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Cliff Notes: Both Stimulus and Sentiment are Key to the Global Recovery

Key insights from the week that was.

Australian consumers’ confidence in the economy went from strength to strength in April, our Westpac-MI consumer sentiment survey rising by a further 6.2% to an 11-year high. This is despite the April survey being undertaken just after the end of JobKeeper and amongst disappointing progress in the local vaccine rollout. The successful containment of the virus in Australia and the consequent opening up of our economy is clearly behind this optimism, with particularly strong gains in confidence seen amongst those who work in recreational services and hospitality. Those working in construction also reported a sharp rise in sentiment, having benefitted significantly in recent months from government support and households’ desire to maximise the quality of their home life through new homes and renovation work.

While expectations of the economy and households’ family finances are near the highs of 2009/10, there are clear concerns over housing affordability. ‘Time to buy a dwelling’ fell 7.9% in the month to be 18.8% below its most-recent peak. With house price expectations now 8% above their pre-pandemic level and wage growth remaining soft, affordability looks set to be an enduring concern; the impact on the housing market and household consumption will be important to analyse over the coming year. Chief Economist Bill Evans discussed a number of these key themes for sentiment in this week’s video update, along with the implications for the RBA of the Australian and global recoveries.

While Westpac-MI unemployment expectations have plateaued, strong momentum continues to be seen in the ABS labour force survey. In the month of March, a further 71k positions were created, twice the consensus estimate. The unemployment rate also fell 0.2ppts to 5.6% despite the participation rate rising 0.2ppts to a record high. Further, the number of workers on zero hours for economic reasons is now back around the levels seen pre-pandemic, and underemployment is 1.1pts below its pre-pandemic level. These outcomes imply that labour market slack of all forms is quickly being eroded, creating a robust foundation for activity growth through the remainder of 2021 and into 2022. On the outlook, note that this week’s March NAB business survey reported record-high business conditions on the back of strong gains for trading conditions, profitability and employment, while confidence also remained elevated. The outlook for business activity and investment is a key theme of Westpac Economics’ Market Outlook in Conversation podcast for April.

Turning then to New Zealand. This week, the RBNZ left the stance of policy unchanged as anticipated. Inflation is expected to lift this year as the effects of the pandemic unwind, but this transitory overshoot of inflation won’t elicit a response from the RBNZ. Instead, like all other major central banks, they will hold fire until a sustained lift in inflation is seen. The RBNZ also has to be mindful of the economic effect of international tourists’ continued absence and the consequences of recent changes to government policy regarding housing. Our New Zealand economics team believe the RBNZ won’t increase the cash rate until 2025.

On to the US. Another wave of strong data this week, most notably a near-200k decline in weekly initial jobless claims and a circa 10% rise in March retail sales, provided further evidence of the benefit of fiscal stimulus and the successful, albeit gradual, containment of COVID-19. Interestingly though, the US 10-year yield has moved lower this week and, in line with our medium-term forecast, the US dollar has lost the remainder of the circa 2.5% gain it made over the second half of March (on a DXY basis) to be back below the level it traded at when our March Market Outlook was released. To our mind, these market outcomes highlight the US economy is still a long way from a full recovery and that momentum is likely very near, if not at, its peak. Spot pricing also recognises that the FOMC is determined to be reactive with policy, trying to maximise the return from this growth cycle. FOMC Chair Powell again made clear this week that the Committee currently expects to keep the fed funds rate at the lower bound until 2024.

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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