Well, here we go again. It’s February 2021 and it’s time for another economic update.
Now, I do these economic updates every month from February to December. My name is Ben Kingsley and I’m the Managing Director of Empower Wealth. And you’re receiving this video presentation because you’re an Empower Wealth customer. And so we’re delighted to be able to share with you the data and insights and, effectively, my observations when it comes to all of this economic and property data. Now, I’m not an economist. So the opinions that are shared are my own, and I draw them from the readings and research and data that I’m looking at. So do take that into note. Now, in terms of, if you’re listening to this as an audio file through our The Property Couch Podcast, we also love to share this information because Bryce and I love and are passionate about sharing education and knowledge when it comes to property finance and money management. So if you’re getting the benefit of listening to this as an audio file, you’ll see what we’re all about. So this is our economic update.
So here we go. Let’s get into it. Let’s talk about the big themes that have shaped the last couple of months, because we took January off…
One of those big things, well in my mind, there are a few, right? We’re talking about the equity markets. Now, they continue to have a bull run, and we want to know how long this will last. Secondly, I’m also interested in what’s happening in terms of, is Australia pulling a rabbit out of the hat? And finally…
Is it up, up and away for the property market in 2021 here in Australia?
So they are all the things I want to cover off as we look at the data around Australia and also globally.
So firstly, let’s focus in on what’s happening outside of Australia.
I want to look at the IMF Report that was released last week in regards to global forecast for 2021. Now the IMF — the International Monetary Fund — have lifted their forecast for global growth from 5.2 to 5.5, citing the COVID-19 vaccines and additional fiscal stimulus as an offset for the resurgent pandemic. So effectively what they’re saying here is, a bit more money going in and they see the vaccines will hopefully open up some economies.
Now, geographically, what was interesting about that is they tweaked up the US with an upgrade, but also then downgraded the Euro and the UK areas because of the worsening impact of the COVID-19 pandemic that’s occurring before the vaccine comes into play.
Now, when we look at what’s happening around different countries, let’s start with the US…
So, after what I would describe as a shocking exhibition of poor judgment leadership and attack on the democratic process — yes, I’m pretty passionate about this — we did say the end of the Trump presidency and the arrival of the 46th president in Joe Biden. So we hopefully we’ll see a little bit more stability and certainly more global engagement as what’s going on there. Now because of that chaos and uncertainty and rapid spread of COVID-19 across America, we did see the fourth quarter results in GDP numbers being pretty ordinary for the US. So GDP rose in an annualised rate of 4% in the December quarter. That outcome was also well below post lockdown surge of 33.4% that was recorded in the September quarter. For 2020, the whole GDP fell. So basically the US market fell by 3.5% in gross domestic production from the year prior. Now this decline was the worst since 1946, and it was also the first decline since 2009 as they moved into this recession.
Now the biggest contributor to the US economic growth is the consumer. That’s what drives that country in terms of consumption. They also saw a soft pace of 2.5% in the December quarter. This rate is a sharp deceleration from the recorded 41% increase that they saw in the September quarter. When they did have a period where they came out of what we would call a slowdown or a bit of a lockdown. Retail spending, which accounts for almost 70% of that GDP fell by 0.7 in December, following a decline of 1.4% in November after that September bounce. The other thing we’re also taking a look at in the US consumer sentiment. Obviously with the chaos and uncertainty and division that we’re seeing in America, consumer sentiment as measured by the University of Michigan Index slipped from 80.7% in December to 79.2 in January. If a context pre-COVID, the index student 99.8% in January 2020.
Now also the other data we’re looking at initial jobless claims continue to run at an elevated level, suggesting that job recovery in the US will continue to be slow. Now, given the US has effectively given up on any type of locking down certain cities and so forth, we are seeing sporadic activity in that area. The vaccine roll out, really, and the speed at which it is rolled out is going to be the catalyst for the fortunes of the US economy in 2021. That, in addition to Joe Biden’s proposal of a $1.9 trillion stimulus package is also going to be important there. Now, we are already seeing, based on the Republican side of the House, that they’ve countered the $1.9 trillion proposal with a between $500 billion and $600 billion range. So they’re basically saying that’s where they see it in terms of 1.9 trillion. And so the argy-bargy will continue where the President will try and work with Congress to try and get a stimulation package through.
