Hi, Ben Kingsley here with the economic and RBA update for March, 2021. Lots going on. We are definitely seeing momentum building in the Australian and global economies. And that has seen a few bears poking their heads up in regards to the inflation and the risk of a spike in inflation around that. But the central bankers around the world aren’t going to have a bar of it. They’re certainly talking down those inflationary fears. The other big news is probably the jobs story. So we’ll get into it.
Let’s start firstly, by taking a look at the pandemic story…
We’ve definitely seen stronger precautionary measures around lockdowns, have seen new infection rates decline in the US, the UK, Europe, and Asia. And that’s also combined with the rolling updates in regards to the roll out of the vaccine, where injections are resulting in a worldwide reduction in new infection numbers. So just to give you an idea – we’re seeing infection numbers around only 150,000 daily, whereas back in November, we were seeing as many as 500,000 infection rates per day. Also, following on from that, the daily death rates, we did see them spiking at around 17,500 deaths per day. And they’re now, down to around 8,000 deaths per day. So still a horrible story in terms of the overall pandemic, but good news story coming out. Some other interesting data as at the 1st of March, it was reported that around 241 million COVID-19 vaccines dosage has been administered across 103 countries, at a rate of 6,703,000 per day. So that is also growing.
The other big news in terms of the pandemic front was around the World Health Organization had recognized AstraZeneca would be available for anyone over the age of 18 years of age. And that obviously paves the way for the immunization to be also pushed out through the developing world. So that is also encouraging news when it comes to the pandemic. Now, obviously that has meant that the global story is around a quicker global recovery, and we are starting to see some of that momentum.
When we look at the equity markets – before we take a deeper dive in the US, and China, and Europe – we did see a mixed bag for February.
So we did see the US S&P markets move higher in the earlier part of a month, only to pretty much give up most of their gains, and that was also consistent with the NASDAQ as well. So there was a period of stronger growth in the earlier parts of the month, but then obviously deteriorating, as we saw more selling pressure come on to those markets, and also tech stocks at the end of the month. In terms of the ASX market, we did see, again, it moved higher in the early part of the month, but pretty much giving away most of its gains, following the US lead.
In terms of commodities, we are definitely seeing some movement here in the big commodity. Certainly oil continues to move higher as the global economy recovers. During February, we did see the oil price move to $63.35 a barrel. And that obviously does reflect the optimism in a swiftly, sort of depleting global oil inventory stocks. We did see the US report that their inventory stocks has been the lowest level that they’ve had in a year. In terms of iron ore prices, we did see the iron ore price rise to the highest level in nearly 10 years, supporting a stronger Australian dollar, which also broke through the $0.80 mark. So that was something before retracting, now. And there is pressure on the Aussie dollar as we go to where, in terms of reporting this, we’re at sort of around that $0.76 $0.77 mark. In terms of where the iron ore is sitting right now, around 170 US dollars a ton. So interestingly, there.
And again, on the back of improving global economic story, we did say the gold price. It posted its worst monthly performance since late 2016, it fell 6.6% in February and is -8.7% since the end of 2020. As I said, the investors are moving away from this safe haven, sort of low-risk play, and looking to park their money somewhere else, as it’s an improving economic outside of the post-pandemic future.
Looking at United States, two big talking points here…
… One will be around the $1.9 trillion stimulus package. It passed the house of reps. It now has to pass the Senate. And obviously, this is the first major policy by the Biden administration, so it’s going to be closely watched. In terms of the Senate, it is split 50/50, so it’s going to be interesting to see how this plays out. It is a popular package, generally speaking out there, is what’s reported, so hopefully it’ll be introduced, and we’ll see some of that stimulus flowing through into the US economy.
The other big talking point, which I mentioned in the intro, was around what was happening in the bond market, and bond prices spiking on the fears of inflationary pressures. But we did see the Fed chair Powell’s testimony at the Senate banking committee, late last month. And where he sent a clear message, that… the Fed gave absolutely no indication they are thinking of changing its policy stance on lower interest rates for longer. He noted that the economy remains a long way from the Fed’s employment and inflation goals. He played down concerns, also, over the inflationary outbreak noting inflationary pressures due to further fiscal stimulus, or pent up demand, is likely to be transitionary only. If I can get that word out.
