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Ben Kingsley Blog post by Ben Kingsley

RBA Cash Rate May 2021:

Hi, Ben Kingsley here with the latest economic update and the RBA update for May.

The verdict is well and truly in — when money is cheap, the world goes around faster. We’re basically seeing that show up now.

The other important news is around inflation – and we’re going to see this word, “transitionary” as the new buzzword.

The positive economic data is everywhere. Let’s see get into the deeper dive into the numbers now.

First of all, I wanted to start with the global economic update first, and the IMF has upgraded its GDP forecast to predict that the best global growth in four decades.

That’s not a bad way to start the presentation. The IMF has predicted that the latest numbers in its world economic outlook. It lifted it’s 2021 world growth GDP forecast to 6% from 5.5% in as late as January this year. The forecast for the U.S. growth was lifted to 6.4% from 5.1% previously, and China to 8.4% from 8.1%, and the forecast for Australian GDP growth was increased to 4.5% up from 3.5%. The upward revisions reflect additional fiscal support in some large economies. The anticipated vaccine driven recovery in the second half of 2021, and the ongoing adoption of economic activity in the face of mobility restrictions. As we move out, we get to be able to spend, and that moves the economy forward.

In other important news, the drive to overhaul taxes for companies gathered some steam after G20 finance chiefs pledge to reach a consensus on new rules by the middle of the year.

The ministers in Central Bank have said they’re committed to reaching a global consensus based solution on minimal global corporate tax rate structures, and how they levy the profits of multinational technology giants. Something to watch there as hopefully the governments get more taxes coming in. Finally, on the global front, the OPEC gave an upbeat projection on oil demand, boosting its 2021 forecast to 96.5 million barrels a day on expectations the market will continue to recover in the coming months.

Now, let’s look at the world stock markets.

Most developed stock markets around the world continue to push to record high levels during the month of April, and the global economy story continues to improve. What this means is well-performing stock markets helped to build household wealth, which has a positive impact on spending and jobs, so equity markets are doing very well.

In terms of COVID update.

We have seen India along with Japan and some other nations are now battling new waves of COVID cases, which is an important reminder about the health risks of this disease, and also, an important reminder that the vaccine rollouts are the only way that we can get back to a normal society, so it’s important to remember the vaccine is our way out. My little side message here is, if you’re eligible to get vaccinated, please do, because it’s unrealistic to expect that we won’t see further lockdowns in the coming weeks and months, as we move into winter.

Turning our attentions to the United States.

GDP numbers: The Federal Open Market Committee released upgraded forecast for the U.S. economy. The median outlook for GDP in 2021 went to 6.5%, a big upgrade from the 4.2% expectations way back in December. Fed officials also indicated the unemployment rate could be 4.5% by the end of the year, and inflation could be running at 2.2%. Slightly above the Feds, 2% target. Speaking of inflation and interest rates, U.S. consumer prices picked up sharply in March as the economic recovery gained momentum, partly reflecting higher gasoline prices. The Consumer Price Index, the CPI rose 0.6 of 1% in March and jumped 2.6% in the year ending March. It was firmest annual rate since August of 2018. The core CPI, which includes the volatile categories of food and energy climbed 1.6% over the year prior, and was up 0.3 in March from February. The Fed Reserve Chair, Jerome Powell, downplayed these readings, noting that he was more concerned about rising infections than rising prices.

Powell said, “The recovery remains uneven and incomplete,” in remarks at the IMF panel discussions. Powell also said that the world won’t be able to fully resume economic activity until the virus is controlled everywhere.

Powell reiterated the Central Bank’s view, that was, to expect a spike in inflation will be temporary. There’s that transitionary and temporary component, and that officials will have the tools to deal with that if need be.

In terms of consumer confidence. Consumer confidence, also on the rise. The Conference Board Index rose to 121.7 in April. It’s highest reading since February of 2020. Americans have grown more upbeat on the economy and the jobs markets, and the reading is consistent with activity forecast, which suggests robust household demand will see GDP rapidly return to pre-pandemic levels.

Looking at the jobs data, the latest initial jobs claims continue their downward trajectory to find consensus with new filings coming in at 547,000, down from a revised 586,000 in the prior seven days. Job openings surged to a two year high of 7.4 million in February, roaring past economist’s expectations. The rise in openings indicates that employers are prime to ramp up hiring in the coming months.

Looking at U.S. housing. The U.S. house prices are soaring. The Federal Housing Finance Agency, House Price Index increased 0.9 in February, to be up 12.2% over year. This is a new record high for annual house price growth. New house sales jumped to 20.7 in March to a 14-1/2 year high. New home sales are up a staggering 66.8% on the back of low interest rates and low inventory for houses for sale. Housing starts jumped 19.4% in March to 1.7 million in annualized terms, beating forecasts again. There is a construction backlog stemming from strong demand during the pandemic and disruptions due to severe winter weather events.

