Australian bank notes

CoreLogic’s national home value index has just hit a new record high and now sits one per cent above pre-COVID levels and 0.7 per cent above its previous high; private sector house approvals rose for a sixth consecutive month in December 2020 and did so at a record pace; and the total value of new loan commitments for housing and the value of owner occupier home loan commitments both hit record highs in the same month. Australia’s Composite PMI remained in positive territory for a fifth consecutive month in January, indicating ongoing recovery in private sector activity. The ANZ-Roy Morgan weekly index of consumer confidence was up. ANZ Job Ads rose for an eighth consecutive month in January, taking the series back above pre-pandemic levels. Payroll data showed jobs and wages both increased by 1.3 per cent between the weeks ending 2 January 2021 and 16 January 2021, although the information content of the series continues to be skewed by seasonal end of year effects. Australia’s monthly trade surplus rose to $6.8 billion in December, taking the annual surplus for 2020 to $72.7 billion.

No reading list this week, as instead there’s a review of key data we missed while the Weekly was on holiday. We take a look at Q4 inflation, the (very positive) December labour market report, the most recent set of monthly business and consumer confidence readings, and the IMF’s latest forecasts for the global economy.

Weekly reading will return next time, although until then, in this week’s Dismal Science podcast we do include a brief review of my summer reading, as well as a discussion of (some of) the many interpretations of the GameStop saga.

Welcome to 2021 everyone, and I hope most of you managed to get a decent break over the Summer after what was a very challenging 2020.

What I’ve been following in Australia:

What happened:

At its meeting on 2 February, the RBA Board decided to maintain its targets of 10bp for the cash rate and the yield on the three-year Australian Government bond, as well as the parameters of the Term Funding Facility (TFF). The Board also said that it would buy an additional $100 billion of federal and state government bonds when the current bond purchase program concludes in mid-April this year, maintaining the current purchase rate of $5 billion of bonds a week.

In the accompanying statement, the Board noted that in Australia ‘the economic recovery is well under way and has been stronger than was earlier expected. There has been strong growth in employment and a welcome decline in the unemployment rate to 6.6 per cent. Retail spending has been strong and many of the households and businesses that had deferred loan repayments have now recommenced repayments…The recovery is expected to continue, with the central scenario being for GDP to grow by 3½ per cent over both 2021 and 2022. GDP is now expected to return to its end-2019 level by the middle of this year’.

Balancing this good news, the RBA also judges that ‘the economy is expected to operate with considerable spare capacity for some time to come. The unemployment rate remains higher than it has been for the past two decades and while it is expected to decline, the central scenario is for unemployment to be around six per cent at the end of this year and 5½ per cent at the end of 2022’.

As a result, the Board sees little sign of any wage and price pressure in the economy, and although inflation and wage growth are both expected to pick up, the RBA expects them ‘to do so only gradually, with both remaining below two per cent over the next couple of years. In underlying terms, inflation is expected to be 1¼ per cent over 2021 and 1½ per cent over 2022’.

The statement concludes:

‘The Board will not increase the cash rate until actual inflation is sustainably within the two to three per cent target range. For this to occur, wages growth will have to be materially higher than it is currently. This will require significant gains in employment and a return to a tight labour market. The Board does not expect these conditions to be met until 2024 at the earliest.’

Why it matters:

The first monetary policy meeting of RBA Board in 2021 saw the central bank sticking to its view that the Australian economy will continue to require a prolonged period of aggressive monetary support, despite enjoying a better than expected recovery. In line with last November’s message that the cash rate would not rise ‘for at least three years’, the Board indicated that it expects no change to the policy rate ‘until 2024 at the earliest.’ Reinforcing its message that the need for continued monetary support remains strong, the Board also committed to extending its Quantitative Easing (QE) program in the form of a further $100 billion of asset purchases on top of the original $100 billion of purchases announced in November 2020. Interestingly, there had been a bit of pre-meeting speculation by some RBA-watchers that the central bank might be considering tapering its QE program early this year. Announcing a repeat package at the first meeting of the year represents a firm rebuff to that line of thought.

