Key insights from the week that was.
For Australia and New Zealand, it has been a very busy week ahead of the Christmas/ new year holiday period. Elsewhere, a run of central bank meetings reset expectations heading into 2022.
The first key release for Australia was NAB’s business survey. In November, business conditions lifted another 2pts to 12 to remain well above average, albeit still materially below the peak level of 30 seen back in the June quarter, before the delta lockdowns. Underlying this result, employment conditions rose 5pts to +11 as trading conditions edged higher to +16. New orders also remained strong at +14, and profitability supportive, +8. Although it fell back 8pts in the month, confidence also remained above average at +12. Focusing in on manufacturing, our ACCI-Westpac Survey of Industrial Trends pointed to positive expectations for the outlook despite flat output in the December quarter.
Our Westpac-MI consumer sentiment survey was also constructive on the outlook in December, remaining above average. The underperformance of NSW and Victoria in the month points to an omicron effect in the headline index’s 1% fall. Also at play are expectations around inflation, with 21% of respondents recalling news on the topic in December, up from 5% a year ago.
Views on the economy overall remain well above average. However, perspectives on family finances are, more-or-less, in line with average levels, while ‘time to buy’ a major household item and dwelling both weakened materially in the month from already sub-par levels. Chief Economist Bill Evans discussed these outcomes and other key themes from December’s consumer sentiment report in this week’s video update, the last for the year.
Although we saw Westpac-MI unemployment expectations rise in December, confidence in the labour market is very strong. This is unsurprising given the recovery in employment following the delta lockdowns. In November, a startling 366k/2.9% increase in employment was seen, the largest monthly gain in the survey’s history back to 1978. Total employment is now higher than in June 2021 prior to the delta lockdown. Even with participation recovering to be just 0.2ppts below its June 2021 peak, the unemployment rate fell to 4.6%, a low back to late-2008, the peak of the mining boom. Underemployment is also the lowest it has been since early-2014 at 7.5%. Along with persistent strength in consumer sentiment and a high level of savings, this momentum sets the scene for strong gains in activity in 2022.
For both Australia and New Zealand, this week also saw the release of mid-year fiscal updates. For Australia, there was little net change in the Budget’s bottom line as higher revenues were offset by greater-than-expected expenditure related to the delta outbreak and new policy. New Zealand’s Government meanwhile reported a sizeable improvement in their Budget position because of a structurally higher tax take.
Also in New Zealand this week, Q3 GDP printed weaker than we had anticipated at -3.7%. However, this was the result of COVID-19 restrictions instead of weakness in underlying demand. A strong recovery is expected from Q4 as pent-up demand is released, albeit at a more measured pace than in 2020 given some restrictions have remained in place through Q4. For the full detail on GDP, see Westpac New Zealand Economics’ bulletin.
Moving further afield, the US FOMC held centre stage this week as they met for their December meeting. As we anticipated, they doubled the pace of the taper, to conclude purchases in mid-March 2022, and guided that three rate hikes were now likely in 2022. The Committee subsequently sees two more rate hikes over 2023 and 2024 than we are forecasting, taking the fed funds rate to 2.1% end-2024 (Westpac 1.675%). While we have a lower endpoint for the fed funds rate, we anticipate that the economy’s persistent momentum and lingering inflation risks will support the 10-year yield, seeing it peak at 2.30% in late-2022 and remain materially higher than the fed funds rate to the end of the forecast horizon. An in-depth look at the FOMC’s December decision and the outlook for the US economy is available on Westpac IQ.
The Bank of England’s approach to policy also took a turn at their December meeting as they increased the Bank rate by 15bps to 0.25%. This decision comes as their asset purchase program formally ends, and despite the clear and present threat of delta and omicron to the health of the UK economy. The decision was justified by the strength of inflation, the latest print coming in ahead of expectations and above 5%yr, as well as a tight labour market which is expected to support robust wage gains in the period ahead. From here, a modest tightening should be expected to help achieve the Bank’s medium-term 2.0%yr inflation target. This is unlikely to be of the same scale or pace as the US FOMC, though the next move will likely occur before the FOMC hikes for the first time in June 2022 – on our view.
Finally, to the ECB. In stark contrast to both the US FOMC and UK’s BoE, the ECB increased policy accommodation at their December meeting, announcing their open-ended Asset Purchase Program (APP) will be expanded to EUR40bn for Q2 2022 and EUR30bn in Q3 2022 before returning to the pre-pandemic pace of EUR20bn per month in Q4 2022. This decision has been made to allow a staged withdrawal of stimulus once the pandemic purchase envelope (PEPP) is exhausted in March.
This decision is required to maintain accommodative financial conditions to support the recovery in activity and as core inflation is expected to remain below the 2.0%yr target throughout the forecast period to end-2024. On the forecasts of the ECB, it is difficult to see the ECB ending asset purchases and beginning to raise interest rates until 2023, at the very least. Indeed, with inflation still below target in 2024 on current policy settings, there is good justification to believe the current stance will remain in place beyond 2023. This is not to say that the Euro Area economy will be weak over this period. Growth is expected to remain above trend to end-2024 by both the ECB and Westpac, tightening the labour market and strengthening income growth. Into the medium-term, the health of the Euro Area economy will therefore remain robust.
This is our final edition until the end of January. We would like to wish all our readers a Merry Christmas and happy new year.