On the jobs front in the US – initial jobs claimed, the weekly jobs claimed, fell more than 100,000 to 730,000 last week. Consensus was for a much less impressive decline at 825,000. And on the back of that, the continuing claims also did better than expected, in terms of ongoing claims, sitting at full 4.42 million. So those numbers are coming down.
When we look at the PMI indexes, the US remained around their higher levels in the past 10 years, in February. So in terms of their PMI, those indexes, the manufacturing PMI index edged down to 58.8% down from 59.2%, in terms of falling short of expectations. But still remaining quite strong. The services PMI was stronger than expected, increasing from 58.3% to 58.9%, a solid reading, reflecting the prospects of additional fiscal stimulus, and the partial reopening of the economy, as the vaccine rollout gains pace.
On the property front in the US in January, existing home sales remind around their highest level since 2006. There were 6.7 million sales, beating expectations, up from their December levels. The red hot housing market has been driven by record low interest rates and a desire to up-size, following a shift to working from home. The US building permits also surged 10.4% in January, against expectations of a 1.4% decline. And they are reaching their highest level since 2006. And it’s another sign of a strengthening market.
Finally in the US, let’s look at the retail spending – the biggest consumers in the world. Let’s see what they’re doing in terms of the US retail spending rose a very solid 5.3% in January. Suggesting that consumers had spent their most recent government payments, and were more confident about the outlook for 2021.
Turning our attention to the second biggest economy in the world, China…
Inflation in China remained subdued. Consumer prices’ highest index fell 0.3% in the 12 months to January. The decline partly reflects a fall in pork prices, which soared in January 2020, following an outbreak of the African swine fever. Producer prices rose just 0.3% over the same period. And this is noted on steel, copper, coal prices have risen in China throughout the year. Maybe they need to buy more of our coal here.
Looking at the Chinese PMI indexes, the manufacturing PMI eased 0.7% to 50.6%, which is the lowest level since May. Non-manufacturing PMI fell one point to 51.4%. And the composite PMI index declined 1.2 points to 51.6%. Now, although there were declines across the board, we’ve got to remember two important points here. Firstly, a reading about 50% still indicates expansion in those indexes, so a growing economy. And the other thing we also need to be mindful of, is China didn’t have the same type of disruptive impact in the first part of 2020. They got on top of their COVID situation in late ’19, which meant that they were able to come out earlier. So that growth story is a lot different to, say, other economies around the world, where we did see a bounce after we got on top of our COVID outbreaks.
Looking at Europe — the Euro area economy shrank by 0.7% in the December quarter on the back of the measures to curb the spread of the COVID-19, so more lockdowns.
This fallout a 12.4% bounce in the previous quarter. The Eurozone economy contracted 5.1% in the year to December. Further news there – the European commission, the EC, released its winter economic forecast, whereas forecasting GDP in the Eurozone region is forecast to rise 3.8% in 2021, down from the previously forecast 4.2%. GDP growth of 3.8% is also expected in 2022. Up from the prior forecast of 3%. Pre-pandemic output is expected to be reached by some European Union States in late 2021. So they’re pretty much back to normal by the end of the year, but others might not reach this point sometime into 2022. Regional inflation is also forecast to remain subdued, at around 1.4% in 2021 and 2022. Hence, the reason why the fed reserves around the world are saying that they don’t have any issue with inflation at the moment.
Finishing, rounding out the United Kingdom, the UK economy narrowly avoided a double dip recession. Last year. The latest figures showed that the UK economy grew 1% in the fourth quarter, beating consensus expectations of a more modest gain. However, and this is an interesting one, GDP shrunk 9.9% in 2020, which is the biggest annual decline since the great frost of 1709. So that just gives you some idea, almost 300 years-odd ago.
And in terms of the quantitative easing bond buying program, they’ve made indications that they’ll continue to keep buying bonds up until at least September and beyond, if they need to, as part of ensuring that they keep the markets under control. And also potentially help with keeping the Australian Dollar lower.