When the RBA announced its first tranche of QE last year, Governor Lowe explained that in part the RBA was reacting to the QE programs of other central banks. The latter had worked to lower government bond yields in other countries, resulting in Australia having higher long-term bond yields than elsewhere as the RBA’s price-based yield curve control (YCC) policy was focussed on the shorter end of the yield curve. This yield gap had added to the attractiveness of Australian dollar assets and put some upward pressure on the exchange rate, which was unhelpful from both a growth and an inflation perspective. With other leading central banks across the global economy still pursuing their own QE programs, this motivation for the RBA remains very much in play.

The RBA also trailed some of the new forecasts that will be presented in more detail in this Friday’s Statement on Monetary Policy. As noted above, these show the current recovery beating earlier expectations in terms of both growth and employment. Back in November, the RBA’s forecast was for Australian GDP to only return to its end-2019 level by the end of this year, for example, while the new projections see this instead happening by mid-year. And while November’s forecast for the labour market expected the unemployment rate to climb above seven per cent in the short-run and still be around six per cent by end-2022, the view now is that the unemployment rate will be around six per cent by the end of this year, and around 5.5 per cent by end-2022. The adjustments to the outlook for inflation appear to be more modest: at the time of the November 2020 statement, the central bank was predicting that underlying inflation would be just one per cent this year and 1.5 per cent in 2022, while the new forecasts have underlying inflation running at 1.25 per cent this year and 1.5 per cent next year, indicating the central bank does not foresee any inflation-related reason for a cash rate adjustment.

As to whether or not we eventually get these outcomes or something closer to one of the alternative scenarios that the RBA also flagged, this week’s statement reminded us that the ‘important near-term issue’ is ‘how households and businesses adjust to the tapering of some of the COVID support measures and to what extent they will use their stronger balance sheets to support spending.’

Governor Lowe provided further detail on the RBA’s views on the economy in his speech on 3 February (see next story).

What happened:

RBA Governor Lowe gave a speech to the Press Club on The Year Ahead, setting out the RBA’s latest take on the economy. The governor started with an assessment of the current state of play, moved on to the RBA’s views on the economic outlook, and finished up with the implications for monetary policy.

On current economic conditions

  1. The governor observed that ‘despite the pandemic having very significant economic costs, the downturn was not as deep as we had feared and the recovery has started earlier and has been stronger than we were expecting’.

  2. Lowe pointed to three factors behind this relative outperformance:

    i. Australia’s success in containing the pandemic meant that the lockdowns and other restrictions on activity had taken less of a toll on activity than anticipated.

    ii. The ‘very significant’ fiscal policy support from the federal and state governments, together equivalent to almost 15 per cent of GDP, had boosted income and jobs and helped bring forward the recovery. The better health outcomes also meant policy got more traction.

    iii. Australian firms and consumers were able to adapt and innovate in response to the pandemic, including via new business models, more use of online communications and sales, and new spending patterns.

  3. There was still ‘very substantial spare capacity in the Australian economy’. Despite recent falls (see story below), the unemployment rate was still at its highest in almost two decades, the RBA thinks the level of GDP in the December quarter will be four per cent lower than where it thought it would be a year ago, underlying inflation is well below target (see story below) and wage growth is at multi-decade lows.

    The economic outlook

  4. Repeating a phrase that enjoyed several outings last year, the governor said he expected that the recovery was ‘likely to be bumpy and uneven,’ remaining hostage to the path of the pandemic and the rollout of vaccines. The RBA’s forecasts assume that the rollout of vaccines will be in line with current government plans, and that international travel will remain ‘highly restricted’ through 2021.

  5. The RBA’s baseline scenario is for the recovery to continue, delivering above-trend growth of 3.5 per cent in 2021 and 2020, which would see the level of GDP return to its end-2019 level by the middle of this year. (Note the speech also briefly discussed an upside and downside scenario: presumably, there will be more details in Friday’s Statement on Monetary Policy.)

  6. The RBA does not foresee the level of GDP returning to its previous trend over the forecast period, mainly because of the impact of lower population growth, which implies that the Australian economy is likely to be permanently smaller than it would otherwise have been.