Now, in contrast, let’s look at the second biggest economy in the world, which is China…
They did get in control of the virus, and you have seen the benefits of what happened there. So in terms of economic growth for the GDP grew by 6.5% over the year to December. Over the same period, industrial production rose 7.3%. While retail sales were also up 4.6%. Now, in terms of the unemployment rate, as of December, the official unemployment rate in China stood at 5.2%. And this is down from the peak of 6.2% in February when they had their severe outbreak and also their slowdown in the economy. Now China is likely to be the only major economy to expand in 2020. And again, that’s a good example of how an economy can move forward. And one of those examples is industrial companies in China were up 20% in terms of profit in December, 2020 compared to 2019. So that economy continues to do well as they control the virus.
In terms of Europe and the UK, obviously winter has not been good…
The virus has been able to get a hold of the population basis in those areas and the same principles applied. The resurgence of that virus will also impact their GDP and certainly their economic recoveries. So we’ll need to see that vaccine rollout program is going to be the catalyst for opening up those economies. So not so great news into Europe and the UK.
Turning our attention to the other focus I had in terms of the themes for this month was really the equity markets…
So we’ve seen the US market, although I’m having a bit of a tough time at the end of the last week. We are seeing the US markets continue to record, record high levels as investors flood into those particular markets. So we are definitely seeing investors looking for better returns from their money in the bank. And those low interest rates are also seeing plenty of cash around.
So the other big observation really has been the participation rate continues to surge in the millennials and Gen Z’s becoming retail investors, right? So they’re having a go at having a punt on the market and trying their luck. And it’s very easy for them to set up accounts like Robin Hood, where they can try it very easily on markets now. Either way, certainly there’s a lot of frothiness and a lot of talk going around the equity markets that also includes here in Australia. And we only saw the situation in regards to GameSpot and what’s happening there, was the big news of last week and will continue to be the big news in terms of the short squeeze.
Now, I’m no expert when it comes to the share market. So you’re not going to hear me give you any advice around what shares to buy. I’ve always been consistent in my view in this area. I’ve lost money. I’ve made money. The best money that I’ve made is because I’ve focused in on the businesses. Not necessarily the what’s happening in the markets, but the fundamentals of the businesses that I’m investing in. How well they’re led, the size of the market, their market share, what level of debt free cashflow they’re generating, and their future earning potential. They are some of the fundamentals that you need to focus in on. Not just looking at the share price in terms of watching it go up or go down, that would be dangerous. So always make sure you do your due diligence in that area.
Now, the other thing that I do look at however is, in terms of when we are talking about markets getting ahead of themselves is what we call exuberance in the market. And there’s plenty of exuberance. And then the ultimate mixture of when we do see a crash in markets is what we call irrational exuberance. And that can lead to marketplaces having very, very high evaluations and then falling off those peaks as the behavior inside that market was irrational. Now that’s not only exclusive to the share market — we can potentially see that in the property market as well. And that’s something we certainly want to keep our eye on when it comes to the Australian property market, which I’ll talk to later in this presentation.
And they shared with us their QE easing plans in terms of bond buying. And that’s also to help with giving some assurity in the market in terms of what their plans are about future bond buying. And that should also help the Australian dollar as they continue to do what they need to do in regards to stimulating and keeping money in the system.
Now, I mentioned earlier about this… has Australia pulled a rabbit out of the hat?
Well, right now it does appear like we’ve definitely done some very, very heavy lifting in regards to being able to suppress or eliminate the virus, greatly assisted by the fact that we are an island, just for the record. But it has meant that our overall we’re in a position where we’ve been able to control that, which has meant that our economy has been able to open up. And from that opening, we’ve seen, obviously our economy perform very, very well. So whilst the RBA has kept the cash rate on hold at this meeting, and also right throughout last year, the Governor did mention in his messaging and signaling to the market that, “The RBA,” and I’m quoting them, “remained prepared to do what is necessary.”
The next question that I’m looking for in the tone and language that I’m looking for, has started to appear a little bit in terms of commentary that’s been set around generally being doing better than expected.
So my question is… Just how long the cash rate will stay down low?
Last year my commentary was basically verbatim in regards to what the RBA was saying. I was just passing on their wording around for at least the next three years. I’m not quite so sure in terms of if the economy’s moving. Now, it’s early days, it’s a very early call. I see no real impetus in moving the cash rate anytime soon. But we do want to see what the language is coming out of Governor Lowe and the board there in terms of what their intentions are.
Now this week, tomorrow, we get to see Governor Lowe present at the National Press Club. So we’ll get some indication there. But we’re also going to see later this week, the Monetary Policy. So we’re basically seeing a release of the Statement of Monetary Policy, where we start to see some reforecasting that might’ve happened. So I expect to see some reforecasting on the upside in terms of what it looks like. So overall the economy is in good shape. And it’s a pretty exciting time if you’re a data nut in regards to what sort of data is showing.