In other economic news, retail sales crushed expectations, surging 9.8% in March. The strongest growth in almost a year. Spending was supported by the latest round of stimulus checks and unwinding of the February freeze and more general economic reopening, so good news there in terms of the broader economy.

Focusing our attention on climate policy, last month, President Biden opened the Global Climate Summit by pledging to cut U.S. greenhouse gas emissions by between 50 to 52% from the 2005 levels by the end of the decade, and urged other world leaders to accelerate in their efforts.

ScoMo, are you listening?

Turning our attentions to China.

GDP: China’s economy is soaring in the first quarter. GDP increased to a record 18.3% in the March quarter compared to last year. Largely in line with forecast, but we need to note that these figures are distorted by when the economy was shut down to curb the pandemic last year. On a quarterly basis, GDP growth slowed to 0.6 from 3.2% in the September quarter. This is likely reflecting managing new virus cases at the start of the year by enforcing some travel restrictions over the Lunar New Year holiday in this quarter. Other economic performance indicators in China. Let’s look at retail sales grew by 34.2% over the year to March, beating expectations, while growth in industry production eased to 14.1% year-on-year. Up until this reading, consumer spending had been trialing other economic indicators in China, but this set of new data shows a material improvement, so we’re now starting to see consumers and retail get in on the action.

China’s trade surged in March despite missing forecasts as a global economic rebound supports trade. Exports were up 20.7% over the year, lower than forecast 28.6. Again, these figures are partly distorted due to last year’s low base. China has benefited from global demand for medical goods and work from home equipment during the pandemic. Imports jumped 27.7% in the past 12 months, beating forecast by 17.6% growth. The surge of imports reflects solid domestic demand and rising commodity prices.

Okay, over to Europe.

We’ve just seen some latest data come out that looks like Europe has gone into a double dip recession, on the numbers that have just come out, because effectively of the lockdown and the COVID management, managing cases over there. In terms of retail sales in February, were stronger than expected, increasing 3% after a declining 5.9% in the previous month, even though restrictions are been tightening in terms of movement in the Continent.

Several confidence indicators published in April, are showing a better story than that first quarter. There are some positive signs around the background of the releasing of those lockdowns and hopefully the vaccine rollout program. Each of the indicators improved for the month, so let’s go through them.

The Industrial Confidence Index lifted 8.6 points to a reading of 10.7. The Service Index rose 11.7 points to be 2.1, and the economic confidence index increased 9.4, to a reading of 110.3. Although these positive readings in Europe, the Central Bank chief economist stressed that the Eurozone economy is still a long way from fully recovered. Also, adding that the pandemic’s negative impact remains large despite these economic rebounding developments.

Turning our attentions back to Australia, and the big news here is this — Australia will be on its way of reaching its pre-pandemic levels of economic activity by the middle of this year.

Well ahead of initial forecast, which some of the earlier research and indication saying that we wouldn’t be at the same level of economic activity until around the end of 2022, so we are well ahead of where those initial forecasts were.

At the RBA board meeting today, Governor Lowe and the board kept the cash rate on hold, so we did see the cash rate remaining at 0.1%.

They also kept steady their guided course around quantitative easing and also, their yield curve control program in the bond market. The RBA has been crystal clear in terms of its policy setting, so I want to go through them again, just so we know what we’re talking about.

  • They will not move the cash rate until such time as actual inflation is sustainably within 2 – 3% target range and they expect that this will not occur until early 2024. It’s at this point in time that they will look at it, but remember, it needs to be sustainably within that. Not a forecast, actual inflation in that 2 – 3% range.
  • In terms of its quantitative easing and bond yield curve controls, they will do what’s necessary to keep them in check, and keep money available, and credit flowing at a cheaper rate.
  • Number three — they will focus on wage growth as the catalyst to drive inflation, to be substantially within that 2 – 3% range, and this means that going after unemployment, and they want to see a four or possibly even a high three in the front number, and this has helped to achieve full employment. This will put pressure on wages and it’s that simple. This wage pressure is hopefully going to result in stronger inflation.

On the housing front, they will be pleased to see that the pace of growth is slowing from the very high levels over the past couple of months, and to date, their monitoring on the riskier lending standards, hasn’t resulted in any raised concern at this moment in time, but they’ll keep a close eye on that. That will be their dialogue in terms of their signaling to the market. Finally, on the RBA front, they recognise the economy is doing a lot better at this time than they, and many others had anticipated, which is that good news story. We’re heading in the right directions as we expect this month’s Federal Budget will also have a strong focus on jobs and economic growth.

Let’s talk about the inflation data.