The other important news that we saw come out in February, was news of Dr. Lowe’s appearance at the National Press Club. We got a couple of really important takeaways from his presentation at the press club. It basically reiterated that will not increase the cash rate until inflation actually is sustainable at that 2% to 3% per annum. That target range. And he does not expect that to happen until 2024 at the earliest. So that’s telling us that we have low interest rates for longer.
Other notes been picked up in regards to the home lending and the rising house prices underway, the RBA seems to believe that that is a positive development. Higher prices strengthen overall household balance sheets and less confidence, with the whole wealth effect, and we’ve talked about this before, having a positive impact on consumer spending.
And then the economy, overall, he did say will still potentially be bumpy and uneven, as we continue down the path to 2021. He noted sections of the economy will remain difficult, and that present hopes of an extension of the job keeper in some targeted capacity. Well, let’s see what the government does in that respect, in their upcoming budget. We certainly know that those tourism areas and hospitality continue to be infected in some capacity.
In other important RBA news – last month, they published The Reserve Bank’s Quarterly Statement of Monetary Policy. As expected, the RBA made changes to its economic forecast, so let’s have a look at those now.
Firstly, it upgraded GDP for 2020, from the previously expected fall of -4.5% to a fall of only 2%. Now that correlated to obviously being better than expected, which means that the GDP growth numbers for 2021 aren’t coming off such a lot of base, they’re coming off a higher base. So that meant that the forecast for GDP growth in 2021 is now 3.5% instead of the original 4.5%. So we’re not saying a bigger bounce, but that’s because we didn’t fall as far. That also left GDP growth in 2022 unchanged at 3.5%.
The RBA also revised lower its unemployment forecast. It now expects unemployment rate at the end of 2021 at 6%. previously, that was going to be 6.5%, so less unemployment. And at the end, at 5.5% previously, 6% for the end of 2022. So that’s positive news. Underlying inflation, which we talked about a moment ago, as measured by the trimmed mean, is expected to remain very soft. But the forecasts were tweaked slightly higher in 2020 and 2021, with the forecast being 1.2% and 1.25%, respectively for those periods, and unchanged in 2022 for 1.5%. Unemployment story, well hot off the press yesterday, where the ANZ Australian job ads. They rose 7.2% month on month in February, following an upwardly revised 2.6% month on month growth in January. Job ads are now up, and I’m pausing for effect here, 13.4% year on year, hitting the highest level since October 2018. So we really are bouncing out of this recovery, and getting some momentum in there.
The data that was reported in terms of the lag data, the labor market continues to recover in January, with the creation of a further 29,100 jobs. It’s a fourth month in a row. The job numbers have been very encouraging and suggest the amount of momentum seen at the end of 2020 is definitely carrying through to 2021. The unemployment rate fell from 6.6% in December down to 6.4% in January. The decline in the unemployment rate was assisted by a small decline in participation rate, from 66.2% to 66.1%.
And again, pausing for effect here, interestingly and very importantly, the level of unemployment in Australia is just below 0.05% below the pre-COVID levels in February.
So that’s only representing job losses of around 64,000 jobs. And now the number of people in part-time jobs has returned to pre-COVID levels. So it really is those full-time jobs. But only 64,000 remaining jobs, technically, to recover. Yet, we have so many new areas of the economy that still needs to be reopened, in terms of tourism, hospitality, events. And also, doing more in that tertiary education and foreign students area as well.
On the wages growth front, it’s important; this is an important area. Obviously, if we start to get unemployment down, wages growth is going to be an important story, here. So what happened with wages growth? Well, we did see wages growth increased by 0.6% from the September quarter to the December quarter. A notable pickup from recent quarterly growth figures. This largely reflects the unwinding of wage freezes and wage cuts from earlier in the year. And we can see here, that the four year wages growth was only 1.4%. So still, some work to be done here. In quarterly terms, private sector wage growth rose 0.7%, while public sector wage growth grew 0.3%. In the year-ending terms, public sector wage growth continue to increase faster than private sector, with growth of 1.6% in the public sector and 1.4% in the private sector, respectively.
