More evidence of rapidly growing global GDP showed in April. China, the first major economy to report Q1 GDP, showed annual growth accelerating to 18.3% y-o-y from 6.5% in Q4 2020. The US will report Q1 GDP later this week and the partial indicators released to date point to annualised growth lifting above 6% from 4.3% in Q4 2020. Beyond Q1, US GDP growth will rise much more primed by the most aggressive fiscal stimulus in the world, more than 15% of GDP and rising. While fiscal stimulus is past its peak in Australia, partial growth indicators point to earlier than expected recovery of GDP losses in the 2020 recession with annual y-o-y GDP growth entering positive territory in Q1 (report due in early June) and pushing above 8% y-o-y in Q2 (report due in September).
Several factors are fostering strong GDP growth in the US. Household income is being supported by rounds of government support payments. The latest is expected to show in March personal income out this week and forecast to show a 20% m-o-m lift. In response, March retail sales (already reported) rose 9.8% m-o-m. Rapid employment growth is also boosting household income. March non-farm payrolls rose 916,000 after lifting 468,000 in February. Unsurprisingly, consumer confidence is rising strongly with the Conference Board’s measure lifting in March to 109.7 from 90.4 in February.
Other leading US economic indicators released in April show recovery developing on a broad front. The March ISM manufacturing and non-manufacturing reports made further ground in strong territory above 60 rising respectively to 64.7 from 60.8 in February and to 63.7 from 55.3. March industrial production rose 2.8% m-o-m. In terms of housing activity, March housing permits rose by 1.7% m-o-m while housing starts rose 12.6% m-o-m and new home sales increased 20.7% m-o-m.
Most US economic indicators are pointing to much stronger US economic growth and there are signs that US inflation is stirring. Annual CPI inflation accelerated to 2.6% y-o-y in March from 1.4% in February while producer prices accelerated to 4.2% y-o-y in March from 2.8% in February.
So far, the Federal Reserve has geared monetary policy to support faster GDP growth and has changed its inflation target to an average 2% annual inflation target. In other words, the Fed is prepared to see inflation run above 2% well into the economic recovery before responding by hiking rates. The Fed argues that the current surge in annual inflation will subside and is mostly a reflection of a low inflation base during the 2020 recession. Beyond that, the Fed will tolerate higher inflation citing the averaging provision in its target. Even if inflation is picking up pace it is unlikely the Fed will concede the point this year or much of next year. Low official interest rates will help to prime US GDP growth in 2021 and 2022 and perhaps beyond.
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. While China’s annual GDP growth rate accelerated to 18.3% y-o-y in Q1, its quarterly GDP growth rate decelerated to 0.6% q-o-q from 3.2% q-o-q in Q4. The peak is also evident in some March readings with annual growth in exports at 30.6% y-o-y from 60.6% in February; March fixed asset investment 25.6% y-o-y from 35.0%; and March industrial production 14.1% from 35.1%. China’s y-o-y GDP growth looks set to slow in Q2 and through the second half of 2021 but still with prospective 6% annual growth for 2021.
In Europe, the reduction of Covid-19 restrictions combined with warmer weather will see acceleration in European GDP growth beyond Q1. Leading European economic indicators released in April were mostly better than expected. Coincident indicators such as retail sales, up 3.0% m-o-m in March, are also improving. Europe’s fiscal response is shifting towards providing most support to growth laggards while the ECB continues to support the European fiscal response buying bonds and showing no signs of lifting the –0.50% deposit rate. European economic growth is poised to respond positively to anything that starts to go right in Europe’s fight against Covid-19, something that continued to show through April in the UK with a high vaccination rate and rapidly falling infection rate.
In Australia, indicators of stronger economic activity proliferated in April on every front. Housing indicators remained extraordinarily strong. Home prices nationally rose more than 1% in March according to industry reports. March home building approvals rose 21.6% m-o-m and new home sales boomed up 90% m-o-m in a rush to buy ahead of the winding back of several government initiatives to help housing construction.
The latest preliminary reading of retail sales for March was strong showing a rise of 1.4% m-o-m after falling 0.8% in February. The April Westpac Consumer Sentiment Survey rose 6.2% m-o-m after increasing 2.6% in March and is pointing to rising retail spending in the months ahead. Australian businesses are also more optimistic. The March NAB business survey showed the current business conditions response lifting to +25 from +17 in February. Business confidence is running high at +15.
Employment rose more than expected again in March, lifting by 70,700 (market forecast +35,000) and total employment was higher than the level before Covid-19. The unemployment rate fell more than expected to 5.6% in March. While Job Keeper finished at the end of March the negative impact on employment will not show until April and May employment reports are released. Treasury forecasts of net loss of 150,000 jobs look too pessimistic given fast building employment demand in the economy.
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 next set of RBA economic forecasts are due on the first Friday in May and are again likely to contain substantial upgrades. For example, the RBA’s forecast for the unemployment rate at 6.5% for June 2021 in the February forecasts sit above the March 5.6% reading and need downward adjustment.
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. This interest rate guidance will come under pressure to change if the unemployment rate continues to fall more than the RBA expects. However, the point where the RBA may need to change its rate guidance will not occur until the unemployment rate falls below 4%, still more than a year away on the most optimistic economic forecasts.
The RBA is unlikely to change its interest rate guidance until mid-2022, at the earliest. With low short-term interest rates persisting for another year and more Australia looks set for an extended period of rapid economic growth led by the housing sector.