Business activity robust despite supply chain woes

The Bloomberg March 2021 survey of economic forecasts for Australia shows that the consensus (median) view is for real output to grow by 4.3 per cent this year and 3.1 per cent in 2022.  Preliminary estimates of February’s merchandise trade indicate that for the first time in history Australia recorded three consecutive months of trade surpluses in excess of $8 billion.  And preliminary data on retail trade for February 2021 show turnover fell 1.1 per cent (seasonally adjusted) over the month but was up 8.7 per cent relative to February 2020.  Australia’s national population dropped by 4,200 people over the quarter to Q3:2020, marking the first population decline in Australia since December 1916.  In the final quarter of last year, tourism job numbers were 10.8 per cent down relative to the December quarter of 2019.  The worldwide adjusted daily average rate of COVID-19 vaccination has risen to 11.9 million: At this rate, it would take another 2.5 years to cover 75 per cent of the global population with two doses.

This week’s readings include an extract from Reconstruction: Australia after COVID, the latest ABS Business Conditions and Sentiment survey, an update on the east coast gas market, IMF policy advice for the Asia-Pac region, technology and monetary policy effectiveness, and lots of listening on the ‘reign of Keynes.’

The Weekly note will take a break over the Easter Weekend but will return the following week.

And stay up to date on the economic front with our AICD Dismal Science podcast.

What I’ve been following in Australia:

What happened:

Australia’s Flash Composite PMI (pdf) rose to 56.2 in March, up from a final reading of 53.7 in February.

Australia:  Composite Purchasing Managers Index (PMI)

The Flash Australia Services Business Activity Index rose to 56.2 from 53.4 last month, while the Flash Australia Manufacturing PMI edged up to 57 in March from 56.9 in February.

Australia:  Manufacturing and Services Purchasing Managers Index (PMI)

Why it matters:

The Flash Composite PMI hit a three-month high in March, indicating the strongest rise in business activity since December last year, while in quarterly terms, Q1 was the best set of results since the second quarter of 2017.  According to IHS Markit, survey participants linked the improvement this month to a combination of an easing of COVID-19 restrictions, stronger demand, greater availability of raw materials, low interest rates and government stimulus.

New order growth hit a 44-month high in March, with the increase particularly strong for the service sector.  The growth in new business was mainly domestic, however, with export orders falling for a 14th consecutive month.  Firms also cited difficulties in international shipping, travel restrictions, and subdued demand in key export partners.

The PMI results also reported higher material, fuel and freight costs with aggregate input prices experiencing their fastest increase since the series began in May 2016 as respondents cited supply-chain disruption as the main driver of inflationary pressures.

What happened:

Treasury Secretary Steven Kennedy gave an opening statement to the Economics Legislation Committee.  Points of note included:

  • The final cost of JobKeeper – originally estimated at $130 billion – is likely to be around $90 billion.
  • The labour market has significantly outperformed Treasury’s expectations: at MYEFO the forecast was for unemployment to peak in the first quarter of this year at 7.5 per cent, but it now ‘appears that the peak is behind us’ with the unemployment rate falling to 5.8 per cent in February.
  • Of $251 billion in direct fiscal support, around $100 billion is either yet to be provided or have its full effect.
  • Treasury estimates that around 1.1 million people will be supported by JobKeeper in the current quarter, down from a MYEFO estimate of 1.3 million.And it reckons that ‘in the order of 100,000 to 150,000 JobKeeper recipients may lose employment at the completion of the program, though there is a wide band of uncertainty around this estimate.’Importantly, Kennedy noted that this does not mean that there will be a commensurate increase in unemployment (some of those leaving employment will also leave the labour market altogether, others will find new roles).
  • A stronger and faster than anticipated labour market recovery means that any persistent adverse impact from the shock (‘scarring’) is likely to be much smaller than feared.
  • Treasury’s current estimate of the NAIRU (the level of unemployment below which inflation would be expected to rise) has been lowered from five per cent to a range of 4.5 per cent to five per cent.A forthcoming working paper will provide more detail.

Why it matters:

Like the RBA, Treasury has also been pleasantly surprised by the pace of Australia’s economic recovery, particularly in the labour market.  But, also consistent with the central bank, it still sees plenty of spare capacity in the labour market and expects that the unemployment rate will have to fall below five per cent before the economy starts to see any sign of the sustained wage increases that the RBA says are necessary for the latter to hit its inflation target and thereby justify any increase in the cash rate.  