So taking a look at some of the important data… Let’s start with the unemployment story. Yesterday we saw ANZ job ads data show further positive signs on the jobs front. So the advertisement, so jobs advertised were up 2.3%. That’s on the back of the strong numbers in December. Now, this is important that now puts the job ads percentage up 5.3% higher than pre-pandemic levels. And that’s a really good sign that the economy and jobs are heading in the right direction.
So let’s take a look at what the unemployment data showed us back in December. We did see 50,000 new jobs created. This follows the creation of 180,000 jobs in October and 90,000 jobs in November. The participation rate, which was one of the other two key things we look at as well as hours worked. So we did see the participation rate move up from 66.1 in November to 66.2 in December. And that is obviously indicating that more people are starting to look for work. And we saw the unemployment rate fall from 6.8% in November to 6.6% in December. If we’re looking at it in context from pre and post COVID periods, we are still 0.7 below the pre-COVID levels of February. And that still means that around 93,000 jobs still need to be created.
But effectively about 90% of the jobs that were outstanding or lost, are now back. So that’s terrific.
Now, I remember the other key measure is about the hours worked. So we only saw a 0.1 of 1% increase in December of hours worked. So we need that metric to move higher. So the RBA has indicated this is a key metric for them because once you get jobs and then you get hours worked up, that puts pressure in response to wages growth. And that’s ultimately what they’re looking for to also put pressure on inflation. So that is an important story there that’s developing.
In terms of around the grounds, Victoria and Queensland led the charge in jobs growth, and then New South Wales, and also South Australia did report job losses in December. Probably for New South Wales, that was on the back of that little cluster that developed there. And we did see New South Wales having a difficult Christmas, New Year period. Queensland still has the highest unemployment rate amongst all States with 7.5%. And Western Australia is currently sitting at the lowest unemployment rate at 6.2. Again, product over there of very, very low COVID cases, even though they currently have an outbreak there at the moment.
In terms of inflation, we did see the headline CPI rise 0.9 in the December quarter. It was impacted by a range of state and federal government policies associated with childcare, as well as housing and electricity. So there was some big movements there. Remember this is going to be choppy on a quarter by quarter basis because of what’s going on with regards to the stimulus and spending and those things. So the annualised headline rate of inflation picked up 0.7 in the September quarter to 0.9 in the December quarter. But inflation does remained subdued. Then we talk about the trimmed mean inflation level for the December quarter rose a modest 0.4. So that’s the measure that the RBA will look at and annually the rate is only sitting at 1.2. So clearly underlying inflation is below the Reserve Bank’s 2% to 3% range for that area.
Now the fact is it could put pressure on prices will be stronger in economic recovery, currently than expected. This will flow into the opening of international borders and rapid roll out of vaccines against the COVID-19. So this is effectively what we’re going to be working towards. Now that will obviously put pressure on the Australian dollar going higher. So this is the upward pressure that we’re talking about. Look, good position to be in, right? Ultimately we want the economy moving, and if the economy’s moving, then inflation will start to show its face.
In terms of… if we do see more difficult conditions with further outbreaks and closures and border closures and those types of things, then the reality is we will see subdued inflation continue, and also the economic activity being sluggish. But that’s not necessarily the view at the moment.
In terms of consumer sentiment… Well, it’s a good news story through the Westpac and Melbourne Institute Index of Consumer Sentiment. In terms of, we got to a decade, high reading in December of 112. That has now since pulled back to 107. Now the index remains 14.6% high on the year early indicating high levels of optimism amongst consumers. And again, why did it come off? Well it’s probably got a bit to do with the state border closures that we saw in the Christmas and New Year period. But still a very, very healthy reading when it comes to consumer confidence.
In terms of retail spending. The preliminary retail sales for the December and Christmas spending period, pulled back from the record high and fell 4.2% in December. Now this follows a rise of 7.1% in November, which is an astonishing number when you’re talking about a mature data set. The decline was deeper than anticipated however. And consensus expected that to fall by around 1.5%. Now we still need to get the final numbers through. That’s only the preliminary number. But again, putting it into context where we were in terms of retail spending in 2019, compared to retail spending in 2020. We’re 9.4% stronger in spending. And that’s a very strong pace compared to the year before.
Business confidence. This is always a key metric for me. Again, we don’t want… This is a consumer led economic recovery. We know that, but we need businesses to be behind that and business spending to also support the growth and get those jobs moving.
