Economic reports and surveys for major economies released during February show mostly renewed signs of economic recovery after a dent from the resurgent pandemic during the northern hemisphere winter. China and Australia are exceptions showing uninterrupted economic recovery. Covid-19 vaccination programs have started in many countries and infection rates are falling, especially in the United States and Europe where second and third waves of infection were highest. Massive fiscal stimulus spending continues to roll out and is reinforced by monetary accommodation that central banks say will last for years. Unsurprisingly, economic forecasters including those in government Treasury departments and central banks are revising upwards 2021 global and Australian GDP forecasts and expect very strong GDP growth in the second half of the year.
In the US January and February economic reports and surveys have strengthened compared with mostly softer readings in Q4 2020. The brighter change is clearest in retail sales, up 5.3% m-o-m in January after falling each month during Q4. The sharp lift in retail sales comes amid growing confidence about government assistance for household income support in the early days of the Biden Administration. A $US1.9 trillion fiscal stimulus package was passed by both houses of Congress in February coming on top of the $US4 trillion of stimulus spending still flowing from 2020 programs. January personal income data is due for release later this week and is expected to show a lift of more than 9% m-o-m. More big increases in personal income on the back of fiscal initiatives will follow boosting retail sales, even after the big lift in January.
US households and businesses are spending more supported by a combination of fast rising business and household income flowing from huge government spending. These highly favourable conditions are reinforced as increasing vaccinations moderate the pandemic and its restrictions and with the Federal Reserve in the words of Chairman Jerome Powell “not even thinking about starting to think to reduce monetary accommodation.”
US GDP growth settled back to 4% annualised growth pace in Q4 but is set to accelerate through 2021. The prospect of much stronger growth is causing the market to consider the possibility of higher inflation and those longer-term bond yields not so firmly anchored by central bank buying are rising. Central banks, including the US Fed, see little chance of an untoward lift in inflation this year or next and will back their view buying more longer-term bonds if yields move too high.
China’s economic recovery continued through Q4 2020 but because of its superior economic performance during 2020 China’s growth rate off a higher 2020 base will be modest in 2021 by international comparison in 2021. China’s GDP growth suffered only one negative quarter in 2020 back in Q1 but has lifted since accelerating to 6.5% y-o-y in Q4. China has benefited from the world’s limited ability to spend on services during the pandemic and its compensating increased appetite for manufactured goods. January and February data releases from China have been limited by the lunar New Year holidays and will be published in March. The older data for December show that 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. A similar configuration of fast-paced growth in exports and industrial production is expected when January/February data are released. China’s economic out-performance during 2020 is continuing in Q1 2021 but will be challenged by strongly rising US and European growth in Q2 and beyond.
Lockdowns to contain covid-19 were more extensive in Europe than elsewhere in Q4 throwing economic recovery into reverse. EU GDP fell 0.6% q-o-q in Q4 and was down 5.0% y-o-y. In 2020 Britain suffered nearly 10% annual GDP fall, the biggest fall since 1709. Vaccination programs have started in Europe and will allow reduction of restrictions and a rebound in economic activity. Fiscal stimulus spending and very accommodating monetary conditions will assist economic recovery over time although business and consumer confidence in Europe are likely to take longer to rebuild than in the US where the scale and certainty of fiscal and monetary support are greater.
In Australia, the economy grew in Q4 (confirmation in the Q4 GDP report due March 3 showing around 2% q-o-q growth) notwithstanding occasional return of restrictions and state border closures to contain small covid-19 community outbreaks. Growth accelerated in January and February based on housing activity, retail sales and employment and will continue to accelerate as the start of Covid-19 vaccinations provides hope of a permanent end to most pandemic restrictions and reason for households to use savings accumulated in the pandemic to spend.
Even ahead of the expected rundown in household savings, household spending is rising rapidly. Preliminary January retail sales rose by 0.6% m-o-m, more than 10% y-o-y. December home loans were up 8.6% m-o-m and 31% y-o-y. Weekend home auction clearance rates exceeded 80% in Melbourne and Sydney through February so far and house prices are rising. Home building approvals are lifting sharply. Employment is growing, up 29,200 in January and has almost recovered the jobs lost in the recession. The unemployment rate continues to fall, down to 6.4% in January.
Australia’s economic improvement continues to force upward revisions to official economic growth forecasts. The forecasts contained in the RBA’s February Monetary Policy Statement show mid-2021 annual GDP growth revised upwards to 8% y-o-y from 6% in the previous forecasts published in November. The mid-2021 unemployment rate forecast is revised lower to 6.5% from 7.5% forecast in November.
Even these improved RBA growth and unemployment rate forecasts do not change the RBA’s firm view that low annual wages growth will lift only slowly, and annual inflation will take years to return consistently inside the RBA’s 2-3% target range. This RBA view about persistently low inflation may change if economic growth continues to run faster than forecast over an extended period lowering the unemployment rate faster than expected and creating wage tension sufficient to push annual change from its current 1% to well above 3%. Such a change in the RBA’s inflation view is unlikely this year meaning no change to the suite of 0.10% official interest rates and plenty of monetary support to keep economic growth bubbling ahead.