Economic reports and surveys for major economies released during January show a blip in Q4 2020 in the “V-shaped” recovery evident in Q3. The source of the blip was the resurgence of covid-19 infections in the northern hemisphere winter and renewed infection containment restrictions. China is an exception to the blip with annual GDP growth accelerating in Q4 and Australia may be another when its Q4 GDP report is released in March. Most major economies, including the US and Europe are likely to resume robust recovery during the first half of 2021 as covid-19 infection rates are battened down by earlier restrictions and rising rates of vaccination. As restrictions are lifted and government stimulus measures kick in GDP growth rates will lift, especially in those economies held back in Q4.

The US economy is a prime example of record GDP growth in Q3, +33.4% annualised, blipping downwards in Q4 to +4.0% (advance reading due on Thursday) if the market consensus forecast is right, but probably lower in our view given evidence of weakness of household spending during the quarter in monthly retail sales, down 0.7% m-o-m in December after falling 0.9% in November. A combination of covid-19 restrictions and the turbulent run-up to the US November presidential election and immediate aftermath adding to uncertainty and delaying several weeks extension of government income support measures weighed on Q4 GDP growth. The damage showed in lower growth in nonfarm payrolls topping 500,000 each month through Q3 but working lower each month in Q4 and falling 140,000 in December.

Some parts of the US economy stayed strong in Q4. Housing activity still flourished although not as robust as in Q3. Manufacturing activity remained firm. One feature of covid-19 disruption to economic activity around the world is that the various forms of restrictions have constrained spending on services and led households to compensate by spending more on physical goods. Local manufacturing inside national boundaries is booming. In the US, industrial production rose in December by 1.6% m-o-m after lifting 0.5% in November.

Beyond the Q4 economic reports, the US economy faces headwinds early in Q1 2021 from the runaway covid–19 infection rate and new measures by the Biden administration to contain it. The headwinds will be short-lived turning to growth tail winds late in Q1 and in Q2. The infection rate will rein in later in Q1 and in Q2 curbed by more effective containment measures, rising vaccinations and warmer weather. The Biden administration is promising greater fiscal stimulus, a promise it can deliver with Democrat control of both houses of Congress. The Federal Reserve is unwavering in promising to keep official interest rates low and maintaining a bond purchasing program that allows the US government to borrow more without the penalty of untoward increases in longer-term bond yields.

While the US economy missed a beat or two in Q4, China’s recovery continued unabated. Annual GDP growth accelerated faster than the market expected to 6.5% y-o-y from 4.9% in Q3. China has benefited from the world’s increased appetite for manufactured goods. In December China’s exports rose 15.0% y-o-y while industrial production accelerated to 7.3% y-o-y, a faster pace than before covid-19. Growth is patchier in other parts of the economy. Fixed asset investment spending is lifting slowly to 2.9% y-o-y in December from 2.6% in November while growth in retail sales slipped to 4.6% y-o-y in December from 5.0% in November. China is combatting modest re-occurrence of covid-19 with an accelerating vaccination program. China’s economic out-performance during 2020 is continuing in Q1 2021 but will be challenged by growth rebounds in the US and Europe in Q2.

Europe is showing signs of the greatest growth pull-back when its Q4 GDP is reported in February. Lockdowns to contain covid-19 were more extensive in Europe than elsewhere in Q4 and are continuing in Q1 even with rising vaccination rates. Europe’s retail sales fell 6.1% m-o-m in November and the December figures due next week are likely to be weak as well. There are strong points for Europe’s economy too. The spat with Britain over post-Brexit relationships concluded with a deal in January. Manufacturing activity has been strong, especially in Germany. A longer-term fiscal stimulus and income support package is in place in the EU with the promise of support from the European Central Bank. European growth will lift strongly in the northern spring and summer but ahead of that improvement Europe is at risk of registering negative GDP growth in Q4 2020 and Q1 2021.

In Australia, while the return of limited community transmission in December caused a return of some restrictions and a confusing range of state border controls cutting into holiday spending plans, strong household spending still appears to have occurred. Retail sales rose 7.1% m-o-m in November after rising 1.4% in October. The preliminary report of December retail sales showed a 4.2% fall in the month, but sales were still up 2.5% in the quarter and more than 9% compared with December 2019.

Spending on housing accelerated even with the greater covid-19 restrictions in December. The Housing Industry Association reported a 91.8% m-o-m lift in new home sales in December in part responding to government initiatives, but also reflecting the priming effect of low home loan interest rates. Home building activity is rising fast. Home building approvals rose in November by 2.6% m-o-m and were up 15.0% y-o-y. Housing activity will contribute to Q4 GDP growth and will contribute more strongly in Q1.

Employment lost in the covid-19 recession has returned more quickly than expected adding to growth momentum. Even with headwinds from renewed restrictions in December employment lifted by 50,000 in the month and the unemployment rate fell more than expected to 6.6% from 6.8% in November. Australia is likely to record Q4 GDP growth of at least 2.0% q-o-q (8% annualised US fashion) when the figures are released in March.

Australia’s economic growth out-performance will still take time to use up excess capacity generated in the recession. Annual growth in wages remains low, around 1% y-o-y with little chance of accelerating near-term. The RBA can still ignore the lumps and bumps in annual inflation caused mostly by government initiatives – the 2% q-o-q fall in the CPI in Q2 2020 giving way to a 1.6% q-o-q rise in Q3 and another 0.7% or so rise when Q4 is reported this week. Annual inflation may briefly push well above 2% y-o-y in mid-2021 on base calculation effects, but it will not stay there weighed by low labour costs.

Later in 2021 and in 2022 there may be a sea change in views about inflation if economic growth stays strong and chews up spare capacity faster than expected. At this stage, a changing inflation view is only a possibility, but if that possibility strengthens late this year or next year the RBA may start to look at rate hike later in 2022. Our RBA interest rate forecasts are unchanged for the time being with the cash rate unchanged at 0.10% throughout this year and 2022 but we are keeping that forecast under review given Australia’s improving economic growth prospects.