Globally, we’re talking about a “transitionary story”— and that’s the buzz word. In Australia, our inflation dragon hasn’t been seen anywhere, so contrary to many economic forecasts who had predicted that the inflation dragon was going to show its head in the March quarter. Well, let’s just say, there was no inflation dragon was present at all. Headline inflation rose 0.6 of 1% in the March quarter, the increase was primarily driven by rising fuel prices alongside the recovery in oil price over the year, headline inflation is up 1.1%. Trimmed-mean inflation, the measure the RBA focuses in on, increased 0.3 of 1% in the March quarter, while over the year, growth actually declined from 1.2% to 1.1%. This reading is the lowest annual growth rate on record.

Again, no inflation dragon here, so now the economists — our economic friends — all turned their inflationary dragon story to the June quarter with the baseline effects of last year’s fall, and then basically the turning off of some of the government support schemes.

They are now expecting a notable lift in headline inflation to appear in the June quarter. Remembering some inflation is healthy for the economy, especially when it’s driven by employment growth and higher wages.

Speaking of employment. Let’s take a look at the employment data. Hot off the news, fresh yesterday was the ANZ jobs data, and the ANZ, Australian jobs rose 4.7% month-on-month in April. It’s the 11th straight month of gains signaling strong labor market demands have continued post JobKeeper. Job ads are now up, wait for this, 27.8% on pre-pandemic levels. In terms of the unemployment rate, employment grew 70,700 jobs in March. A terrific result given February was also a strong month of 88.7%, and we expect that number to continue through April. Importantly, there are now more people employed in Australia than before the COVID pandemic ravaged the labor market. The unemployment rate declined to 5.6% from 5.8% in February.

Again, forward-thinking. We all now turn our attentions to next month’s data, as it will give us a first glimpse of the impact of the JobKeeper expiry in the economy. Most economists are predicting some disruption to jobs is likely, but given the overall momentum in the economy, they don’t believe that it will be enough to prevent the unemployment rate ending the year at an even lower right than it is now, so that’s a good news story when it comes to unemployment.

Consumer confidence and sentiment — the Westpac-Melbourne Institute Consumer Sentiment Index rose 6.2% to a reading of 118.8 in April. The index is now at its highest levels since August of 2010. This was another important observation in that the survey was taken in the week after the JobKeeper expired, which suggests consumer optimism about the outlook remains resilient and is another positive economic sign.

Retail spending — Also, on the up, continues to show strong positive news. Retail spending numbers are on a strong run. Preliminary estimates show that retail spending jumped 1.4% in March, beating economic forecast estimate of an increase of 1%, but the rise follows a 0.8% decline in February. That said, the increase was led by Victoria with a 4%, and WA, 5.5%, which rebounded from a snap lockdown in February. There was also a small decline in Queensland alongside a three-day lockdown at the end of March. By industry, cafes, restaurants, takeaway services led the rise in restrictions, eased in Victoria and WA. Clothing, footwear, and personal accessory sales and department stores also saw gains. Food retail declined slightly. Over the year, retail sales are up 2.3% in March.

Looking forward, it is expected that retail sales will be supported by low interest rates and the upturn in house prices, which obviously brings out The Wealth Effect, improving labor market conditions, and elevated consumer confidence.

We know that the consumer has been leading the charge post-lockdown, but what about businesses? It’s essential that we see that business confidence and investment also flow through. Well, I’m pleased to report, they look to be joining the party with business conditions hitting a record high in March, increasing to 25 from a reading of 17 in February. This is the survey’s highest reading since 1996. On the business confidence front, the reading did ease to 15 after lifting to an 11 year high of 18 in the previous month, although importantly, it remains well above its historical average. Business conditions in all industries have returned to positive territory, in trend terms, and that’s the first time since mid-2018.

The Australian Bureau of Statistics in mid-April, also ran a survey for business confidence and sentiment, and the key takeaways were that, operating conditions for businesses have continued to recover, and business revenues improved further in April with only 18% of businesses reported a drop in revenues. The lowest share since the pandemic began. Now, that means that the share of businesses reporting higher revenue was also the best result this year with 82% reporting revenue increases.

Taking a look at some of our indexes. The Markit Services, Purchasing Managers Index, the PMI Index that shows services continue to expand in March with a reading of 55.5 up from 53.4 in February. Markit Composite PMI also climbed to 55.5 in March as well. Remember, a reading of 50 or greater is expansionary and the AIG’s Performance of Services Index lifted in March to 80, to 58.7 from a reading of 55.8 in February.

