More signs showed of global economic recovery in March albeit bumpier in some parts such as in the US and Europe. Positive news of rising Covid-19 vaccination rates was tempered by an increase in infection rates in some countries including several in the EU forcing a return to restrictions. The US Congress passed the Biden Administration’s stimulus package increasing and extending income support for US households. Major central banks including the US Federal Reserve and the ECB reaffirmed their commitment to monetary stimulus for the long haul. Continuing extensive fiscal and monetary stimulus combined with evidence of global economic improvement are underpinning forecasts of very strong global GDP growth in 2021 with the best of the growth occurring in the second half of the year and extending into 2022.
In the US the lumpy payments from government income support programs are showing in bumpy economic reports. For example, January retail sales lifted by 7.6% m-o-m on a government-boosted 11.1% m-o-m lift in personal income in the same month, but in February retail sales fell by 3.0% m-o-m. The story was similar for housing permits, up 10.7% m-o-m in January but down 10.8% in February. Despite the variability month-to-month, retail sales and housing permits are at high levels and trending upwards.
Other US indicators are showing more consistent recovery. Rising demand for housing has pushed national house price growth above 10% y-o-y. US manufacturers are benefitting from rising domestic spending and the global shift in favour of buying goods during the pandemic. The latest regional manufacturing purchasing manager reports have shown strong increases so far. The March Empire (New York) State survey rose to +17.4 from +12.1 in February while the Philadelphia Fed survey rose to +51.8 from +23.1.
The improving US economy is also showing in a sharp lift in demand for workers. Non-farm payrolls rose in February by 379,000 more than double market expectations (165,000) and the upwardly revised 166,000 (+49,000 reported initially) lift in January. The strengthening US labour market combined with the Biden Administration’s latest stimulus package and the Federal Reserve’s guidance that it sees no reason to consider lifting official interest rates before 2013 promise rising US GDP growth through 2021.
Unlike the US where GDP growth is likely to accelerate through 2021 China’s annual GDP growth may have peaked in Q1 2021. China was first into the Covid-19 pandemic and first out back in Q2 2020 when the first signs of economic recovery started to show. By Q4 2020 China’s economy had recovered all of the output and demand lost in the pandemic and more. In Q4 2020 GDP rose 6.5% y-o-y, a positive outlier in a world where almost all other countries experienced negative annual GDP growth, some as much as –10% y-o-y. In Q1 2021 China’s annual GDP growth rate will push well above 10% y-o-y, perhaps even above 20% y-o-y, mostly because of the weak base for comparison in Q1 2020 when China was in lockdown battling the pandemic.
The low base effect was evident in the big annual change readings contained in February economic reports. Exports rose 60.6% y-o-y; fixed asset investment was up 35.0%; industrial production rose 35.1%; and retail sales were up 33.8%. These mid-Q1 economic readings will reflect in China’s Q1 GDP report due in mid-April. The extraordinary annual growth in Q1 will not be sustained, however, as the base readings during Q2 and Q3 2020 rise. Nevertheless, China’s economy will be growing beyond Q1 but the annual growth pace will start to look modest as the US, Europe and other Asian economies show their biggest annual GDP growth increases in Q2 2021.
In Europe, Covid-19 vaccination programs are moving slower than hoped other than in the United Kingdom. Covid-19 infection rates have risen again in several countries constituting a third wave and necessitating a return to restrictions. The restrictions are limiting economic recovery in the near-term but fiscal stimulus measures combined with accommodating monetary conditions still point to strong economic improvement. The effect of policy stimulus will be reinforced in the northern summer when warmer weather and higher numbers of people vaccinated slow the pandemic. Reflecting the brighter outlook, leading European economic indicators are positive. The March ZEW economic sentiment index rose to 74.0 from 69.6 in February. The latest March purchasing managers’ reports showed the manufacturing PMI rising to 62.4 from 57.9 in February and the services sector PMI lifting to 48.8 from 45.7 in February. Europe is likely to show much stronger economic reports starting later in Q2 2021.
In Australia, the economy grew more strongly than expected in Q4 2020, up 3.1% q-o-q and down only 1.1% y-o-y, confirming that Australia’s economic recovery was among the strongest in the world, barring China. The three key early drivers of Australia’s economic recovery are rising retail spending and exports and sharply rising spending on housing. Business investment spending also showed first signs of improvement in Q4. All told the economic recovery is progressing much faster than predicted by all forecasters including Treasury and the RBA.
In March, there were more signs that Australian economic recovery is gathering pace. Home buying activity has been particularly strong. The value of housing finance commitments rose in January by 12.3% m-o-m after increasing 7.1% in December. More current weekly home auction reports during March showed high sales volumes, clearance rates and prices all markers of strengthening housing activity. On the retail sales front, while a brief return to Covid-19 restrictions in some states in February caused retail sales to fall 1.1% m-o-m, they were still up more than 8% y-o-y.
Another sign of economic improvement has been the upside surprises in Australian labour market data. The latest employment reading for February showed an increase of 88,700 (market forecast +30,000) causing the unemployment rate to fall to 5.8% (market forecast 6.3%) from 6.4% in February. There are concerns that the end of the Government’s Job-Keeper program this last weekend may result in the loss of 150,000 jobs (Commonwealth Treasury’s forecast) over the next few months but if the upward momentum in the jobs market over recent months is maintained the loss of jobs could be much less than forecast by Treasury.
Australia’s better-than-expected economic recovery has forced the RBA to continually upgrade the economic forecasts it releases in its quarterly Monetary Policy Statements. The latest substantial upgrades came in early February but were rendered in need of further upgrade by the strong Q4 GDP report released in early March as well as the lower February unemployment rate at 5.8% (the RBA’s latest June 2021 unemployment rate forecast is 6.5%). Notwithstanding that the RBA’s economic forecasts continue to track behind the curve of Australia’s economic recovery it maintains that there is no case to think about lifting official interest rates this side of 2024! If the RBA sticks with this interest rate guidance Australia looks set for an extended period of rapid economic growth led by the housing sector.