The global economic recovery undulated during November with evidence of mostly soft GDP growth in Q3 but with stronger monthly economic readings late in Q3 and in October. The promise of renewed strong economic growth, however, came amid signs that higher inflation was becoming entrenched with some central banks looking to lift the pace of withdrawing very growth accommodating monetary policy support. The risk of higher interest rates started to challenge the near consensus view among analysts in October and early November that global economic recovery would gather pace in 2022.
Later in the month, another downside risk to global growth prospects appeared as rising covid infection rates in the northern hemisphere’s late autumn/early winter generated a return to some restrictions in parts of Europe. The emergence of the omicron variant over the past week has added more uncertainty to global economic growth prospects. It is impossible to assess omicron’s impact on global growth prospects until more information becomes available about the severity or otherwise of the health threat it poses and what additional measures may or may not be required in terms of restrictions and vaccine development and distribution.
Not knowing what the likely impact of omicron will be may dent near-term economic growth prospects, but it will also dent inflation very near-term via tumbling energy prices and slow the withdrawal of monetary accommodation plans of central banks. What happens beyond the next few weeks depends upon whether the omicron variation turns out to be comparatively benign, generating little serious illness or something more ominous threatening a sharp lift in hospital admissions and deaths requiring a return to more stringent, recession-threatening restrictions. Global economic recovery prospects for 2022 could recover strongly or dive further over the next few weeks as more information about omicron becomes available.
Returning to the economic data releases during November, US economic growth moderated in Q3 with annualised GDP growth at 2.1% down from 6.7% in Q2. During Q3 GDP growth started to inflect and September and October economic readings have strengthened. October retail sales, for example, rose 1.7% m-o-m after increasing 0.7% in September. The US labour market has strengthened with non-farm payrolls up 531,000 in October after increasing 312,000 in September. The unemployment rate fell to 4.6% in October while annual growth in average hourly earnings accelerated to 4.9% y-o-y in October from 4.6% in September.
Strong US economic growth built on rising business and household income continued to stretch limited supply of goods. October producer prices remained high, up 0.6% m-o-m, 8.6% y-o-y and CPI inflation jumped 0.9% m-o-m, 6.2% y-o-y up from 0.6% m-o-m, 5.4% y-o-y in September. The Federal Reserve, while starting to express some concern about inflation, still plans only slow withdrawal of monetary accommodation. It has started reducing the size of monthly bond purchases but indicates that it will hold off starting to lift official interest rates until mid-2022.
The new uncertainty surrounding the omicon variant has sent investors scurrying to the safe-haven of government bonds reducing yields and raising expectations that the Fed may delay the winding back of monetary support. Revitalised bond market bullishness may be fragilely based. It is worth keeping in mind that large scale government infrastructure spending plans legislated in November will underpin US economic growth in 2022. Also, high US inflation while perhaps dented near-term by lower energy prices, will be reinforced in 2022 as slow-burn rising home rents force up the heavyweight “cost of shelter” component of the US CPI.
China’s economy continued to lose growth momentum in Q3. GDP rose 4.9% y-o-y down from 7.9% in Q2 and the policy initiatives over recent months add to the risk of even softer growth in Q4. China’s environmental initiatives and attempts to contain excesses in the property development sector while potentially positive for China to grow sustainably longer term are at the expense of near-term economic growth. The continuing clamp-down on property continued to hurt in October with annual growth in fixed asset investment spending sliding to 6.1% y-o-y in October from 7.3% in September. Industrial production and retail sales were a touch better in October. Industrial production rose 3.5% y-o-y compared with 3.1% in September, while retail sales accelerated to 4.9% y-o-y from 4.4%. China’s annual GDP growth looks set to continue to fade to around 4% y-o-y in Q4, far below 6% official target and a sign of the increasing difficulty the authorities face trying to sustain growth while reform and curtail excesses.
Europe’s annual GDP growth rate stepped down to 3.7% y-o-y in Q3 although the q-o-q growth rate at 2.2% was strong. Growth in Q4 is being dampened by an energy supply crisis as well as a resurgence of covid cases forcing a return to some restrictions. The energy crisis and acute supply chain problems are driving up factory gate prices faster in Europe than elsewhere. Producer prices were up 16.0% y-o-y in September while the CPI lifted 4.1% y-o-y in October. October producer prices and the November CPI out later this week are expected to be even higher. The European Central Bank recognises that inflation is running higher than expected but continues to delay any policy response. The Bank of England, facing higher than expected British inflation, also chose to delay any policy change at its November policy meeting.
In Australia, Q3 GDP out on Wednesday is expected to show that GDP fell around 2.7% q-o-q reducing annual growth to around 3.0% y-o-y from 9.6% in Q2. The Q3 GDP report is ancient history reflecting the deeply negative impacts on household and business spending when New South Wales and Victoria were in lockdown. Release from lockdown has spurred a sharp recovery in spending in October and November. The preliminary October retail sales report, for example, showed an out-sized 4.9% m-o-m increase. The negative Q3 GDP report should be followed by a strong Q4 GDP lift. Even if the latest omiron variant becomes a lasting negative influence on growth (it could turn out to be the opposite if fears about its dangers are squashed over the next few weeks) the impact will show in Q1 next year rather than Q4.
Other Australian economic reports released in late October and through November showed housing activity still strong but showing signs of softening under pressure from tighter APRA lending rules and rising fixed interest rates on new home loans. The value of housing finance commitments fell 2.7% m-o-m in August while September home building approvals fell 4.3% m-o-m. The labour market was still soft in October with total employment down 46,300 and the unemployment rate lifting to 5.2% from 4.6% in September. However, labour market readings for November and December reflecting release from lockdown are expected to improve sharply.
Australia’s Q3 inflation report was higher than expected but not as high as inflation reports in most other major economies. The headline annual inflation (CPI) rate retreated to 3.0% y-o-y from 3.7% in Q2, but underlying inflation (average of the trimmed mean and weighted median) accelerated to 2.1% y-o-y from 1.7% in Q2. The higher underlying inflation reading forced the RBA to accept that inflation was running higher than it had forecast previously and could if supported by higher wage growth sustainably above 3% y-o-y lead to a need for a higher cash rate in 2023. The Q3 wage price index released in mid-November showed annual wages growth at 2.2% y-o-y, up from 1.7% y-o-y in Q2 but even with a tightening labour market still likely to take time to rise into inflation priming territory above 3%.
The RBA has declared that it will be patient waiting until tight labour market conditions develop that support annual inflation staying in the higher end of 2-3% target range. It is adamant that it will not react to what it perceives as temporary spikes in the inflation rate. Of course, if spikes persist the RBA might change its view. We thought it more likely that the RBA would be forced to a view change in mid-2022. The omiron variant with its potential to upset growth and inflation forecasts has made our call of a mid-2022 rate hike a little less likely.