The NSW new COVID case count is stabilising while other states have come out of snap lockdowns. The economic impacts of these lockdowns should not derail the strong economic narrative, but exposed industries will be suffering in the absence of JobKeeper.
National Cabinet announces a four stage plan to exit COVID – finally, there is light at the end of the coronavirus tunnel!
There is growing evidence from around the world that the Delta variant is highly contagious but less pathogenic (i.e. dangerous). This is good news when combined with evidence of the high level of effectiveness of the vaccines against the Delta variant, indicating the natural pathway to living with COVID.
Australian job vacancies surge to a new record high from the old record high. This highlights a worsening supply-demand balance in the Australian labour market and a need to open international borders to alleviate the potential strains on business.
The value of new mortgages written in a month jumped to $32.6bn in May, a new record that is 95% above year ago levels. Investors are returning in force signalling a shift in the source of growth for mortgages away from first home buyers.
US payrolls rise by 850k – stronger than expected. Markets have no fear of tighter monetary policy and power to new record highs.
The RBA meeting this week will be watched for announcements on the 3-year yield target and the QE program. We should see initial small steps to monetary policy normalisation.
Equity markets remain strong, only a hawkish shift from central banks appears to be able to change sentiment.
Bond markets remain stable with long-term interest rates hovering around recent levels.
The Aussie Dollar is just over US75c, a little lower than this time last week. Our currency refuses to react to a strong world economy, bullish financial market sentiment and high commodity prices in the way it has for much of the last 30 years. A model of the $A based on 40 years of data has ‘fair-value’ well above US80c at present.
Quick Economic Update
Finally, light at the end of the coronavirus tunnel
Last week was a turning point for Australia in its fight against COVID-19. The Government announced a 4 phase plan to return life back to normal following last week’s National Cabinet. It appears to have the buy in of the State Premiers. The big shift is the recognition that we are going to have to learn to live with the virus in a vaccinated world.
For businesses and everybody wanting to move beyond disruptive lockdowns, it is all about phases 1 and 2. Once a suitable level of vaccination has been achieved, Australia will begin moving beyond the cycle of lockdowns and heavy restrictions. Domestically, at least, we are getting ready to take a big step forward over the next six months as the Pfizer vaccine roll-out is turbo charged.
What we don’t know it the magic vaccination rate number. That is being worked on as we speak by the federal health authorities in conjunction with the epidemiologists from the Doherty Institute. While the virality of the Delta variant suggests a vaccination rate of 80% is required for herd immunity, the PM’s announcement hinted at a lower number. Once everyone who wants a vaccination is effectively offered one, then it’s time to get on with it.
Underlying this is increasing body of evidence that the Delta variant is less dangerous than previous strains. Also important is the high level of effectiveness of the vaccines to the Delta variant. If this early evidence proves correct, the fact that the Delta variant is more contagious than other strains is good news because it means that this less dangerous variant will dominate others in transmission.
At the end of phase 1, we can stop focusing on the new case count and instead allow health professionals to monitor hospitalisations and the death rate.
The big concern for business groups aired over the past few days is the treatment of international borders. In a concession to State Premiers who have been plagued by hotel quarantine failures the government has cut international arrivals in half for the foreseeable future, that is, until we get past phase 1. Business groups are worried that this will exacerbate labour supply problems highlighted by last week’s strong job vacancy data (see below).
Immigration and international borders are a political hotspot for both the State premiers and a PM facing an election in the next 6-9 months.
The end game for normalisation post-COVID is to fully open borders for vaccinated people. This is critical to the easing of labour shortages developing across the economy. The four-phase plan appears to have accentuated the problem by cutting arrivals and delaying the opening of borders further.
I think the treatment of international borders and immigration will remain politically difficult as the vast majority of Australian’s (something like 70% to 75%) are happy to keep the borders closed while any threat exists.
The reality is that the government will move to open the flow of people back into Australia as soon as it is politically viable and safe. That was never going to happen before March next year and this plan does not really change the timing of that end game. It does, however, mean fewer people coming into the country in the short term, but this may be a small price to pay to get Australia’s political leadership to accept that we have to learn to live with the virus!
From record high to record high: job vacancies surge once again
The ABS reported the latest job vacancy statistics for the month of May last week showing another surge in the demand for labour across the economy. Job vacancies rose by 23% to 363k from 294k in February. However you cut it the data is strong. Job vacancies rose at a double-digit percentage change in all states. Every industry group saw a rise in vacancies from February to May with the exception of media and telecommunication. Even this industry group has seen a doubling in vacancies over the past year.