  7. The unemployment rate is expected to continue to decline, falling to six per cent by the end of this year and around 5.25 per cent by mid-2023 in the baseline scenario. Continued labour market slack means that wage growth is predicted to rise only gradually and still be sub-two per cent by end-2022. As a result, underlying inflation is also expected to remain below two per cent through 2021 and 2022. Note, however, that the RBA does expect a temporary spike in the headline rate of inflation to around three per cent in the June quarter of this year, largely reflecting the impact of changes in administered prices including childcare.

  8. The governor also pointed to two key issues underpinning these forecasts.

    i. The nature of the household response to the tapering of fiscal and other support measures (note, for example, the JobKeeper program is currently due to finish on 28 March this year). Lowe remarked that normally ‘when income falls, so too does consumption’ but also stressed that this has not been a ‘normal’ recession. Instead, fiscal largesse has supported incomes which in turn has flowed into higher household savings. Whether households continue to sit on their higher savings buffers or draw down some of this money to support spending will be critical. Lowe reckons that rising house prices (again, see story below) will help support the decision to spend.

    ii. A resumption in private investment spending is also needed to underpin any sustained recovery. Unsurprisingly, given high levels of uncertainty, private capex has been weak (and was so before the pandemic). The forecast assumes that lower uncertainty and stronger demand will encourage a recovery in investment rates.

    Implications for monetary policy

  9. Lowe judges that ‘very significant monetary support will need to be maintained for some time to come. It is going to be some years before the goals for inflation and unemployment are achieved. So it is premature to be considering withdrawal of the monetary stimulus’.

  10. As noted in the previous story, the RBA has announced that it will extend its current $100 billion program of bond purchases (QE), which will end in mid-April, with a further $100 billion of purchases. Here, Lowe cited three factors for the expansion, noting:

    i. That ‘it was clear that the bond purchase program has helped to lower interest rates and has meant that the Australian dollar is lower than it otherwise would have been’;

    ii. That most other central banks ‘have recently announced extensions of their bond purchase programs, many running until at least the end of this year…if we were to cease bond purchases in April, it is likely that there would be unwelcome upward pressure on the exchange rate.’ And

    iii. The outlooks for inflation and jobs remained ‘well short’ of the RBA’s goals.

  11. The Term Funding Facility (TFF) ‘will be maintained as it is’ for now. The TFF will expire in end-June this year (which means that banks will have been able to secure low-cost funding out to mid-2024) but the Board would only consider extending the facility if there were a ‘marked deterioration in funding and credit conditions.’

  12. The three-year yield target for Australian Government Bonds will also be maintained for now. Later this year, ‘the Board will need to consider whether to shift the focus of the yield target from the April 2024 bond to November 2024 bond. In considering this issue, the Board will be giving close attention to the flow of economic data and the outlooks for inflation and jobs. It has made no decision yet.’

  13. The cash rate ‘will be maintained at 10 basis points for as long as is necessary.’ How long will that be? Long enough to ‘see inflation sustainably within the two to three per cent target range’ which will require ‘a tighter labour market and stronger wages growth than we are currently forecasting’. In terms of an estimated timeframe, Lowe suggested ‘based on the outlook I have discussed today, we do not expect it to be before 2024, and it is possible that it will be later than this.’

Why it matters:

There was a lot of useful information and analysis in this speech, hence the lengthy summary above. But the key messages can be summarised in three simple points.

  • First. The economy has performed much better than the RBA expected.

  • Second. The economic damage suffered has nevertheless been substantial and the RBA’s best guess is that output gaps are both large and likely to remain so for some time.

  • Third. A prolonged period of expansionary monetary policy will therefore be required for the RBA to hit its inflation target.

The key takeaway here is that the RBA is determined to avoid any premature tightening of policy.

The governor’s speech also provided us with a few important things to keep an eye on over the coming months, including the anticipated expiry of the TFF, the upcoming decision on the future of the RBA’s yield curve control policy, and a future temporary spike in the headline inflation rate.

Finally, there were also several interesting comments to come out of the Q&A session, including Lowe’s view that ‘at the moment’ he wasn’t particularly concerned about rapidly rising asset (equity and house) prices, the judgement that wage growth was being held back not just by the pandemic, but by a combination of globalisation, technology and the reduced power of labour relative to employers, and his support for a permanent hike to the JobSeeker payment (‘it is a fairness issue’).

