MONTHLY ECONOMIC BRIEF
07 February 2021 | Publications Director View
Australian Economy Following the RBA’s board meeting, the institution left the cash rate at an historic low of 0.1 per cent, as the domestic economy seeks to return primary economic indicators such as its headline non-seasonally adjusted consumer price index (CPI); inflation towards its mandate of full employment. Core CPI currently records at 0.9% which has priced in recent data produced within the Services PMI which saw a 12.20% gain over the recent 3 months. The unemployment rate saw a decrease to 6.6%, alongside an increase in the labour force participation rate to 66.2% for the month of December 2020. Noticeably, this was fuelled by a decrease in the underemployment rate to 8.5%. Federal treasurer, Josh Frydenberg has highlighted the introduction of sector-specific support replacing the traditional pandemic wage subsidy programs to bolster participation rates. Central Bank Policy Action Governor Lowe highlighted the importance of achieving primary indicator targets for the RBA noting that in the current economic headwind, low wages growth and low inflation has adversely impacted the Australian dollar’s purchasing power in trade weighted terms. Dr Lowe also highlighted that the effect of monetary policy would be “marginal” highlighting little monetary support left to lift consumer confidence over the medium-term noting that the cash rate is currently recorded at 0.1%. The RBA later published their forecasted figures for unemployment to remain above 5 percent for several years, for inflation to remain below the lower bound limit of 2 to 3 percent and for wages growth to remain stagnating at 2 percent or less. COVID-19 Overview On the global scale, COVID-19’s infection rate per person has ranged between 1.5 and 3.5. In comparison, the seasonal flu had an infection rate of 1.3. National economies and local businesses and governments have been adapting to new measures to control the spread of the virus whilst ensuring business activity remains prominent. Noticeably, the FTSE, Dow Jones Industrial Average and the Nikkei experienced a 14.3% fall in 2020, recording it as its worst performing year since 2008. Efforts from the local government saw a rise in household wages by 0.9% which was cited within the Weekly Payroll Jobs and Wages in Australia publication. Continuing support towards SMEs saw 55% of local businesses requiring financial support to sustain debt obligations. However, Australia has invested $1.9 billion towards a COVID-19 vaccine rollout to stabilise economic recovery and allocation of capital by providing varying vaccines such as BioNTech, Fosun Pharma and the Pfizer vaccine to hospitals, GPs and pharmacies.
MONTHLY ECONOMIC BRIEF
07 February 2021 | Publications Director View
Housing Market In regards to the property market, we saw a rise in the market value of Australian properties which have seen a 4.5% gain since September 2020 (Statista, 2021). Economists are factoring in a possible asset bubble due to the prominence of government schemes to promote dwelling investment. However, RBA officials have warded off this possibility due to tightening lending standards towards sub-prime borrowers issued by federal treasurer, Josh Frydenberg, billing a planned repeals of the law which states that banks must conduct background checks to better understand default risk of potential investors (Butler, 2021). Moreover, the RBA is working alongside the federal treasury through injecting ample liquidity to ease borrowing costs accompanied by the lowering of household saving ratios. Equity & Commodity Markets OPEC+ vowed recently to continue with a reduced policy output which saw crude oil prices edging up 0.14% to $58.77. This is accommodated by WTI futures increasing by 0.68% to $56.07. Economists have suggested that crude prices have been accelerating greater than expected to ultimately re-balance the market back to an efficient level of output.
Economic Update By Region United States US PCE inflation increases • Over the December quarter US recovery saw stagnated growth of 4.0%, contributed over the recent backdrop of rising political tensions and rising COVID-19 infections weighing down on business activity • Real Disposable income levels rose 0.2% over the December quarter which was bolstered by supplemental unemployment reinsurance payments. This however hasn’t fed into consumption as personal consumption expenditure (PPE) fell by 0.6% MoM, primarily driven by a fall in spending on durable goods. • Year-ended growth finalised at 1.3% • Jobless claims fell by 4.06% down to 779,000. Claims continued to fall at 4.6 million in the week ending January 23, down from 4.8 million Euro Zone / United Kingdom Euro zone lockdown leads to economic contraction in Q4 • The Euro zone area’s real GDP figure fell by 0.7% over the final quarter of 2020 due to rising COVID-19 lockdown restraints weighing down on business activity. • Germany (0.1% q/q) and Spain (0.4% q/q) saw positive growth figures recorded whilst output in France fell less-than-forecast after consumer spending rebounded sharply in December • ECB president Christine Lagarde has promised to bolster greater monetary support if fiscal austerity measures are not successful in the short to medium term in placing upward pressures on inflation
MONTHLY ECONOMIC BRIEF
07 February 2021 | Publications Director View
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Headline annual figures rose 0.9% over January upward from -0.3% from the Decem ber quarter. Moreover, CPI rose 120 bps to 1.4%. This wanted rise was contributed by the removal of COVID-19 related government policies specifically including the t emporary reduction in the German VAT amount. The Euro zone unemployment rate stagnated at 8.3% in December The Bank of England’s Monetary Policy Committee kept its policy rate unchanged at its February meeting. The meeting concluded with leaving their cash rate target neutral with the committee willing to inject further liquidity into markets if inflation deteriorates. The committee’s outlook saw December growth to had been slightly more positive compared to previous expectations of negative growth in November. Lockdown restraints saw first quarter real GDP expected to contract by 4%.
China / Japan Chinese Manufacturing PMIs ease in January • NBS and varying PMIs for China identified a decrease in the outlook for business activity where the NBS fell from 51.9 in December to 51.3 in January. Despite this modest decrease leading to the new year, high-volatility indicators have suggested that the manufacturing sector was expanding in January but at a modest rate. • Following the recent BOJ committee meeting, noticeable downward pressures on cruise oil prices is projected to push down CPI through energy prices. Therefore, medium-to-long-term inflation is expected to continue weakening. Under these circumstances, the year-on-year rate of change in the CPI is expected to turn positive and then increase gradually. • The BOJ has continued its quantitative monetary easing (QQE) with yield control aiming a price stability target of 2 percentto ward off supply shocks whilst easing borrowing costs for financial intermediation. Australia / New Zealand Australian housing market records further price increases • Dwelling prices nationally rose 0.9% with all major cities recording gains off the backdrop of lowering interest rates offered to borrowers. Cities such as Darwin (2.3%m/m), Perth (1.6%m/m), and Hobart (1.6%m/m) recorded the strongest growth • The value of home loans rose by 8.6% m/m. Owner-occupied loans rose 8.7% m/m, while investor loans rose 8.2%. The value of total home loans in December rose 31.2% compared to the year previously. • Overall dwelling approvals rose 10.9% in December, primarily driven by a 14.9% rise in the number of housing approvals. Furthermore, the number of higher-density dwelling approvals also rose by 2.5% in December • The RBA kept the cash rate and 3-year government bond yield target at 0.1% In their February meeting. The board also extended their quantitative easing program and will purchase another $100 billion of Federal and State government bonds to ease borrowing costs for investors. The forward guidance is expected to not see the cash rate rise until 2024 or until progress is made towards full employment.