That judgment should also have implications for the government’s own fiscal strategy, given the forward guidance that links any move to budget repair to the state of the labour market.  The Treasury Secretary’s statement was quite cautious on that point, noting only that:

‘The extent to which the unemployment rate can be lower before inflation pressures arise will be an ongoing consideration for Government. The Government’s two stage fiscal strategy accommodates flexible targeting of the unemployment rate and a considered and prudent approach to medium term consolidation in the light of near-term uncertainties.’

What happened:

The Bloomberg March 2021 survey of economic forecasts for Australia shows that the consensus (median) view is for real output to grow by 4.3 per cent this year, 3.1 per cent next year and 2.7 per cent in 2023.  (Note that the number of forecasters providing projections for 2023 is significantly smaller than the number contributing forecasts for 2021 and 2022.)

Australia: Monthly consensus forecasts for GDP growth in 2021 and 2022

The unemployment rate is now expected to average 5.9 per cent this year, 5.3 per cent in 2022 and 5.2 per cent in 2023.

Australia: Monthly consensus forecasts for unemployment rate in 2021 and 2022

The annual headline rate of inflation (as measured by the Consumer Price Index) is predicted to average 1.8 per cent this year, 1.7 per cent in 2022 and two per cent in 2023.  And the median forecast for the cash rate at Q2:2023 is 0.1 per cent.

Why it matters:

The latest set of monthly forecasts shows that optimism around the near-term economic outlook continues to build: the median growth forecast for this year has been upgraded for a sixth consecutive month while the expected unemployment rate has likewise been downgraded for the sixth time in a row.

Note that – for now at least – there is little sign of any significant inflation risk showing up in the consensus predictions: the average rate of increase in the CPI is only expected to be at the bottom of the RBA’s target band by 2023.  That perhaps looks just a little faster than the RBA’s forecast which in its February forecast expected headline CPI inflation to be 1.75 per cent in the June quarter (but note here that the RBA does not provide an estimate for the second half of 2023).

What happened:

The weekly ANZ-Roy Morgan Consumer Sentiment Index fell 0.5 per cent to an index level of 110.4 for the week ending 20-21 March.

Australia: ANZ-Roy Morgan Weekly Consumer Confidence

The subindices enjoyed mixed fortunes, with weekly declines for ‘current economic conditions,’ ‘future economic conditions’ and ‘future financial conditions’ but increases for ‘current financial conditions’ and ‘time to buy a major household item.’

Why it matters:

This marked a second consecutive weekly drop and came despite last week’s very positive news on the labour market, including a big drop in the unemployment rate.  Possible sources of the downturn in sentiment are the scheduled termination of the JobKeeper program and the heavy rains and flash flooding that hit part of the east coast, with significant drops in confidence reported for both Sydney and Brisbane.

What happened:

The ABS said that preliminary data on Australia’s merchandise trade for February showed goods exports up two per cent over the month to $32.1 billion, leaving the value of exports 17 per cent higher than in February 2020.  Goods imports were also up two per cent (to $24 billion) over the month and 12 per cent in annual terms.  That combination delivered a trade surplus of $8.1 billion (original terms).

Developments of note in the monthly trade numbers included:

  • February saw the highest monthly cereal export on record, in line with reports of Australia’s second largest wheat crop on record.
  • There was a big jump in exports of non-monetary gold to Singapore in February, with the monthly value equivalent to more than half the value of all gold exported to Singapore last year and the second largest monthly gold export to that market on record.
  • Exports of iron ore to China fell 12 per cent over the month as volumes dropped.
  • Imports of road vehicles rose to their fifth highest value on record after a fall in January.The increase was mostly driven by internal combustion vehicles, but the Bureau also highlighted a new record value for electric vehicle imports (at $125 million, four time larger than in February 2020) along with strong growth in hybrids.

Why it matters:

According to the ABS, this was the first time in history that Australia has recorded three consecutive months of trade surpluses in excess of $8 billion.

What happened:

Last Friday, the ABS released preliminary data on retail trade for February 2021.  The early estimates show turnover fell 1.1 per cent (seasonally adjusted) over the month but was still up 8.7 per cent relative to February 2020.