What happened:

CoreLogic reported that national house prices rose 0.9 per cent over the month in January 2021 to be three per cent higher than in January 2020. The combined capitals index was up 0.7 per cent month-on-month and 1.7 per cent year-on-year, while the corresponding gains for the combined regional index were 1.6 per cent and 7.9 per cent.

Graphic - CoreLogic hedonic home value index

All capital cities and all regions enjoyed a rise in dwelling values over the month, with the largest gains in Darwin (up 2.3 per cent), Perth and Hobart (both up 1.6 per cent). The strongest regional growth came in South Australia and Western Australia.

Source: CoreLogic

CoreLogic pointed to several noteworthy trends in the data:

  • Regional markets are outperforming capital cities: housing values in regional Australia rose atmore than twice the pace of capital cities in January while since the onset of the pandemic in March 2020, regional values have risen 6.5 per cent compared to a fall of 0.2 per cent for capital city housing values.

  • Houses are outperforming units: at the national level, house values have risen 3.5 per cent over the past six months while unit values have been flat.

Other market indicators show relatively low supply (the  number of fresh listings added to the market over the four weeks to 24 January 2021 was 3.3 per cent lower than the same period a year ago and more than 13 per cent below the five-year average, while total listing numbers are roughly 28 per cent lower than the corresponding period in 2020 and 29 per cent below the five-year average) combined with buyer activity that is well above average. Auction clearance rates are also high.

corelogic-auction-national-weekly-clearance-rates

Why it matters:

Ultra-low interest rates are currently doing what low interest rates typically do in Australia – boost the housing market. Strikingly, however, this particular increase is occurring, despite what are still relatively high levels of unemployment as well as closed international borders that have halted net overseas migration and thereby slowed population growth to a crawl. In the aftermath of the biggest decline in Australian GDP in decades, CoreLogic’s national home value index has just hit a new record high and is now sitting one per cent above pre-COVID levels and 0.7 per cent above the previous high recorded in September 2017. 

That’s not to say the pandemic is having no influence on the housing market: the relative strength of regional vs capital cities markets may reflect an increase in migration out of the big cities to take advantage of WFH opportunities and lower density living even as lower migration has softened boost capital city demand, while the shift in relative appetite for houses over apartments could likewise be driven by a post-pandemic preference for more spacious living as well as a fall in investor appetite. Importantly, pandemic-driven changes in behaviour for now are more about preferences over location and type of property than they are about any adverse impact for the overall demand for housing assets.

What happened:

The ABS said that the number of building approvals for total dwellings rose 10.9 per cent in December 2020 (seasonally adjusted) to be 22.8 per cent higher than in December 2019.

Approvals for private sector houses rose 15.8 per cent month-on-month and a huge 55.6 per cent year-on-year while approvals for private sector dwellings excluding houses were up 2.3 per cent over the month but down 19.3 per cent in annual terms.

 

The value of total building approved in December rose 4.9 per cent over the month. The value of new residential building approved was up 1.4 per cent, while total residential building (including alterations and additions) rose 2.3 per cent.  The value of non-residential building approved in December rose 10.1 per cent relative to November.

Why it matters:

This was the sixth consecutive month of rising private sector house approvals, and December’s monthly increase represented a record high. The pattern of increase held across Australia, with the ABS reporting rises across all states and record highs (in seasonally adjusted terms) in Victoria, South Australia and Western Australia. The value of residential alterations and additions also reached a record high in December.

Housing stimulus measures from the federal and state governments such as the HomeBuilder program (due to expire at the end of March this year), plus extremely low interest rates, have combed to trigger a surge in demand for detached houses in particular. The subsequent rise in approvals should later be followed by increased dwelling investment.

What happened:

According to the ABS, new loan commitments for housing rose 8.6 per cent over the month in December 2020 (seasonally adjusted) and were up 31.2 per cent over the year. Loan commitments for owner-occupiers rose 8.7 per cent month-on-month and 38.9 per cent year-on-year while commitments to investors were up 8.2 per cent over the month and 10.9 per cent over the year.

