Key insights from the week that was.
This week’s key data highlighted that the momentum apparent in GDP in Australia in Q4 has been sustained in early 2021, bolstering our prospects for recovery.
In February, the NAB business survey reported business conditions at their strongest level since mid-2018, when the last home-building boom peaked. Confidence also improved in the month, printing at an 11-year high. Importantly, the uptrend in confidence and conditions is broad-based across the nation and by industry; and the conditions detail points to businesses becoming increasingly more disposed to expanding their workforce.
Combined with the global vaccine rollout and the growing expectation of a swift, full recovery, Australia’s domestic strength has left the consumer in a very optimistic mood. The headline measure from our Westpac-MI consumer sentiment survey remaining near its 10-year high in March as each of the core components (the 1 and 5-year economic outlook and family finance expectations) printed above their respective long-run averages. Our gauge of labour market sentiment also showed strength in the month, reporting one of its best readings in nearly a decade.
Unsurprisingly, house price expectations rose again in March to a new 7-year high, with the readings for NSW, QLD and WA particularly upbeat. However, as actual and expected prices jolt higher, perceived affordability is deteriorating, the ‘time to buy a dwelling’ indicator from our survey falling 12% over the four months to March to be below its long-run average. As the recovery matures, it will be critical to assess how actual and perceived affordability constraints affect housing and consumption.
This week also saw the release of our latest Market Outlook and Market Outlook in Conversation podcast. As detailed by Chief Economist Bill Evans in the podcast, the momentum of the early recovery in the second half of 2020 combined with strong support for the consumer in 2021 from elevated savings, an improving labour market and rising wealth have led us to revise up our growth expectations for 2021 from 4.0% to 4.5% with a still-above-trend 3.0% gain to follow in 2022.
While we have also lifted our expectations for term interest rates this month on the back of the global recovery, we remain of the view that the RBA and other key central banks will persist with asset purchases to at least late-2022, and hold their policy rates at the lower-bound for years.
As detailed by RBA Governor Lowe this week, the timing of lift-off for the cash rate will depend critically on “sustainably higher rates of wages growth” which will require “a tight labour market for an extended period”. With the full employment level of the unemployment rate for Australia conceivably “in the 4s”, Westpac’s forecast for a strong recovery through 2021 and 2022 still does not result in the pre-conditions for robust wages growth being in place given we see the unemployment rate ending the period above 5.0%. Hence, we expect the cash rate to remain unchanged till well after the end of our forecast window in 2022.
As alluded to above, central banks across the world face the same situation. In the US, even though President Biden’s stimulus will stoke growth to almost 3 times potential in 2021 and more than twice potential in 2022, the output gap created by the pandemic will only just close by end-2022. The US economy is also therefore unlikely to see strength in wages growth, let alone the sustained period of inflation above target necessary to begin making up for a decade of underperformance. Europe and the ECB are further behind still, with the ECB’s latest inflation projection for 2023 only 1.4%, nowhere near their target of 2.0%yr.
The additional concern for the US, and arguably for Europe as well, is that the investment outlook remains challenged. Domestically-focused businesses certainly have good justification to be positive on the near-term outlook; but as much of the above-trend momentum stems from stimulus, they are likely to remain circumspect on the medium-term, making them wary to expand capacity. Globally focused businesses can expect sustained robust growth in demand owing to the economic development that is continuing in Asia and elsewhere in the world; but for many of these businesses it will make more sense to locate their expansion in Asia and other emerging markets, where growth is focused and the cost of production lower.
As we look out beyond the end of 2022, this is why China’s outlook is so promising. Like the West, they have benefitted from a strong recovery in consumption and will see further gains in 2021. But Chinese authorities’ focus is instead on maximising investment to ready the economy to expand its markets abroad, and to provide a much larger share of the goods and services consumed locally by their own consumers. Last week’s 2021 NPC made clear that high-return investment will remain the focus for China over the coming 5 years, with the dividends to flow well beyond.