Australia: Retail trade (nominal)

Why it matters:

The ABS pointed to falls in turnover in Victoria (down four per cent) and Western Australia (down six per cent) as driving the monthly decline in February, noting that public health restrictions due to COVID-19 meant that retail trade was restricted for five days in each state.  Those falls were only partially offset by increases in New South Wales and Queensland - both states had seen trade impacted by COVID-19 in January and enjoyed a recovery in activity last month.

What happened:

Also from late last week, new data on national, state and territory population showed that Australia’s national population was 25,693,059 people as at 30 September 2020.  That represented a decline of 4,200 people over the previous quarter but left the population 220,500 (0.9 per cent) larger than in the same quarter in 2019.

Australia: Population growth

Of that annual growth, 61.4 per cent reflected natural increase and 38.6 per cent net overseas migration in a reversal of the ‘typical’ pre-COVID pattern of relative contributions.  The natural increase over the past year - 135,400 people – was down 3.8 per cent relative to 2019 while NOM at 85,100 was down 64.8 per cent relative to 2019, reflecting a 35.4 per cent drop in overseas arrivals.

All states and territories experienced population growth in annual terms in the September quarter, with the rate of increase ranging from just 0.2 per cent in the Northern Territory to 1.2 per cent in Western Australia and 1.3 per cent in Queensland.   In quarterly terms, New South Wales, Victoria and the ACT all suffered a decline in population while other geographies still saw an increase.

Why it matters:

In the September quarter the decline in overseas migration (a 34,800 drop) outpaced the rate of natural increase, producing the first population decline in Australia since the year to December 1916, during World War One, when the population fell by 51,500 (a one per cent decline).

The decline in population growth implies that, all else equal, Australia’s potential growth will also be lower.   Back at the time of the 2020-21 budget, for example, Treasury said that it reckoned Australia’s potential growth rate would fall below two per cent per annum in the near term and only gradually return to around 2.75 per cent.  A weaker outlook for population growth drove a lot of that growth downgrade, with the budget projections assuming that by 2029-30 Australia’s population would be permanently smaller by about 1.6 million people relative to pre-COVID projections.  Those demographic projections were updated in December’s Population Statement, which estimated that Australia’s population would be around four per cent smaller (1.1 million fewer people) by 30 June 2031 than it would have been in the absence of COVID-19.  At the same time, reduced NOM and fewer births mean that this population will also be older than it otherwise would have been, with potentially adverse consequences for the participation rate.

Australia: Treasury projections for population

A smaller population, again, all else equal, also implies a lower level of domestic demand (including for housing) and a smaller labour force.

What happened:

One last piece of catch-up news from last week: The ABS published the experimental Q4 quarterly tourism labour statistics.  In the December quarter of last year there were 664,400 tourism jobs.  This was an increase of 5.1 per cent or 32,300 jobs over the number of jobs in the September quarter but was still 10.8 per cent less than the number of jobs in the December quarter of 2019.

Australia: Tourism jobs

Industries within the tourism sector which enjoyed the largest increases in the number of jobs over the quarter included cafes, restaurants and takeaway food services (up 3.9 per cent), retail trade (up 5.5 per cent) and accommodation (up 8.3 per cent).

Why it matters:

Since hitting a low point in the June quarter of last year, the tourism sector has added about 58,000 jobs.  Notably, the pace of recovery for tourism has been much slower than for the economy as a whole: The ABS estimates that tourism has only recovered four out of 10 filled jobs lost during the 2020 pandemic while the economy overall has regained seven out of 10 over the same period.

Australia: Change in number of tourism jobs by industry, Q4:2020

The data also show that the different industries that comprise the tourism sector have had very different experiences over the pandemic, with the biggest employment losses over the year seen in transportation, cultural services and accommodation services.

. . . and what I’ve been following in the global economy

What happened:

According to Bloomberg’s COVID-19 vaccine tracker, more than 486 million doses have now been administered across 137 countries.

Global: COVID-19 Vaccines administered

The adjusted daily average rate of vaccination (which uses interpolation to adjust for those countries that only report vaccine data infrequently) is now running at 11.9 million.  At this rate, it would take roughly another 2.5 years to cover 75 per cent of the global population with two doses.