 

The number of owner-occupier first home buyer loan commitments increased 9.3 per cent over December to be 56.6 per cent higher than in December 2019.

New loan commitments for personal fixed term loans fell 0.5 per cent in December and were almost flat (up just 0.1 per cent) over the year.

Why it matters:

The total value of new loan commitments for housing and the value of owner occupier home loan commitments both hit record highs in December, while owner occupier first home buyer commitments reached their highest level since June 2009 (when commitments were boosted by the government tripling the first home owner grant as part of its response to the global financial crisis).

As with dwelling approvals (see previous story), government incentives and low rates are boosting activity in the housing sector. The ABS estimates that the valuer of construction loan commitments has more than doubled since the government introduced its HomeBuilder grant in June 2020.

What happened:

The IHS Markit Australia Composite PMI eased(pdf) to 55.9 in January 2021 from 56.6 in December 2020 but remained comfortably in expansionary territory.

 

The Services PMI reading fell from 57 in December to 55.6 in January while the Manufacturing PMI rose from 55.7 to 57.2 over the same period.

 

Why it matters:

The Composite and Services PMIs have now each been in positive territory for five consecutive months while the Manufacturing PMI has enjoyed an even longer run of eight straight months of readings above 50, as the recovery in private sector activity that started last year has continued into the first month of 2021.

What happened:

The ANZ-Roy Morgan weekly consumer confidence index rose 0.8 per cent to 112.1 on January 30/31.

 

The weekly rise in confidence was driven by an increase in both the current and future financial conditions subindices, along with a lift in the ‘time to buy a major household item’ component. Both the ‘current economic conditions’ and ‘future economic conditions’ subindices were down over the week, likely reflecting some payback after the previous week’s big gain.

Why it matters:

After jumping by 2.3 per cent last week (reflecting big increases in respondents’ assessments of current and future economic conditions following better news on the public health front and the re-opening of state borders), this week’s improvement in confidence was much more modest. Even so, the index is 3.6 points higher than its reading in the same week last year and is now very close to returning to its long run average.

What happened:

ANZ Australian Job Ads rose 2.3 per cent over the month in January, taking the rate of annual growth up to 5.3 per cent.

ANZ job advertisements 

Why it matters:

The ANZ measure of Job Ads has now risen for eight consecutive months, leaving the series at its highest level since April 2019 – so back above pre-pandemic levels.  Consistent with December’s upbeat labour market report (see below), the Job Ads results are telling the story of a strong labour market recovery.

What happened:

According to the ABS, the latest experimental payroll jobs and wages data show that jobs and wages both increased by 1.3 per cent between the weeks ending 2 January 2021 and 16 January 2021. Over the four weeks since 19 December 2020, payroll jobs are down 4.6 per cent and total wages paid are down 7.2 per cent.  And for the period since the week ending 14 March 2020, jobs have fallen 4.3 per cent and wages are down 5.2 per cent.  (But see the warning about seasonality and other distortions in the payrolls data below).

 

By state and territory, relative to the week ending 14 March 2020 the largest falls in payrolls jobs have been in Victoria (down 5.9 per cent), the ACT (down 4.8 per cent) and New South Wales (down 4.6 per cent).

Over the most recent fortnight, the biggest payroll jobs gains have come in Queensland (up 2.8 per cent), South Australia (up 2.4 per cent) and Tasmania (up two per cent) while the lowest gains were in New South Wales and Victoria (both up 0.7 per cent).

By industry, the biggest declines in payroll jobs since the week ending 14 March 2020 have been in accommodation and food services (down 14.7 per cent), education and training (down 13.8 per cent) and information, media and telecommunications (down 13.1 per cent).  Only four industries have added payrolls jobs over this period, led by financial and insurance services (up 4.2 per cent).

Over the most recent fortnight of data, the biggest jobs gains came in manufacturing (up 6.5 per cent), construction (up 5.9 per cent) and administrative and support services (up 5.4 per cent) while the biggest decline was suffered by education and training (down 4.6 per cent).

