“Don’t stop when you’re tired, stop when you’re done” – Wesley Snipes
I wish there were more to talk about, but COVID continues to dominate every aspect of daily life and economic policy. It seems the general population are taking the vaccination protocols seriously which in turn will give the government the ability to start relaxing current lockdown restrictions. That said, there is no doubt that it will take some time for life to return to some sort of normality but there is one thing people can feel certain about and that is that economic policy is sure to remain accommodative for the near future. In other words, interest rates are more than likely going to remain low for some time yet.
The past week has really all been about employment in the context of the impact the recent lockdown is having on businesses. In terms of employment in the August Labour Force survey, Westpac’s forecast for –150k was almost identical with the ABS reporting –146.3k. This month the pain was felt by part–time workers, they experienced the largest hit to employment (–78.2k) but full–time employees still had an incredibly significant decline (–68.0k). The lockdowns are again hitting part–time workers much harder than full–time workers. In the last three months part–time employment has fallen 94.8k with the annual pace of part–time employment growth falling from 15.8%yr in May to just 0.6%yr in August. Contrast that with full–time employment which has fallen just 20.5k in the last three months with the annual pace of growth still a robust 4.3%yr in August compared to 5.1%yr in May.
In terms of consumer confidence, the NAB survey provided tentative evidence that this wave of the virus and the consequent lockdowns are having less of an effect on the economy than in 2020. Confidence in NSW looks to be responding to the vaccination drive, the state’s index rising 8pts to -12 in August. The extension of Victoria’s lockdown however saw confidence deteriorate there to -10. Both outcomes are materially below the national figure of -5, itself a well-below average reading, but up 2pts in the month.
While challenged by present circumstances, Australian consumers are optimistic on the outlook, the Westpac-MI consumer sentiment index rising 2% in September to an above-average reading of 106.2. Behind this headline result was material strength in the components related to the economic outlook, the 1–year and 5–year views up 5% in the month to respectively be 15% and 25% above their long-run averages. Views on family finances are modestly above average levels currently, supported by strong gains for house prices, equities near all-time highs and labour market resilience.
The recent strength shown by consumer sentiment rests on the rapid vaccination of Australia’s population which is materially reducing health risks related to the virus and should soon allow the nation to re-open. To see lasting strength in consumer spending and hence GDP (Gross Domestic Product), household incomes must return to their full employment level, not just the headcount of those who seek employment and find it.
In terms of interest rates, the RBA (Reserve Bank of Australia) is still closely watching inflation and wages growth. The belief that to achieve its inflation target in the medium-term, “wages will need to be growing by at least 3 per cent”, almost double the annual growth rate for the Wage Price Index in June 2021. It is worth emphasising that the RBA not only believe the slack present in our labour market must be removed if their wage and inflation goals are to be achieved, but also that the adverse inertia present in wages growth pre-pandemic must abate. This additional headwind stems from several forces including “multiyear employment contracts; [the] strong cost-control mindset of Australian business; and low and stable inflation expectations.” These are challenges entrenched the world over, making them a significant challenge to overcome.
In terms of overseas developments, the most significant piece of news came from China. The gap between annual retail sales growth to August (2.5%yr) and year-to-date growth (18.1%) highlights how severe the impact of recent restrictions against COVID-19 has been on spending. Fixed asset investment was in line with expectations in the month, despite property investment disappointing again. The troubling situation faced by Evergrande (China’s second largest property developer) and the hit to confidence for the rest of the sector is likely to continue to affect investment in coming months.
The below chart illustrates the cost in waiting for rates to rise. Whilst the chart is based on the current US interest rate environment the same can be applied to Australia. In other words, investors continue to hold cash in low interest-bearing accounts hoping for rates to rise when the reality is that this scenario is unlikely to transpire for some time and investors will lose out on potential gains.