year ago.

Recent ABS labour force data certainly support the view that job prospects will continue to improve at a robust pace into 2021. In December, a further 50k jobs were created, taking the unemployment rate back down to 6.6% (from 6.8% in November). The level of employment is now almost back to pre-COVID levels – a higher level of participation being behind the still-elevated level of the unemployment rate. That said, the bulk of the gains for employment have been part-time in nature, with the level of full-time employment still 1.3% lower than in March 2020 and total hours work 1.4% weaker since. Despite a strong recovery from COVID-19, Australia’s labour market still faces a long road to recovery for both employment and wages. The overall state of our labour market will prove critical for the outlook for policy, as will developments offshore.

The key data release offshore this week was Q4 China GDP. China clearly finished 2020 with considerable strength, activity rising by 6.5% over the 12 months to December despite a near-10% contraction in the first quarter of the year. On a year-average basis, GDP grew 2.3%. Most telling in the detail was the strength of consumption (both private and public). For 2020 overall, it reportedly contributed 3.5ppts of the 6.5%yr gain. This highlights that China remains largely free of the virus and that households are in a strong financial position, in large part because of the government’s pro-active response. These factors are expected to sustain strong growth in household demand in 2021. Over the year to December, investment contributed a further 2.8ppts to growth. These gains were initially driven by a government-directed turnaround in essential infrastructure and state-owned enterprise spending, but momentum has since broadened across the economy. Having been down 26% year-to-date at February, come December, 2020 private fixed asset investment was up 1% on 2019. Ahead, the windfall China has received from resurgent domestic demand and exports will justify further robust expansion of manufacturing and service-related investment. Increasingly, the focus on quality investment and the development of new industry will pay dividends, for both activity and household incomes.

We continue to expect a circa 10% gain for China GDP in 2021 in year-average terms after which growth is likely to settle sustainably around 5.5-6.0%. Ahead, Australia and the Australian dollar will continue to benefit from strong Chinese demand for iron ore and, more broadly, improving sentiment from the global recovery. These developments are consistent with our expectation that the Australian dollar will rise from its current level near USD0.77 to, and then above, USD0.80.

Finally to the North Atlantic region. The past week (and indeed month) has seen a striking contrast between concern over current circumstances and optimism over the outlook. For Europe, COVID-19 new cases have remained elevated and medical resources stretched. This has seen authorities act against the virus with more stringent restrictions, extending economic weakness into the first quarter of 2021. That said, having delivered on stimulus at the end of 2020, with vaccine deployment beginning and Brexit agreed, at their January meeting, the ECB highlighted there is cause to be cautiously optimistic over the outlook. Still, like most other major central banks, the ECB is not considering easing back on policy support for the foreseeable future. Excess slack in their economy will persist for a protracted period, even if the recovery is sustained, and there is also need to be mindful of financial conditions, particularly the trend rise in the Euro which we expect to continue as the global economy recovers.

Then to the US. The recent resurgence in initial jobless claims to above 900k per week is cause for concern for the immediate outlook, particularly as it follows the loss of 140k jobs in December. Until the virus is brought under control, abnormal levels of churn and slack will be seen in the US labour market. Both the FOMC and President Biden’s administration know this well and are intent on delivering significant, sustained stimulus to combat the negative economic consequences of the pandemic. On the fiscal front, additional cash payments and extended unemployment benefits will be the first means of support put to Congress for approval. It is hoped that an infrastructure package will follow, though its timing and scale are far more uncertain.

Westpac Banking Corporation
Past performance is not a reliable indicator of future performance. The forecasts given above are predictive in character. Whilst every effort has been taken to ensure that the assumptions on which the forecasts are based are reasonable, the forecasts may be affected by incorrect assumptions or by known or unknown risks and uncertainties. The results ultimately achieved may differ substantially from these forecasts.

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