Why it matters:

In the previous release in this series, the ABS cautioned that the payroll jobs data should be treated with an even greater degree of caution than usual around the year-end/Australian summer period. That’s partly because of strong seasonal labour market effects at this time of year reflecting increases in labour market activity before Christmas and a combination of public holidays, school holidays and lower business activity in many sectors after Christmas. Remember, the payroll jobs data are not seasonally adjusted. But it’s also because the data could be affected by modified business reporting of single touch payroll (STP) data over this period. As a result, the ABS noted, the ‘underlying movement at year-end in both payroll jobs and wages, will be somewhat hidden by these effects until ‘normal’ business reporting resumes.’ The Bureau also pointed out that the original labour force statistics confirm that there is a regular seasonal fall in January each year in both the number of employees and weekly hours worked.  Further, previously unreleased payroll data for late 2019 show a pattern of decline in jobs (and wages) that looks very similar to the movements over the past month or so.

All of which makes interpreting the payroll data tricky at the moment. So, for example, while the COVID-19 outbreak and subsequent lockdown in Sydney late last year may well have had some adverse impact on employment over this period, it’s difficult to disentangle this from the seasonal factors that look to be dominating the payroll series.

What happened:

Australia’s goods and services trade balance in December was a $6.8 billion surplus (seasonally adjusted), an increase of $1.8 billion on November’s result.  According to the ABS, exports of goods and services rose three per cent over the month, while import values fell two per cent.

In annual terms, the balance on goods and services for 2020 was a surplus of $72.7 billion, up from 2019’s already hefty $67.5 billion surplus. Exports of goods and services fell 12 per cent over the year but this decline was outpaced by a 15 per cent drop in imports.

Why it matters:

After a year when the two big themes for Australia’s trade were the impact of the pandemic and the bilateral relationship with China…2021 promises more of the same. As noted by both the RBA (above) and the IMF (below), much will depend on how successful the global rollout of vaccines proves to be.  But decisions made in Beijing (regarding growth, the environment and the bilateral relationship) will also play an important role.

. . . what we missed while the Weekly was on holiday

What happened:

On 27 January 2021, the ABS reported that Australia’s Consumer Price Index (CPI) rose 0.9 per cent over the December 2020 quarter to also be up 0.9 per cent over the year.

 

In terms of underlying inflation, the trimmed mean rose 1.2 per cent over the year, the annual weighted median was up 1.4 per cent in annual terms and the CPI ex volatiles rose 1.5 per cent.

 

According to the ABS, significant price changes over the December quarter included:

  • A 10.9 per cent quarterly increase for tobacco, due to the annual excise tax increase of 12.5 per cent and the bi-annual excise tax increase based on Average Weekly Ordinary Time Earnings (AWOTE) indexation, both of which were applied on 1 September 2020;
  • A 37.7 per cent rise in childcare, following the unwinding of the free childcare policy, that sent out-of-pocket expenses for childcare fees back to pre-COVID levels (this drove the overall rise in the furniture, household equipment and services group);
  • A 6.3 per cent increase in domestic holiday travel as tourism picked up in the run-up to Christmas and as state borders re-opened; and
  • A 2.5 per cent increase for medical and hospital services after private health premiums increased on 1 October, marking the end of a six-month freeze.

The most significant price fall was in electricity (down 7.5 per cent in the steepest quarterly fall in the history of the series) as the Western Australian Household Electricity Credit provided households with a one-off $600 credit, resulting in a fall in electricity prices of 66.7 per cent in Perth.

Why it matters:

At the close of 2020, both headline and core inflation remained well below the RBA’s target range with the trimmed mean (the RBA’s preferred measure of underlying inflation) now having been stuck below two per cent for 20 consecutive quarters.  Market expectations regarding inflation – while up from their lows at the peak of the crisis – also remain at or below the bottom of the target range.

No surprise then, that given this context plus the uncertainty around the recovery from the pandemic, the RBA remains happy to keep the cash rate at a record low and persist with its QE and YCC programs. 

That said, the end of year inflation rates for both the headline rate (0.9 pe cent) and the trimmed mean (1.2 per cent) did at least beat the RBA’s November 2020 Statement of Monetary Policy forecasts for 0.5 per cent and one per cent inflation rates, respectively. But as noted above, the main drivers of the inflationary impulse (such as it was) in the December quarter were tobacco prices and childcare costs, neither of which reflect any kind of sustained inflationary pressure.

