Economic readings and surveys in major economies again rose more strongly than expected through October for the most part despite rising covid-19 infection rates in many countries including the United States and much of Europe. The stimulus measures put in place by governments and central banks early in the pandemic continue to support a resurgence in spending by households and businesses that for most countries will see GDP growth rebound strongly in Q3 reports from low-point readings in Q2.
One exception to strongly rebounding GDP in Q3 is China showing quarterly GDP growth decelerating to +2.7% q-o-q in Q3 from +11.5% q-o-q in Q2, although annual GDP growth improved to +4.9% y-o-y in Q3 from +3.2% y-o-y. China was first in to the Covid-19 infection crisis and associated shutdowns and deep recession in Q1. It was also first to bounce off the bottom in Q2 when other major economies were plumbing the depths. China may also be leading the way in what happens beyond the first big quarterly rebound in GDP growth, a quick settling down to much lower GDP growth than in the initial flush.
For some countries the pull-back beyond the initial burst of growth could be more pronounced if stimulus measures are withdrawn too quickly and/or covid-19 infection rates stay high ahead of the development of widespread effective vaccination prompts extensive new shutdowns. Legislative deadlock in the United States over supplements to unemployment benefits, unless resolved soon, will threaten the current housing /household consumption-led US recovery and probably as soon as Q4.
In Europe, while stimulus spending is more certain to continue through the remainder of this year and into 2021 a big wave of new covid-19 infections is forcing a return to extensive lockdowns in several countries including France, Italy, Spain and the United Kingdom. Soon to be reported Q3 GDP will show a big bounce but likely to be followed by one of the world’s bigger setbacks in Q4.
Australia also looks like being an exception to the big Q3 GDP bounces likely to be recorded for most major economies. Australia’s Q3 GDP lift (when released in early December) is likely to be comparatively small weighed by Victoria’s lockdown through much of the quarter. In contrast to much of the rest of the world, Australia seems likely to show a bigger rise in GDP in Q4 assisted by very low covid-19 infection numbers, Victoria coming out of lockdown, state borders relaxing and strong government stimulus still evident after the October Budget in which Treasury forecasts the underlying budget cash deficit will extend from -$85.3bn or –4.3% of GDP in 2019-20 to -$213.7bn or –11.0% of GDP in 2020-21.
The shift in the size of the underlying budget deficit shows the Government still pumping the economy hard in 2020-21 even though a shift in the nature of the stimulus, stepping down direct income support measures and stepping up tax incentives, tax cuts and job subsidies, is lower octane support than putting money straight into household income.
Briefly looking around the major economies during October, the US continues to report very strong housing readings. September pending, new (August latest available), and existing home sales rose respectively 8.8% m-o-m; 4.8%; and 9.4%. September home building permits and starts rose respectively 5.2% m-o-m and 1.9% while the October National Association of Homebuilders index rose to a cycle high of 85 from 83 in September. Notwithstanding the unemployment benefit supplement political stalemate household spending remains strong too. Retail sales rose 1.5% m-o-m in September after lifting 0.6% in August. The US unemployment rate continues to fall faster than expected, down to 7.9% in September from 8.4% in August. The US will report Q3 GDP later this week and it is expected to rise at over 31% annualised from –31.4% annualised in Q2.
In China, the strong quarterly Q2 GDP bounce moderated in Q3. September economic readings point to moderate economic growth continuing at the end of Q3 and heading into Q4. September export growth accelerated to 9.9% y-o-y from 9.5% in August while imports lifted to 13.2% y-o-y from –2.1% in August and an indication of stronger domestic spending. September fixed asset investment spending, +0.8% y-o-y from –0.3% y-o-y in August; industrial production +6.9% y-o-y from +5.6% y-o-y in August; and retail sales, +3.3% y-o-y from +0.5% in August all showed modest improvement. China is becoming more dependent upon domestic spending to support growth with increasing international trade frictions with its major trading partners threatening to limit export growth and dial down what has been a major factor in China’s economic growth out-performance over the past two decades.
In Europe, Q3 GDP growth (preliminary report due next week) will bounce after Q2 GDP showed a fall of 11.8% q-o-q, -14.7% y-o-y. Leading indicators of economic activity are already starting to turn down and the move to new covid-19 restrictions in several larger European economies raises the risk that after lifting sharply in Q3, European GDP could fall again in Q4.
In Australia, there remains concern among forecasters that the economic recovery road is going to be long and unusually bumpy. The long Victorian covid-19 shutdown has added fuel to these concerns. Both the Federal Government and the RBA have taken on board the long, slow bumpy economic recovery view reflected in the Government’s willingness to run very big budget deficits and the RBA’s guidance that very low interest rates (perhaps a touch lower very soon) will persist for years to come.
Recent economic readings and survey reports are running on the strong side of official and general economic forecasts. Housing activity has been more resilient than widely expected and remains so even in the early stages of banks reducing home loan repayment holidays. The latest August reading of housing finance commitments for example showed a record 12.6% m-o-m increase. House prices have stopped falling in all capital cities except Melbourne according to the latest industry data. Retail sales, although falling month-on-month in August and September nationally were up in most states other than Victoria and were still up 5.2% y-o-y nationally in September.
Monthly labour force readings have routinely been stronger than expected over recent months, including even the latest Victorian shutdown affected September reading when although employment fell 29,500 it was less than market forecast of a 35,000 fall and the unemployment rate rose less than expected to 6.9% from 6.8% in August.
Better-than-expected Australian economic readings may not persist but for every factor pointing towards setbacks to economic recovery – low population growth ahead on very low immigration; the end of bank loan holidays; and the stepping down of income support – there are factors pointing to positive surprises – Australia’s very good covid-19 numbers soon to be rewarded by relaxed restrictions and fewer state border restrictions; fiscal stimulus that is still large and will become more potent if confidence continues to lift; and very low borrowing interest rates and easing lending restrictions.
There is a reasonable likelihood that Australia’s economic recovery may not be as soft, long and bumpy as widely feared. Nevertheless, Australian policymakers will continue to err on the side of caution given the high degree of uncertainty forecasting in the covid-19 era. Interest rates are set to stay very low for a prolonged period even if the economy performs better than widely forecast.