Wages growth – as we talked about earlier and plenty of times when I’ve done these presentations – is critical, in terms of the stated RBA goals of wages growth, around that sort of 3.5% to 4% in year ending terms, in order to generate the inflationary rate they need to hit that target of 2.3%. Now, again, there’s no signs of this happening anytime soon. And that’s why they’re stating that they see interest rates staying low into 2024. We’ll see what happens there, considering how the economy is rebounding.
Turning our attention to the business outlook. And pleasingly, there are some really positive indicators everywhere here, in terms of how businesses are starting to get out and get on with things post-pandemic. In terms of business confidence in conditions, business conditions decline nine points in January to seven, off the back of a strong print in December. So we had a really strong bounce. These conditions are now around their long-run average levels. So that’s good to see business conditions are where they are, in terms of long-term trends.
The unemployment index is seven points in January to three, but importantly, remained in positive territory. This means more businesses are increasing hiring than reducing their headcount. Business confidence rose five points in January, to be a total of 10. This follows a dip in business confidence in December, as COVID-19 concerns in New South Wales weighed on sentiment during that time. Looking forward, indicators suggests further improvement, with capacity utilisation and forward orders both trending higher. Utilisation rose 0.2% percentage points to 81, and is now around the long-term average and pre COVID levels. The rebounding capacity utilisation will help drive businesses to increase hiring, and subsequently, support the recovery in the labor market. Importantly, both conditions and confidence are stronger than their previous periods, just before the pandemic and also around their longterm averages. So we’re starting to see confidence in conditions where we were before February and March of last year, when the pandemic started to bite on the Australian economy.
In terms of business investment – a leading indicator of future jobs – in terms of what’s happening here, some more good numbers…
So business spending picked up in the December quarter, as social distancing restrictions were eased, and the economy outlook improved. Private capital expenditure, or CapEx, as we call it, increased by 3%, but remained 7.5% below its same levels for the same quarter of 2019. So still more work to be done there. The increasing investment has been directed to equipment and machinery, which has up 5.7% in the quarter. This points to the government tax incentives, introduced in the October federal budget, are feeding through to business investment. And we agree with that.
On an industry basis, the quarterly increase was driven entirely by a 4.9% rise in non-mining investment. And that’s where we need to see it. We need to see the investment in the real economy, not necessarily just in the mining economy. Now, this came off a lower base, and remains muted, down 13.3% year on year. So we’d like to see more of that happen, but ultimately, it’s pointing in the right direction. In terms of mining investment, declined by 1.4% in the quarter. However, the annual terms, mining investment remains resilient, up 2.1%.
In terms most of the surveys, the fifth estimate for business investment plans for 2020 and 2021 was 4.8% higher than the fourth estimate, which was 22.8%. Now that is higher than the low point of estimates, of two estimates ago. So the estimate number two. So what happens here is, they take estimates on these bases, and we start to see these changes is happening. So it’s effectively a survey, and we’ve definitely seen that there’s been a big strong rebound in regards to intentions of business investment as we come out of this. So that’s a good story, in terms of where we were in the middle of the pandemic, to where we are now, in that fifth estimate. So we’ll continue to watch these surveys come through, to see what’s happening in regards to continued pickup. So on the whole, business appears more optimistic, and that’s showing up in the data. We’re even potentially going to see more improvements in these estimates and these surveys, as we move throughout 2021.
Focusing our attention now on consumer confidence and sentiment, the Westpac Melbourne Institute index of consumer sentiment rose 1.9% in February to 109.1.
The index continues to hover around a 10 year high from December, suggesting consumers remain optimistic about the economy. So a good news story here, we’ve got the business investor and the business community optimistic, and we’ve also got the consumer optimistic here as well. Nationally, four out of the five index sub-components rose. The economic conditions in the next 12 months, sub-index out-performed, lifting by 6.9 points.
In terms of the other one which we watch closely here, with our property focus, is a time to buy a dwelling index declined 3.1% to 120.7 in February. And is now 8.6 points below its November peak, which means trends to reflect shifts in housing affordability. So the decline over the last few months suggests the recent increase in house prices, and I’m going to share with you those at the end of this presentation, in regards to the latest February numbers, are really starting to potentially see, well maybe, with price movements, we’re going to see that time to buy a dwelling, start to decline, in terms of purchasing sentiment. Which makes sense.