Finally, note that the December quarter CPI also reflects the annual re-weighting of the index.

What happened:

On 21 January 2021, the ABS said employment in December 2020 increased by 50,000 people over the month, with full-time employment rising by 35,700 and part-time employment up by 14,300.

Monthly hours worked increased by 1.7 million hours (0.1 per cent) over the month although they were still down 1.5 per cent relative to December 2019.

Australia’s unemployment rate fell to 6.6 per cent in December 2020, down from 6.8 per cent in November. At the same time, the underemployment rate fell from 9.4 per cent in November to 8.5 per cent in December, taking the overall underutilisation rate down from 16.2 per cent to 15.1 per cent.

The participation rate rose by 0.1 percentage points to reach a new record high of 66.2 per cent, 0.2 percentage points above the corresponding month in 2019.  The employment-to-population ratio increased by 0.2 percentage points to 61.8 per cent in December, leaving it 0.8 percentage points below its December 2019 level.

Why it matters:

Australia’s labour market recovery was sustained into December, with the economy continuing to add jobs, the unemployment and underemployment rate again falling, and the participation rate climbing to a new record high.

Back in March 2020, total employment stood at almost 13 million before the impact of COVID-19 and the first round of lockdowns saw employment slump by more than 872,000 over April and May. But by December last year, employment was back up to more than 12.9 million, a little less than 88,000 below the March figure, as the economy recovered a large share of the jobs lost. 

A closer look at the numbers shows that the recovery in part-time employment has been faster than the return of full-time employment. Part-time employment in December 2020 had risen by almost 25,000 relative to the number of part-time employed in March 2020. But full-time employment in December was still more than 112,000 less than the March result. As a result, although the share of part-time work in total employment fell slightly to 32.1 per cent in December from 32.2 per cent in November, it is still 0.3 percentage points higher than in December 2019 and 0.4 percentage points up on the March 2020 ratio.

That difference in part-time vs full-time work is also reflected in the difference in the pace of recovery between hours worked and overall employment, with the latter recovering faster than the former. By December 2020, relative to March 2020 hours worked were 1.4 per cent lower while employment was 0.7 per cent lower.

Along with falls in the unemployment, underemployment and underutilisation rates, another sign of labour market recovery has been the continued decline in the number of Australians working zero hours for economic reasons. This fell by a further 17,000 people over the month to December and has now returned to pre-pandemic levels.

Finally, the big gap between the number of unemployed and the number of JobSeeker recipients that opened up in May 2020 remains in place. As of December 2020, the labour market data show the number of unemployed at 912 million while Services Australia puts the number of JobSeeker recipients for the same month at more than 1.3 million plus more than 150,000 Youth Allowance recipients.

What happened:

Last week, the NAB monthly business survey reported that business conditions in December 2020 rose to an index level of 14 points, up from seven points in November. But business confidence fell nine points over the month to an index level of four points.

 

The Employment subindex rose to nine points in December from minus four points in November, returning to positive territory for the first time since February, and there was also a rise in the reported rate of capacity utilisation.

Why it matters:

The December survey delivered mixed messages on the economy. On the one hand, the business conditions index rose to its highest level since late 2018 in December and has now improved for four consecutive months. Conditions are well above average and consistent with a sustained recovery in business activity (an interpretation which also lines up with the January PMI readings discussed above).  Likewise, another rise in the employment index is also consistent with December’s strong labour market result (see earlier story).

On the other hand, the decline in business confidence shows the continued vulnerability of sentiment to adverse developments on the public health front, with the fall likely driven at least in part by the Sydney COVID-19 outbreak late last year.

What happened:

Published on 20 January, the Westpac-Melbourne Institute Index of Consumer Sentiment fell(pdf) to an index level of 107 in January 2021 from 112 in December 2020, a drop of 4.5 per cent.

All components of the index fell in January with significant declines in the ‘economic conditions next 12 months,’ ‘economic conditions next five years,’ and ‘family finances vs a year ago’ measures. There was a more modest decline for ‘time to buy a major household item’ and a very small move for ‘family finances next 12 months.’