So the December NAB Business Survey provided further confirmation of a rapid rebound in activity.
Basically the rolling back of the COVID-19 restrictions and the reopening of the economy. So business conditions jumped five points in November and then surged a further seven points in December to be plus 14. That’s terrific.
In terms of business confidence declined by 0.9, but is still a robust plus 0.4. And that obviously was to do with what happened around Victoria coming out of the second lighter locked down, but also the impact that we saw on some of those closures when we see those small outbreaks starting to occur.
In terms of the PMI indexes. These are important measures, manufacturing services and the composite index. So we’ve seen the manufacturing PMI index rise to 57.2 from 55.7. In January, but the services and composite index resided by 1.2% and 0.6% respectively to 55.8 and 56.0. All three indexes remain above the critical 50%. So again, if you’re new to this presentation, 50% means expansion and below 50% means contraction. So it’s also important to understand that they are positive numbers.
Credit growth data’s coming through. We’ve got some early indication on credit growth. So credit for the private sector grew by 0.3 in December. It’s not a big number, lifting the annual right to 1.9. Now again, whilst credit growth remained soft, it was the strongest monthly expansion since March of last year. And the big credit growth story is really in housing, which I’ll get to in a minute. But the business credit advanced by 0.2 % after seven consecutive months of decline. So early green shoots there in terms of business credit. We want to see more of that business lending coming through. All roads lead to the story around housing credit growth. So housing demand and housing lending are being underpinned by very, very low interest rates. And that is definitely saying housing credit lift by 0.4 in December. And this is up on a staggering 47% since May, which was the trough associated with the lockdown. So we are starting to see those numbers start to materialise, and I can tell you in our business, we have never been busier when it comes to our mortgage broking services and the inquiry that we’re getting when it’s coming to property at the moment.
But that is a good segue into the property data…
Where I got to spend a minute in terms of going through this data. And so we will get as part of this video presentation, you’ll see that the grass coming up to support it. But those of you who are listening via audio channels, stay with me on this. We’re going through a lot of data numbers. For the start of the new year, I want to paint a bit of a picture in regards to where the property market sits. Because we’re going to go around the grounds, are you going to basically get an idea in terms of your local area, state or territory and capital city?
So we did see CoreLogic’s results come out yesterday. And this is what we were told. Sydney up 0.4 for the month. Melbourne up 0.4 for the month. Brisbane up 0.9%. Adelaide 0.9. Perth, 1.6. Hobart 1.6. Darwin 2.3 off their lows. Canberra 1.2. So combined capitals up 0.7. Combined regional, really strong result there up also 1.6. I won’t do the quarterly one. I’ll go straight to the annual data.
So Sydney annual capital growth rate is 2% for a total return. When you add in the yields being generated, there are 4.6%. Melbourne -2.1 annualised. The total return’s still positive at 1.1%. Brisbane 4% capital growth. Add the yield on that 8.3% total return. Adelaide, total return of 10.8 with a 6.5% capital growth return. Perth, capital growth return of 3.4. Annualised return with rent 8%. Hobart, 6.8 on the yield. And then we’re talking about 12.1 total return. Darwin, annual 11.4, really coming off its bottoms now. Total return, 17.3. Canberra, 8.5 for a total return of 13.5. So you can start to see what’s happening in terms of total returns.
Now, the other component that we’re also interested in, because we want to look at demand and supply here, because it’s always a story of demand and supply. I want to talk to you about the supply side. So we did see in terms of, I’m just going to talk about annual changes, because it’s really important to understand where we sit. So annual 12 month changes on supply side of listings. Sydney was down 4% for a total number of listings at 12,984. Now that represents 0.74 of the total stock of the Sydney market, okay? Melbourne, 12 month change was 20.8% increase in stock to give a stock rating of 19,367. So that’s listings. Now again, context. Total market, that’s 1.08% of the marketplace that’s currently for sale. Brisbane, current stock levels decreased by 14.9% to be 13,292 listings. That represents 1.46% of the total stock in the Brisbane catchment. Then we go to Adelaide, -9.7%. So we are seeing total listings in Adelaide of 4,680 listings as we go to where now we look at Adelaide, that represents 0.89 of 1%. So 0.89 of 1%. So tight stock there in Adelaide. Perth, we saw an increase of 2.2% over the year to listings of 12,619. In terms of context of overall market, Perth sits at 1.52 of total stock. So the highest rating of all of the capital cities. Then we moved down into Hobart. Stock on market now are very small numbers. This gives you the context of the size of the market.