Once again, positive consumer sentiment and positive business sector, not withstanding the challenges, as I’ve highlighted in the tourism events and hospitality sectors, does suggest the overall recovery is gaining further traction.
In terms of retail spending, just wanted to take a point here to just reflect on what a year 2020 was, now that we’ve got all the data. And remembering the changes in behavior that that happened during that time. So, more home-bound, more buying goods in, more online shopping.
Well that definitely showed up in the numbers, in terms of what we’re seeing now. As the economies are opening, we’re starting to see more foot traffic into high traffic shopping centers, and those types of things. So maybe we will return back to a more normal living style, as opposed to just staying at home and getting everything ordered in. But let’s have a look at the retail spending story. So retail sales, in value, grew by 9.6% year on year. Well above the long-term average of 3.7%, and well above the annual rate of 6.2%. And that was recorded in December of 2019. So you can start to see December ’20 2.6, I should say. Then we had the long-term average is 3.7%, and we did a 9.6% year on year.
Looking at how we finished off the year in December, retail sales fell 4.1%, but it’s true to say that, we were out of puff. You know, we were hitting with gusto, some of those online sales in November: Black Friday, Cyber Monday sales. So it just basically petered out for December and Christmas selling. Online spending fell 2.3% in December. But here we go, on a year ago, it’s 53.8% high. And during the height of the pandemic, online spending grew by nearly 86% per annum, which is an incredible movement away from traditional in-store shopping to online spending. In terms of retail sales volumes, or what we call real retail sales, jumped 2.5% in December quarter and up 6.4% on a year ago. The fastest annual rate in 16 years. So even though we were spending online, we were also spending big, in terms of in-store shopping, as well as in that last quarter. Effectively, on the back of Victorians coming out of their 100+ day lockdown, and wanting to spend some money.
Credit growth – we’ve seen the latest credit growth figures come out yesterday. New loan commitments for housing rose 10.5% to 28.8 billion in January. The value of new home commitments for owner-occupied housing was 52.3% higher than in January 2020.
This is an owner-occupier led property boom that we’re experiencing at the moment.
First home buyers, as well, if we want to pick up a segment of the market leading the way. So just to give you an idea, in January 2021, the number of owner-occupiers first home buyer loan commitments rose 6.9%, reaching the highest levels since May of 2009. And compared with January 2020, that was 70.8% high in owner-occupied first home owner loan commitments. The value of the new loan commitments for existing dwellings was 38.7% higher. And the value for construction loan commitments was 141% higher. Since the home builder grant was introduced in June, 2020, we’ve never seen these types of record rises in the value of home construction loans. The value of home construction loans for investment housing rose 9.4%. And it’s the largest rise since September of 2016, as it reached 6.6 billion. But the gain here is owner-occupiers. And certainly, first years are getting in on the action. So investment lending has rebounded 62.4% since reaching a 20-year low in May of 2020.
Now, the value of new other loan commitments for fixed personal term finances. So this is personal loans, only grew by 0.2%. So you can see here, that the biggest game in town right now is lending for property.
Let’s turn our attention to the construction. So obviously, if that’s the commitments, it’s got to be starting to show up in terms of building approvals. And here are the numbers. Building approvals rose 10.9% in December. This comes off a top surge of activity from the previous three months. Approvals are booming, up a whopping 22.8% on a year earlier. Approvals for private houses rose 15.8% in December, to be up 55.6% over the year. Monthly private sector houses approvals that are an all time high at 13,600. This series began in 1983. So it’s the highest reading ever since 1983 July.
Also, which was a little surprising to me, but good news overall for the economy, was the demand for apartments is not dead. Approvals in multi-density, or apartment dwellings rose 2.3% in December to 5,600, which is up from a low of 3,900 in June of 2020. What’s interesting about this mini boom, is these numbers are being recorded whilst we haven’t got immigration. And we are seeing no population growth at the moment, or very, very little population growth. So with the immigrants and the students who are going to be coming back into the market, it bows for a second wave of demand that’s going to come through into the property space.
Speaking of properties and the property prices. Here we go…
And that is also factoring in that Sydney and Melbourne are yet to reach their same price records from the last cycle. So indicating that this really is a national property cycle. We’re not seeing cycles within cycles at the moment. Both the city markets are moving and also the regional markets are moving in coordination. So that is, obviously, showing up in the numbers.
