2020 didn’t exactly turn out the way many of us expected.
In fact 2020 didn’t turn out the way most economists expected if you look at their gloomy forecast of earlier this year
Now, one by one economists are doing a U-turn and forecasting strong economic growth in 2021.
Two weeks ago NAB upgraded their forecasts now expecting a stronger near-term recovery in activity and a lower peak in unemployment.
Driving their change in view has been the continued strength in NAB’s transactional data (we’re spending up big) and the solid turnaround in business conditions and confidence recorded in NAB surveys.
That said, while NAB expect economic activity to return to previous levels by the end of 2021, they believe it will take years for unemployment to recover.
In a recent economic briefing NAB Chief Economist Alan Oster said that uncertainties remain, even with a vaccine seemingly close to being rolled out.
The NAB report went on to say…
As such, federal and state fiscal support will be key for a sustained recovery, while monetary policy will assist, at the margins, by keeping the cost of credit low.
Given the strong near-term outlook, NAB expect the unemployment rate to peak at 7.4% in Q4 2020, before steadily declining from there to 5.7% at the end of 2022.
Even with their strong outlook for activity, unemployment remains well above the pre-virus low of 5.2% to the end of 2022.
This high unemployment points to weak wages and inflation.
These forecasts broadly align with the best-case scenario NAB outlined at the start of the pandemic.
Since then, the containment of the virus and large fiscal stimulus have seen downside risks fade, while a vaccine seems likely to be rolled out in 2021.
As such, the bank’s outlook is notably more optimistic and more confident than 3 to 6 months ago.
However, in the medium term, NAB expect consumer spending growth to moderate and business investment growth to remain soft, returning to pre-virus trends.
In particular, for consumption, high unemployment, record weakness in wages and a sharp slowdown in population growth will be significant headwinds.
As such, NAB expect further stimulus, with the RBA likely to extend its $100bn 6-month QE program.
This support will be helpful, but marginal compared to large fiscal stimulus at both the federal and state level, although at present fiscal stimulus is set to be scaled back in 2021/22.
Consumer spending has rebounded sharply and this should lead to a solid recovery in the next year
Recent Q3 GDP data show that consumer spending rose by a sharp 7.9% in Q3, after a 12.5% collapse in Q2.
These data confirm that following the easing of restrictions across much of the country, except Victoria, household spending surged on the back of large pent up demand.
The encouraging rebound in spending was supported by the huge fiscal stimulus deployed at the start of the pandemic.
These measures limited job losses and supported household income, enabling households to largely resume spending in Q3.
Further, NAB transactional data suggests that spending remains strong, even as the initial boost from reopening wanes.
The NAB Cashless Retail Sales Index released today shows a 3% rise in November, supported by Black Friday/Cyber Monday sales.
Given consumer spending is over half of activity, NAB expectation for further gains underlies our recently upgraded forecast for activity to return to pre-virus levels by the end of 2021.
In the near term, additional gains in consumer spending, supported by the end of Victoria’s lockdown, should support a healthy recovery in activity.
With a stronger rebound in activity expected, we also lowered our forecast peak in the unemployment rate to 7.4%, down from 8%.
As such, the NAB outlook suggests the worst is over for the Australian economy and the recovery is well underway.
That said, NAB note there remain many headwinds to a full recovery for the household sector, where consumer spending is still around 7% below its pre-virus level.
As stimulus tapers, elevated unemployment, weak wages growth and weak population growth are likely to see spending growth return to a weak pace, as was the case pre-virus.
Notably, labour market conditions need to improve further for a full recovery.
NAB forecasts the unemployment rate to steadily improve, reaching 5.7% by the end of 2022, just 0.5pp above the 5.2% recorded pre-virus in February.
However, in the near term, elevated unemployment will weigh on wages.
Recent wages data showed wages rose just 0.1% in Q3, with annual wages growth slowing to a record 1.4%.
As such, the priority for policymakers continues to be reducing the unemployment rate.
On this front, NAB think government stimulus – both federal and state – will be key for supporting demand and jobs growth.
The RBA’s substantial policy easing, including our expectation that the RBA extends its QE program, will help, albeit at the margin.
Dwelling prices have begun to turn following a brief slow down
Dwelling prices have held up much better than expected since the onset of the pandemic, despite the significant deterioration in the labour market and elevated uncertainty over the pace of population growth over the next couple of years (impacting demand growth).
The latest monthly data from CoreLogic show housing prices – as measured by the 8-capital city dwelling price index – rose by a strong 0.7% in November, to be 2.4% higher over the year.
All the capitals recorded solid growth in the month, with the smaller cities seeing rises of well over 1%.
Melbourne also saw a notable gain, rising by 0.7%, following the end of its lockdown.
With house prices appearing to have now turned up, prices appear to have only seen a modest impact during the pandemic, falling 2.8% between April and September.
While unemployment has indeed risen sharply (and wage growth has slowed further), the large support to household incomes from the government’s JobKeeper and JobSeeker programs appears to have mitigated the impact on households.
The rebound also reflects the substantial easing in monetary policy, with many borrowing rates now at record lows.
Consequently, NAB have revisited their prediction for house prices over the next year.
They now expect gains of 5% in 2021 and 6% in 2022, with rises across all capitals.
The impact of lower rates and a recovering economy will be key supports.
However, the softening in rents in the largest cities and uncertainty over population growth will likely temper some of the increase for Sydney and Melbourne – particularly the apartment segment.
Therefore, we expect stronger gains for the smaller cities.
The decline in construction appears to be moderating.
The Homebuilder program has boosted building approvals.
Dwelling investment was broadly flat in Q3, with a moderate decline in new construction offset by a notable rise in alterations and additions (ie. renovations).
Dwelling approvals rose by 3.8% in October to be 33% above its July low.
Detached housing has driven the rise, where approvals for private houses are now at multi-year highs, having risen strongly through 2020 (32%).
In contrast, approvals for apartments remain relatively soft after falling just over 10% in the year to October.
NAB expect the rise in approvals to feed into new residential construction, such that dwelling investment will turn up around mid-next year, following a protracted period of weakness.
The government’s HomeBuilder package will also provide support in the near term, where to 20 November 19k applications have been made for new builds.
Source: NAB – The forward view: Australia – strong rebound as confidence improves.
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