Private sector vacancies have tripled in the last year from 110k in May 2020 to 332k this year. The demand for labour is rising at one of the fastest rates on record while the supply of labour is growing at its slowest pace in 100 years due to the closed international border. The Vacancy Rate (vacancy/labour force) is now 2.8%, up from a previous high of 2.1% in February. The long-run average is 1.4%.
The most important market in the economy is acutely imbalanced. This will be a major source of headaches for businesses over the year ahead as they have to compete aggressively for staff and in some circumstances will simply not be able to find suitable labour at any price.
Victoria experienced the strongest quarterly rise of 33%.
New borrowing remains strong in May
The value of new mortgages written in the month of May was $32.6bn, up 4.9% on April and a new record high level. Owner-occupiers continue to dominate the market accounting for $23.4bn of this demand for new mortgages. Investors are making a comeback as expected with $9.1bn of new mortgages written in the month taking the investor number back to near the highs seen in the previous cycle (2015-16). The overall value of mortgages written in May is 95.4% above levels a year ago. It looks like the source of growth in the mortgage market is shifting towards investors.
New business lending is starting to rise gradually but is lagging the stellar growth in the mortgage market. New business loans were $2.2bn in the month, just under 15% up on the year. I think the demand for business loans has been hampered by the massive cashflow boost from JobKeeper. With that program now well behind us I would expect to see business loan growth accelerate over the final 6 months of 2021.
Exports rise to a new high in May
Australia registered another large trade surplus in May of $9.7bn, the third-largest on record. Exports continued to rise strongly lead by commodities. Exports rose 6% to $42bn for the month. Imports have been on the rise this year, largely reflecting the strength of the domestic economy.
RBA expected to start winding back unconventional policy stimulus
The RBA has flagged this week’s board meeting for major decisions on unconventional monetary policy for the last two months. The RBA Governor, Phillip Lowe, is holding a press conference at 4pm to discuss the outcomes, something he rarely does. The focus is on the 3-year yield target and the QE (bond buying) program.
The market consensus appears to be centred on some minor changes to each of these policy instruments that effectively kick off the process of policy normalisation.
The market is expecting the RBA to maintain the operational focus of the 3-year yield target on the April 2024 bond. The option they have is to roll the operational activities to the November 2024 bond (the next maturity in the government bond market). By not rolling the operational focus out to the November 2024 bond, the RBA is effectively saying the yield target is no longer a 3-year target. The yield target will rolldown the yield curve and become a 2-year target next year, a 1-year target in two years and cease in 2024.
By not rolling the yield target to the November bond the RBA is effectively saying that on the balance of probabilities they think the actual cash rate is likely to start going up in 2024. Given the strength of the economic recovery, the emerging tightness of the labour market and the prospect of higher inflation, most in the market would see this as reasonable.
The other decision will be on the bond program. At the moment they are announcing a buying target and time frame ($100bn over the six months). It appears they are looking for a little more flexibility in both the quantum of purchases and the timeline. The market has been primed to expect a weekly purchase rate reviewed at each monthly board meeting.
The current weekly purchase rate is approximately $4bn (i.e. $100bn over 26 weeks). The range of expectations for the new weekly rate is $3bn to $5bn. I favour a smaller purchase rate ($3bn) given that the supply of bonds is falling due to lower budget deficits and the recovery in the economy.
Lots of data this week, both here and overseas
In Australia the biggest number people want to know is the required COVID-19 vaccination rate that allows us to move beyond phase 1 of the exit strategy. It is highly unlikely we will get that in the next few weeks.
What we will get this week is a range of monthly economic indicators both here and overseas. We also get to look at some new ABS reports on the labour market, which could attract plenty of attention given the emerging challenges in the labour market.
SMEconomics Report 6th Edition
2020 has been a year unlike any other with the impact of the COVID pandemic being felt across the global economy. This edition of the Judo SMEconomics report examines the Australian economic landscape and provides insights into what the recovery looks like for Australian business now and into the future.
SMEconomics Report 7th Edition
Welcome to the 7th edition of the Judo Bank SMEconomics Report. After what has been a year unlike any other, 2021 is all about economic recovery and the outlook for growth. This edition of the Judo Bank SMEconomics report provides insights into the outlook for the housing market, inflation, population growth impacts on the economy and the end of JobKeeper. Along with the growth outlook for the world’s two biggest economies, the US and China and implications for Australian businesses.
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