Economic reports and surveys for major economies released during November show some upside surprises although the proportion is noticeably less than in October. Australia is an exception where upside surprises continued through the month. The global economic recovery from the covid-19 recession is continuing mid-Q4 2020 at a less frantic pace than in Q3, although in Australia the pace is lifting in Q4. Fiscal and monetary policy settings internationally remain expansionary supporting economic growth. Resurgent covid-19 infection rates in the US and Europe present a potential stumbling block to economic recovery, although one that may be removed soon with several covid-19 vaccines very close to widespread distribution. Australia’s outstanding effort almost eliminating covid-19 through November has added to factors placing the economy on strong footing to out-perform by international comparison.
Another factor providing hope of a better economic recovery in the US and the world was the outcome of the US presidential election. The win by Joe Biden is still being challenged by President Trump, although with no success through the courts so far and options for further challenges close to non-existent running towards the Electoral College vote and certification of the result on 14 December. The messy transition between the Trump and Biden presidencies does not detract from the fact that after inauguration in late January, President Biden, probably constrained by what may still be a Republican majority in the Senate, has little opportunity to tax harder, but has some chance to extend fiscal stimulus blocked through the election campaign.
A less promising development through November has been more evidence of China’s President Xi Ping’s hard-line China first policies raising trade barriers against several countries, including Australia, deemed to be threatening China’s strategic interests. The trade threats continue to escalate raising potential downside risk to global growth prospects.
Briefly looking around the major economies during November, US economic readings have turned mixed strength. Housing activity continues to forge ahead with October housing starts up 4.9% m-o-m, after rising 6.3% in September, October existing home sales up 4.3% (September +9.4%) and the November National Association of Homebuilders’ index lifting to an exceptional 90 from 85 in October. Household consumption spending, however, the mainstay of the 33.1% annualised lift in Q3 GDP, is starting to flag in Q4. October retail sales rose by only 0.3% m-o-m after lifting 1.6% in September. November consumer sentiment fell to 76.9 from 81.8 in October. Legislative gridlock has prevented extension of unemployment benefit support payments and the resulting weaker household income growth is starting to hurt household spending prospects.
On the positive side for US households, the initial bounce out of recession continues to boost employment and reduce the unemployment rate at a faster pace than widely expected. Non-farm payrolls lifted by 638,000 in October and the unemployment rate fell to 6.9% (market forecast 7.6%) from 7.9% in September. Strong labour market conditions may mitigate the extent of damage to household spending growth from delay to unemployment benefits. Nevertheless, US Q4 GDP growth will be much softer than in Q3, one of several reasons why the Federal Reserve will maintain its policy position of doing whatever it takes to support US economic growth.
In China, the strong quarterly Q2 GDP bounce moderated in Q3. October economic readings point to moderate economic growth continuing early in Q4. October export growth accelerated to 11.4% y-o-y from 9.9% in September, but imports grew at softer pace, +4.7% y-o-y from +13.2% in September an indication of less robust domestic spending. Annual growth in industrial production was steady at +6.9% in October, while fixed asset investment spending, +1.8% y-o-y from +0.8% y-o-y in September and retail sales, +4.3% y-o-y from +3.3% in September showed modest improvement. China’s economic recovery continues at better pace than in most major economies but increasing international trade frictions with its major trading partners threatens 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 lifted sharply by 12.6% q-o-q, but annual growth was still down 4.4% y-o-y. European growth is showing signs of stalling in Q4 amid resurgence of covid-19 infection rates and new lockdowns in the major European economies including France, Germany and the United Kingdom. Europe is struggling to implement the substantial fiscal economic rebuilding program promised earlier amid opposition from some EU members. The final Brexit deadline is also approaching with doubts about the deal between the EU and the UK. Europe is at risk of suffering a double-dip recession and at the very least looks set to under-perform economically for an extended period.
In Australia, business and consumer optimism continued to rise in November while almost all October economic readings were stronger than expected pointing to strengthening economic recovery. September housing finance commitments rose 6.0% m-o-m extending earlier strong monthly gains. September home building approvals were much stronger than expected, lifting by 15.4% m-o-m. Weekly home auction sales have returned to levels not seen in more than a year at the height of the last housing boom and house prices are rising in all Australian capital cities.
Retail sales are also lifting more strongly than expected. Q3 real retail sales rose by 6.5% q-o-q after falling 3.4% in Q2. The preliminary reading of nominal October retail sales rose 1.6% m-o-m and were up 7.3% y-o-y surprisingly strong results given that Melbourne was still in lockdown during the month. The biggest upside surprise came from the October labour force report showing employment up 178,800 in the month (market forecast –29,500) with the labour force participation rate lifting a percentage point to 65.8% recovering almost all the fall during the recession. The unemployment rate edged up to 7.0%, but that was less than 7.2% market forecast.
The RBA while admitting that economic recovery is progressing better than it expected eased monetary policy further at its early November policy meeting. The cash rate, 3-year bond yield target rate and term funding rate were all cut 15bps to 0.10% and the interest rate on exchange settlement accounts was cut to zero. The RBA also announced $A100 billion purchases of longer-dated government and semi-government bonds over six months an explicit move to quantitative easing. Essentially, the RBA is pleased that the economy is progressing better than expected but recognises that the economic outlook is uncertain and there is still considerable excess capacity to be used up before annual wages growth and annual inflation can accelerate to acceptable levels. The RBA indicated at its policy meeting and subsequently in its quarterly Monetary Policy Statement that it sees very easy monetary conditions being sustained for at least the next three years.
Australia is likely to show stronger economic growth than most major economies during Q4 2020. Stimulatory monetary and fiscal policy look set to sustain Australia’s economic growth out-performance into 2021.