Separately, the Unemployment Expectations Index rose 11.9 per cent over the month (indicating respondents expected a future rise in the unemployment rate) although the housing market remained immune from January’s softening of sentiment, with the ‘Time to buy a dwelling’ index edging slightly higher over the month while the House Price Expectations Index was up 1.1 per cent.

Why it matters:

Westpac noted that the fall in the monthly consumer sentiment indicator relative to the very strong reading recorded in December (when the index reached a ten-year high) likely reflected the negative health news that arrived in the weeks following December’s survey, including the emergence of the Sydney COVID-19 clusters and subsequent lockdowns. Even after January’s fall, the index remained comfortably in positive territory with optimists outnumbering pessimists. With better health news in recent weeks, the weekly ANZ-Roy Morgan survey (see earlier story) suggests that households may already be feeling more upbeat.

What happened:

Last week, the IMF released its January 2021 Update for the World Economic Outlook (WEO), arguably the closest we get to an ‘official’ view on the world economy. The Fund’s new base case is for world real GDP (measured at purchasing power parity exchange rates) to grow 5.5 per cent this year after an estimated contraction of 3.5 per cent in 2020, followed by 4.2 per cent growth in 2022.

 

Advanced economies are expected to grow 4.3 per cent in 2021 and 3.1 per cent in 2022, while emerging markets and developing economies are predicted to grow at 6.3 per cent and five per cent over the same two years. 

The Fund thinks that the Australian economy will have shrunk by 2.9 per cent last year but forecasts real GDP growth of 3.5 per cent this year (in line with the RBA forecast discussed above) and 2.9 per cent in 2022 (below the RBA’s projection for a second year of 3.5 per cent growth).

The  IMF’s baseline forecast assumes that there will be ‘broad vaccine availability’ in advanced economies and some emerging markets by the middle of this year, and that most countries will have vaccine access by the second half of next year.  It also assumes that medical therapies will ‘gradually become more effective and more accessible worldwide over the course of 2021-22.’ As a result, ‘local transmission of the virus is expected to be brought to low levels everywhere by the end of 2022.’

Unsurprisingly given the year we’ve just experienced, the Fund warns that its forecasts are subject to ‘exceptional uncertainty’. On the upside, the world could do better than expected in terms of vaccine manufacture, distribution and effectiveness, leading to a faster end to the pandemic. The resultant boost to confidence would then see a stronger recovery. But on the downside, the Fund worries that ‘vaccine rollout could suffer delays, widespread hesitancy could hamper vaccine take-up, vaccines could deliver shorter-lived immunity than anticipated, and advances on therapies could be limited. Intensifying social unrest, including due to higher inequality and unequal access to vaccines and therapies, could further complicate the recovery. Moreover, if policy support is withdrawn before the recovery takes firm root, bankruptcies of viable but illiquid firms could mount, leading to further employment and income losses. The ensuing tighter financial conditions could increase rollover risks for vulnerable borrowers, add to the already large number of economies in debt distress…and increase insolvencies among corporates and households.’  Ouch.

Why it matters:

The IMF’s assessment of the global economy has gradually become more optimistic since the middle of last year. The Fund’s first take on the impact of COVID-19 on global growth was presented in the April 2020 WEO, when the assumption was that world output would fall by three per cent last year. That forecast was then downgraded to a decline of 4.9 per cent in the June WEO before being upgraded by about half a percentage point to a decline of 4.4 per cent in the October WEO. Now the estimated economic damage suffered last year has been scaled back again, with the predicted decline in GDP in 2020 trimmed by a further 0.9 percentage points. 

Meanwhile, the Fund’s projections for growth this year have consistently had a ‘five’ in front of them since the April 2020 WEO, with the latest forecast representing an upgrade of 0.3 percentage points on the October 2020 forecast.

As noted, the outlook for this year is subject to ‘exceptional uncertainty.’  Still – and without in any way seeking to downplay the severe economic damage already caused by COVID-19 –the world economy looks like it has a decent chance of escaping many of the worst case economic and financial scenarios that were haunting policymakers and economists during the opening months of the pandemic.