There's little doubt Australia's economic recovery has surprised even the most optimistic of us.
Consumer and business confidence are high and 90% of the jobs lost through the CVC (Corona Virus Crisis) have returned.
So what's ahead?
The NAB have recently released their updated economic forecast looking out to 2023 and are expecting firm economic growth but more moderate reductions in unemployment.
The economic recovery continues to unfold at a brisk pace – and forward-looking/high-frequency indicators point to ongoing strength inactivity and the labour market even as some fiscal support is wound back.
While NAB data shows some softening in consumption growth, the NAB Business Survey showed ongoing strength in March.
Alongside strong reads for confidence and conditions, capacity utilisation also strengthened further, suggesting that beyond just rebound inactivity, there is likely a solid underlying momentum in the economy.
NAB sees GDP as having fully recovered its pre-COVID level in Q1 – with another quarterly rise of around 1%.
While this is encouraging, a large degree of spare capacity remains in the labour market and the output gap remains positive – and will not likely be closed for an extended period.
Indeed, employment has now more than recovered its pre-COVID levels and the NAB Business Survey, as well as Job ads/vacancies, point to ongoing strength in labour demand.
However, the unemployment rate remains around ¾ ppt higher than pre-COVID levels implying ongoing slack in the labour market.
The key implication of ongoing slack in the labour market (as well as the economy more broadly) is that wages growth and hence inflationary pressure will remain soft, despite above trend growth in the near term.
This points to ongoing easy monetary policy, and possibly the need for further fiscal support.
On policy, however, the faster than expected rebound in activity and the unfolding recovery in the labour market suggests that the RBA cannot credibly commit to unchanged rates - according to the YCC program - beyond the April 2024 bond.
Therefore, NAB continue to expect an announcement will be made by August that the RBA will begin to wind back this program by limiting purchases to the April 2024 bond.
That said, the degree of remaining spare capacity in the economy warrants ongoing easy monetary policy for some time.
Consequently, while NAB expect YCC to be tapered, they expect the RBA to continue a 3rd round of QE ($100bn) and for the cash rate to remain on hold until at least early 2024.
The labour market continues to recover, highlighted by a sharp fall in the unemployment rate in February.
The unemployment rate fell by a sharp 0.5 percentage points to 5.8% in February.
The four-month decline (1.2pp) is the largest experienced since the series began in 1978.
The unemployment rate is now just 0.6pp above its March 2020 level of 5.2%, but still well above our estimate of around the NAIRU or full employment, around 4.5%.
Employment has now returned to around its pre-COVID level, as has the underemployment rate, while hours worked is just 0.7% lower than in March 2020.
However, labour force growth remains weak by past standards (0.8% y/y in February compared to around 2% pre-COVID-19).
This is despite an increase in workforce participation and reflects a collapse in population growth due to international border restrictions.
The end of the Government’s JobKeeper wage subsidy scheme in late March is an immediate risk to the progress made to date.
However, elevated job vacancies and employment conditions in the NAB survey suggest that an underlying improvement in the labour market remains on track.
NAB have upgraded their outlook and now expect unemployment to fall to 5.1% by the end of 2021 and to reach 4.4% by the end of 2023.
This suggests that by the end of 2023, the unemployment rate should be broadly around the NAIRU.
As such, wage pressures should be growing, lifting wage growth to 2.8% y/y by the end of 2023, from its current annual pace of 1.4%.
This will support spending activity and inflation, although it’s possible that wages take a little longer to pick up, given the experience overseas.
The strength of the labour market recovery should support the outlook for consumer spending although population growth remains weak.
Retail sales (in nominal terms) declined by 0.8% m/m in February and so far in Q1 are tracking slightly below their 2020 Q4 level.
NAB’s Cashless Retail indicator points to only 0.1% mom growth In March and NAB’s weekly index also points to some softening in consumption.
Nevertheless, we still expect to see solid growth in household consumption in Q1 as a whole.
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Last year there was a significant shift in spending away from services towards goods.
Some of this is likely to endure to the extent COVID-19 has permanently changed behaviours (e.g. more work from home).
However, in the second half of 2020 services consumption grew more quickly than goods consumption and this should continue into 2021.
While retail sales is mainly an indicator of goods consumption, spending on Cafes, restaurants, and takeaway foods services over January and February was well up on Q4 while the rest of retail sales declined.
Moreover, consumption in other service sectors which are not part of retail sales (notably transport and accommodation) have far more scope to grow.
Housing markets continue to show signs of strength, with price growth accelerating and construction indicators pointing to a robust level of activity.
Dwelling price growth continues to accelerate.
The 8-capital city dwelling price index increased by 2.8% m/m in March – the highest monthly gain since 1988 – to be 4.8% higher over the year.
Prices rose in all eight capital cities, with the largest growth in Sydney.
Regional house prices are no longer outpacing capital city growth but continued to grow strongly too, increasing 2.5% mom.
New housing finance (excluding re-financings) fell slightly in February (-0.4% m/m) but remained at an exceptionally high level.
This is particularly the case for owner-occupiers, although new loans for investors are also well up on a year ago.
Amongst loans for owner-occupiers, the most rapid growth has been in the loans for the dwelling construction segment.
The Q4 2020 national accounts indicated that dwelling investment rose by 3.1% q/q ending the downwards trend evident since mid-2018.
The large fall in approvals in January (-19% m/m) was more than fully reversed in February (+22% m/m).
Looking through the monthly noise, approvals have risen sharply since mid-2020 to a reasonably high level by historical standards.
All the growth has been in the housing segment, with approvals of other dwellings (apartments) down on their pre-COVID level.
The strength of the recovery in housing markets (both prices and construction) in part reflects government policy measures such as HomeBuilder and stamp duty discounts.
The unwinding of policy measures will likely take some of the heat out of the construction market.
The Federal Government’s HomeBuilder program ended on 31 March.
The program requires that work commences within six months of the contract being signed.
Schemes such as HomeBuilder, as well as encouraging new activity, bring forward activity that would otherwise have occurred, and so a dip in approvals in coming months would not be a surprise.
However, the broader recovery in the economy, as well as low-interest rates, should underpin a solid level of activity over the forecast period.
Moreover, the increase in dwelling building approvals that has occurred means that there will be a substantial pipeline of work for a while to come.
Accordingly, while NAB expect to see robust growth in dwelling investment over much of 2021, heading into 2022 they expect to see some easing back, albeit to a still solid level.
Another risk the NAB foresee around the housing outlook is how long population growth remains muted by international border restrictions, and whether there is a return to more typical levels of net migration as the border re-opens as assumed in our projections.
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