So let’s have a look at the data…
- Sydney’s property prices grew by 2.5% for the month.
- Melbourne up 2.1%
- Brisbane up 1.5%
- Adelaide up 0.8%,
- Perth up 1.5%
- Hobart up 2.5%
- Darwin up 0.7%
- Canberra up 1.9%.
For a combined capital cities of a 2% rise for the month. In terms of combined regional was up 2.1%, to give us our overall national rise of 2.1%.
Now looking into the data, it’s very clear that we, obviously, have seen demand spiking, but also the lack of supply. And we’ve talked about this before. So what we did see in the most recent measure of total listing numbers from CoreLogic, our good friends at CoreLogic. These numbers show up, in terms of what’s happening for property prices. So let’s look at the data, the number of properties advertised for sale nationally, remain 26.2% below 2020 levels, over the last 28 days until February 21. So the 21st of February, putting that into context, 26% lower stock. Now compare that to the sales activity that had been going on. And this is where you are starting to see demand and supply putting pressure on property prices, is we did see the overall sales up until that point is 35.3% higher than 2020 levels. And if we look at the regional sugar hit that’s happening at the moment, regional sales are up 40.6% compared to last year, and city sales are up 32%, giving us that overall 35.3% combined result. Now what we do know, in terms of this type of story, is it’s logical that there’s going to be price pressure, given the imbalance in terms of demand and supply.
What we also know, from previous cycles is, traditionally, we do see the higher quarter — so the top 25% of property prices by area – moving the quickest. And that is the case here.
So the higher value properties are increasing quicker than the mid range and the lower end of the market. But we also know, historically, that they are the property prices that are the most volatile, so that attained to fluctuate and the most as well. So we are saying that price movement in that area, but that’ll also then cause the ripple effect that we see in terms of middle-range markets. And then obviously outer suburb markets as well.
Turning our attentions to the unit market – where we have definitely seen the unit market underperform the detached housing. So the detached housing is outperforming the unit market almost three to one at the moment. But I do suspect that the unit market will have some time in the sun, as that that price range will become less affordable for people, and they still want to live in those particular locations. Add that to immigration and students returning into those markets and potentially the investor, seeing an opportunity there, you might see some more price growth in that unit market, as a lagging phase of this particular cycle.
So in summary, let’s talk more broadly about the Australian economy…
The vaccine rollout. We’re seeing obviously the Pfizer, now the AstraZeneca drugs arrived earlier this week. So we’re now starting to see that program start to roll out. We’re definitely starting to see business confidence improving, the consumers hanging around, property prices are going up, giving people some confidence also to spend. So that bodes well for a further momentum in the economy. On the property side, these are definitely competitive times. If you were brave enough to act in the middle of the pandemic last year, and secure your property, congratulations to you. You will be enjoying your spoils for the efforts of your labor.
In terms of those looking to do something, it’s early days in this particular cycle…
Now these cycles usually can go on for several years. In this particular case, it’s obviously impossible to tell, but if you think about it, you’re probably looking at around a 12 to an 18-month cycle. If that is the case, it’s still time to organise yourself. And if you’re thinking that property is going to be something of focus to you for this year, then you need to start lining your ducks up. You need to make sure that you’re getting that deposit organised, and you’re getting that finance pre-approved, and you’re getting to move into that space.
So that’s really what’s happening. There is real momentum. Obviously we’re going to see media reports of a booming market, because all they like is boom or bust. So ultimately, there will be continued momentum in the property market. FOMO will be a thing again, fear of missing out, will come back in as well. So just be mindful of that. So, again, I encourage you to, to do your research. If you haven’t listened to our podcast, The Property Couch, Bryce and I did Three Episodes Around How To Compete And Win In A Hot Buying Market. There’s some tips and tricks in there, in terms of how to set yourself up, and what you need to do in terms of giving your offers and negotiation and all those types things. So check that out on the podcast herev, if you haven’t already done so. So I look forward to catching up with you and giving you an update next this month.
But until then, just remember, knowledge is empowering, but only if you act on it.