Global: COVID-19 Vaccines administered

Cross-country differences in vaccination rates remain substantial, with Israel continuing to top the global league table with 51 per cent of the population fully vaccinated.

Global: COVID-19 Vaccines administered by selected country

Why it matters:

As noted in previous editions of the Weekly and in my recent economics webinar for members, the global success of the vaccine rollout remains a critical input to forecasts of the world economic outlook.  The average daily rate of vaccination is continuing to rise, and the expected time to vaccinate has fallen from more than three years a couple of weeks ago to 2.5 years now, although that still leaves a lot of room for further gains.

What I’ve been reading . . .

The AFR has an extract from John Edwards’ new Lowy Institute Paper, Reconstruction: Australia after COVID.  I’m looking forward to reading the full version once I manage to get my hands on a copy.

The ABS on one year of COVID-19.

Also from the ABS, an interesting essay on the role of automotive fuel prices in inflation.  Fuel prices are often volatile and as such can have an outsized impact on the headline rate of inflation as measured by the CPI. During the pandemic, for example, prices for automotive fuel fell 20 per cent in the June 2020 quarter and accounted for almost half of the record 1.9 per cent quarterly fall in the CPI in Q2.

And one more from the Bureau: the March 2001 ABS Business Conditions and Sentiments survey results.  Now, ‘just’ 29 per cent of businesses are accessing government or other support (such as wage subsidies and renegotiated property rent/lease arrangements) compared to 73 per cent in May 2020, while 46 per cent of businesses expect it to be easy or very easy to meet financial commitments over the next three months, up from 23 per cent in August 2020.

Grattan on problems with Australia’s vaccine roll out.

ASIO’s annual threat assessment 2021.

Mark Limb and Cameron Murray argue that zoning isn’t to blame for high Australian house prices, citing work using Brisbane data covering 20 years of changes to zoning, housing supply and prices across more than 25,000 sites in 19 major centres that were subject to repeated zoning changes designed to encourage urban infill.

Michael Keating reckons that the RBA’s plan to use monetary policy to target wage growth won’t work and that it would be better to rely on more standard measures to boost wages: increased spending on education and training to lift skill levels and therefore earning power along with the removal of public sector wage freezes.

Related, Paul Bloxham warns of possible tensions between fiscal and monetary policy ahead, should the RBA continue to prioritise the labour market and the government switch focus to budget repair.

Bain on what brands can learn from Australia about the post-COVID consumer.

ACCC Chair Rod Sims provides an update on the east coast gas market.  According to Sims, the ACCC ‘continues to find that the gas market is still not a functional, competitive market.’  A fundamental problem ‘relates to a lack of supply relative to demand’ (with a risk of shortfall for southern states as early as 2024 and the east coast market overall in 2026), compounded by ‘the very limited degree of competition at the producer and retailer level, which results in higher prices and a reduction in competitive outcomes for commercial and industrial users.’  A solution will involve new sources of supply and related infrastructure, a review of LNG netback pricing that reflects changes in global LNG markets, and more careful monitoring of pricing behaviour.

The IMF sets out some economic policy advice for the Asia-Pacific Region.  The first chapter first look at early lessons from the lockdowns and the region’s re-opening drawing on the experience of 11 countries including Australia and finds that:

  • ·on the containment front, regional countries in general responded relatively early to the pandemic by introducing restrictions.
  • the stringency and duration of lockdowns differed significantly across countries.
  • the effectiveness of these lockdowns varied across countries although in general restrictions tended to do a better job in flattening the epidemic curve when implemented early, when infection rates were still low.
  • most regional countries reopened their economies after suppressing the virus to a point where new cases were more than 80 per cent below peak levels, and of these only three (Australia, Japan and Malaysia) suffered a substantial second wave of infections.
  • the smaller group of regional economies that opened up earlier when infection rates were still high continued to experience a high rate of infections along with a slower pace of reopening and a slower rate of recovery in economic activity.
  • test and trace and related measures played an important role post-lockdown.

These results lead the authors to draw three main lessons:

  • containment measures should be activated early.
  • existing lockdowns after virus suppression leads to better economic outcomes.
  • effective test and trace systems are important in managing the post-lockdown environment.