So supply was down or listings was down 25.3%. Total listings at the moment, 646. Now, in terms of the overall market still represents 0.75% of the total market. Then we go into Darwin. Saw an 11.3% decline in listings to a total listings of 619 in the city. And that is 1.36 of the marketplace. So still, again, really small numbers. But as a percentage of the marketplace, 1.36. So it’s just below Perth and Brisbane as a percentage. And Canberra. We’ve seen Canberra in Queanbeyan. So stock levels decreasing by 16.3% throughout the year. So there’s 1,171 properties available as we go to where. And that in terms of as a percentage of market represents 0.64% of the overall stock of market in terms of dwellings in those areas.
So you can see that in terms of percentage numbers, even though Melbourne had an increase of 20% of stock or stock for sale, it’s still only represented 1%. That’s why you can understand why Melbourne is actually growing in capital growth when a lot of people did expect it to actually be continuing to fall. So we have tight stock and that is our problem.
Let’s now talk about the changes in yield. So obviously with the COVID event and less migration and student accommodation, we have seen definitely some interesting data showing up around rental yields. And a lot of people probably expected rental yields to fall. And that was the commentary that we were hearing in terms of an oversupply. But it is also a classic case of the tale of two markets. One is houses and the other one’s unit. So let’s take a little bit of a dive into that.
So coming off historically low, poor performing, reducing rents that we saw through 16 and 17, Darwin is up 12.4% in terms of change of rents for houses. Perth is up 11.7% when it comes. And again, both of those markets had deteriorating rental yields. Whereas the rest of Australia back for three or four years, haven’t had declines in rent. We are definitely seeing… We’ve only seen Sydney have a bit of a decline, but the other markets have actually been growing year on year. So rounding out in terms of rental increased percentages wise. Canberra 4.1%. Adelaide 4.1%. Brisbane 3.4%. Sydney 2.1%. Melbourne 0.8 of 1% and Hobart 0.1 of 1%. So all in positive territory, even though throughout a little bit of a period there, Hobart went into a negative.
Now let’s talk about the unit market, because this is a completely different story. Again, still Darwin positive, 10% growth in the 12 months. Perth 8.7%. Canberra 1.9%. Adelaide, 1.8%, and then it goes all into negative for the unit market. So Brisbane -0.3 of 1%. Hobart -0.7 of 1%. Sydney -5.6%, and Melbourne -7.8%. So you can start to see what’s happening there in regards to those markets. So two tier market, unit market and house market are pretty solid in the housing market. But those clusters of units in the concentrated areas have seen a deterioration in global yields across those particular capital cities.
So, in wrapping up the property story, it’s one of tight supply. We’re also seeing rental yields. So rents, if we see more people trying to enter the property market and more construction going on, the rental pools could be exposed until that immigration starts to arrive as soon as we start to open up our borders. So that will be one to watch. But in terms of the overall property market itself, it really is a story of risk in medium and high density is probably continuing, but bottoming out now.
But it’s also very much a story of high demand, low supply, low interest rates. So we expect to see the property market going higher.
And we also expect to see the media reporting a word that was in our vocabulary in 2017, which was FOMO — Fear Of Missing Out. We are definitely going to see pent up demand that we’re already seeing. So property prices going and a fair bit of competition. And that’s right across markets because of low interest rates. So this is not necessarily going to be something that’s attributed to just the high end of the market. But we’re also going to see affordable areas also go higher where people would be making judgment calls, Is it easier to buy and pay off a mortgage than more expensive to rent? So we’ll see a bit of that pressure coming into those particular markets.
So it’s going to be a very, very positive property market. So long as stock comes on. If that stock doesn’t come on, we are going to see some really, really strong price growth. And it wouldn’t surprise you if you didn’t see double digit growth across most locations across Australia.
In terms of the other summary economically, we’re in pretty good shape. We’ve come through this pretty well. Once again, we’re punching above our weight globally when it comes to managing our economy. Of course, we’ve got the luxury of having an island nation with closed borders. So that’s also important. And then the other one is just to be understanding about the share market. Is it a bit frothy? Is everyone getting in? Just be careful what you’re doing in terms of the share market. Similar to the property market. We’ll continue to keep our commentary running in terms of when we feel like fair market value has been exceeded. But if we are talking about low interest rates for a longer period of time, we do expect the repricing of asset values, especially residential property over the next couple of years. And that will only materialize as we go through.
So there it is. That’s the wrap-up for the first month, February of 2021.
And just remember — knowledge is empowering, but only if you act on it.