Private credit story. At the time of recording this presentation, we did see the private credit reports for March, not April, but still in positive numbers, so private credit grew by 0.4 in March, it’s fastest monthly growth in the past year. It’s also an encouraging sign that household and businesses are beginning to borrow more and to fund investment in economic recovery, as the economic recovery continues. Business credit may have turned the corner, where business credit growth ticked up 0.3 of 1% in March and is been reporting positive business credit growth has been anemic over the past year, so this is a real positive development, and we hope momentum continues on the front of this improved business conditions and improved confidence reading story. Housing credit growth continues to accelerate in March up 0.5, led by owner occupiers. Housing credit has been on the rise since late 2020. Other personal credit increased by 0.2 of 1% in March. This is the largest monthly increase since 2015, although on an annualized basis, other personal credit growth is still down 10.7%.

Now, turning our attentions to the property market…

Construction. We did see the AIG’s Construction Index rise to 61.8 in March, a record high. A level above 50 indicates growth is likely in construction. Construction activity is being driven by the Home Builder Program, low interest rates, and shifts towards detached housing and regional areas. In terms of building approvals, the federal government has extended the deadline to begin construction under the home builder program. Those eligible for the grant before its March 31 conclusion, will now have up until September of 2022, to commence construction rather than this September. The government said more than 121,000 people applied for the grant. The Housing Industry Association says the extension will allow for more homes to actually be built.

In terms of property prices, we saw CoreLogic‘s data release yesterday, and according to their April reading released yesterday, property prices continue to grow, but the rate of growth is slowing.

Australian house prices rose 6.8% for the past three months, and at 10.2% higher than the COVID low of September of last year. Generally speaking, Tim Lawless, Head of Research at CoreLogic, noted in his report that the reason for the slowing in pace could be attributed to prices rising higher than income growth. Meaning some are starting to be priced out of the market based on deposit requirements, potential borrowing power they have, and thus the overall affordability story. You can listen to Tim’s interview on The Property Couch about this here >>

Now, in terms of my opinion, it’s logical to conclude that the pace of growth was unsustainable at the rate at which it was growing, and things will and have settled down and we will see them doing so over the coming months.

Taking a look at the results for the April month…

  • Sydney saw a growth of 2.4%
  • Melbourne saw growth of 1.3%
  • Brisbane, 1.7%
  • Adelaide, 2%
  • Perth, 0.8%
  • Hobart, 1%
  • Darwin, 2.7%
  • Canberra, 1.9%

For a combined capital cities growth rate of 1.8, and the combined regional growth rate of 1.9. Leaving our national growth rate of 1.8 that was reported for the month of March.

Overall annual returns, we look at combined capital cities, 9.4%; combined regionals, 18.2%, so that has been the COVID story as people move to the regions. Overall, nationally on an annualised return basis, we’re seeing 11.4%. Median price across Australia currently sits at $625,000 in rounded terms.

Now, in terms of my property messages, and as I close out this economic update, this is my message….

Those who have strong incomes, potentially some equity and some stable employment still have an opportunity to drive demand in the marketplace. I still see those upgraders, the owner occupiers who are driving the demand in that space, as well as also potentially maybe buying a second home in the regions, or starting to look at buying an investment property, are going to drive demand growth for the foreseeable future. That will see property prices continue to grow, just not at the pace that they have been growing, but this cycle is still well and truly underway. There’s still plenty of price growth left in this particular cycle, so that’s something to also take away, if you’re thinking about taking action inside this particular market.

My other message is just in terms of the broader economic story. The news is super positive. The numbers are all pointing in the right direction. Confidence, momentum is on our side, all because we’ve had our freedoms back and we’ve been able to get on with our lives and do the spending that’s needed to grow the economy. If we stay on top of the health crisis, we will win both the short and longer-term economic story and prosperity story for all.

But what do we need to do to get that?

Well, the answer is pretty simple. We need to get vaccinated. When the government is allowing us to do that based on our age and accessibility, it’s really important that we continue to get vaccinated, because there is obviously a very high risk and in my personal opinion, we will see further lockdowns as we head into winter, so that should encourage us to get our vaccinations done as quick as possible. It’s really important that we do that because if we don’t, we will be going down into these sort of isolated lockdowns, and if it gets out of control, a more severe lockdown, so we do need to get vaccinated when we’re allowed to.

Finally, May is the Federal Budget month, so it’s going to be important to see what we see in Mr. Frydenberg’s, our treasurer’s, announcements coming up in the May budget. I suspect the story is going to be very, very strong on jobs, jobs, jobs, and also, on that economic growth story. I suspect spending will improve. There will be a significant improvement in terms of the budget deficit, probably in the vicinity of $50 billion or more, in terms of where we thought we would be, because of this economic improvement that we’re seeing. That’s what we’ll basically see, and hopefully we’ll be able to report on the highlights of the Federal Budget next month.

So until next month’s update, remember Knowledge is empowering, but only If you act on it.

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