The second chapter in the report tries to think about potential medium-term consequences of the pandemic in Australia and New Zealand.  In the case of Australia, the authors note that potential output growth had already slowed pre-pandemic reflecting sluggish productivity and weak investment and go on to flag that:

  • sectoral reallocation effects (leading to skills mismatches) plus lower migration rates are together likely to dampen labour supply.
  • slower growth, more uncertainty and higher corporate debt will discourage business investment.
  • downturns generally tend to lower productivity growth by reducing investment (particularly on R&D) and increasing market concentration which can in turn reduce competition and innovation.

The authors estimate that these effects combined could reduce potential output in Australia by 2.75 per cent to 7.25 per cent.  They recommend reform measures targeted at retraining displaced workers, upgrading infrastructure (particularly in the green and digital economies), simplifying business processes, and reducing regulatory and tax burdens.

PWC’s new report on the views of more than 32,500 workers across 19 countries including Australia, Hopes and Fears 2021 finds that only nine per cent of those who can work remotely want to go back to a traditional commute and work environment full-time, 39 per cent think that their current job will be obsolete within five years, 48 per cent believe that traditional employment won’t be around in the future, 50 per cent say they have faced discrimination at work, 60 per cent worry that automation is putting many jobs at risk (although 64 per cent think technology presents more opportunities than risks), 72 per cent would like a mix of remote and in-person working, 77 per cent are ready to learn new skills or completely retrain and 80 per cent are confident they can adapt to new technologies entering their workplace.   For Australia-specific results on work, see http:here.

Related, new work from BCG looking at the future of jobs in the era of AI.   The approach is to look at the potential impact of several technologies on jobs in the United States, Germany and Australia.  In our case, the report finds that Australia will experience difficulties in filling jobs in certain sectors, with much the greatest shortfall computer and mathematics, followed by health care practitioners and technical support, and business and financial operations.  At the same time, technology is projected to create workforce surpluses in production and office and administrative jobs.

This VoxEu column suggests that – by increasing the relative importance of intangible assets such as brand equity or organisational structure – technological progress reduces the effectiveness of monetary policy.  That’s because firms that invest more in intangible than tangible assets tend to use less debt financing (because intangibles are not a good source of collateral) and because intangible assets are subject to a much higher rate of depreciation than tangible assets (between 10 per cent and 40 per cent vs less than ten per cent) and higher depreciation rates imply a smaller change in the user cost of capital and hurdle rates for a given change in interest rates.

The McKinsey Global Institute has a special report on consumer demand and COVID-19, drawing on data from China, France, Germany, the United Kingdom, and the United States. 

Martin Wolf on hopes and fears of the global recovery.  AFR version here. 

The Conversable Economist reminds us of the perils involved in making ‘This time is different’ predictions, in this case about the future of cities after COVID, noting that while the past 50 years or so have brought repeated – and plausible – predictions that shifts in technology  would cause urban job concentrations to disperse, those predictions have repeatedly failed to eventuate.

A couple of quick pieces on economics.  The Economist has a piece on efforts to modernise the teaching of economics.  And Dani Rodrik has a suggestion as to how economists and non-economists can get along better: be a bit clearer about the role and limitations of economics’ approach to causal inference.

Finally, some listening that also links back to my summer reading.  Probably my favourite summer read (technically, listen, as this one was an audiobook) and also one of my favourite books from the past year overall was Zachary Carter’s The Price of Peace: Money, Democracy, and the Life of John Maynard Keynes.  Joe Walker’s Jolly Swagman podcast has a very good discussion with Carter in The Reign of Keynes Part 1.  And then a couple of episodes later Walker had another good conversation with another biographer of the great man, Robert Skidelsky.   I have to confess that I haven’t read Skidelsky’s much-lauded three volumes on Keynes, but I did read his self-abridged one volume version back around 2005 and the rather hefty paperback I bought back then still sits on my bookcase.  Note that there is quite a lot of background noise on this second interview - I found that I could tune it out OK, but your tolerance may vary.

Also on my summer reading list was Stephanie Kelton’s The Deficit Myth, which I found an entertaining and helpful (albeit – unsurprisingly – very US-centric) introduction to some of the economic propositions of Modern Monetary Theory (MMT).  In a sign of the times, Kelton has an interesting conversation with Bloomberg’s Tracy Alloway and Joe Weisenthal on How MMT won the fiscal policy debate.