Key insights from the week that was.
Federal Budget 2021 was our focus this week. As detailed by Chief Economist Bill Evans in his video update as well as in our detailed budget report and infographic, building up Australia’s economy through investment and employment and by guaranteeing essential services is the Government’s top priority.
Even with significant additional spending over the next four years, the deficit is still expected to fall from $161bn in 2020/21 to $57bn in 2024/25. Net debt is consequently forecast to peak at 40.9% in 2024/25 – a low level compared to the rest of the world.
In terms of the risks to the Budget’s bottom line, the momentum the economy has shown to date in this recovery and the sustained strength of iron ore prices point to the balance of risks being to the upside, with a further windfall over the coming year likely.
Critical for the performance of our economy in 2021 and beyond is the strength of consumer spending. This week also provided an update on momentum in the sector in early 2021. Although the volume of retail sales fell 0.5% in the three months to March, this follows considerable strength through much of 2020. As a result, at March, retail spending was 5.9% higher than prior to the pandemic.
It is also worth emphasising that spending in the March quarter was affected by several mini lockdowns related to COVID-19 and heavy rain/ flooding in the eastern states. We are also at the point in the pandemic recovery where services spending is rebounding as social distancing restrictions ease and consumers become confident that risks related to the virus are limited. Note that at December 2020, discretionary services spending was still down 27% on its pre-pandemic level. This sub-sector of spending, much of which is outside the scope of the retail sales survey, therefore holds considerable promise for household consumption in the quarters ahead.
Moving offshore, the US economy was again in the spotlight this week as the April CPI surprised materially to the upside. Headline consumer prices rose 0.8% in the month and core prices (excluding food and energy) were stronger still, gaining 0.9%. Consequently, annual inflation leapt to 4.2%yr and 3.6%yr respectively for headline and core prices.
Looking into the detail, these outcomes are the very definition of a transitory surge in prices. Sectors of the economy re-opening as the vaccine rollout takes effect saw prices storm higher – examples include accommodation away from home as well as the cost of tickets to leisure activities.
The biggest contributor to both headline and core inflation prices in the month was used car prices. They rose 10% in the month to be up more than 20% on a year ago. This incredible increase is a function of supply disruptions restricting the availability of new cars and the large cash payments made to households recently as part of President Biden’s stimulus. Simply, for many low and middle-income households, these stimulus payments are making long-desired purchases possible, and households are taking up the opportunity.
Before concluding, it is worth noting that FOMC members also continue to see this jump in inflation as temporary. The take-home point from their comments this week is that inflation will most likely slow back to near target in 2022, and that there is still much to do to heal the economy from the ill effects of the pandemic. Policy therefore still needs to remain extraordinarily accommodative for the foreseeable future.