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Ben Kingsley Blog post by Ben Kingsley

RBA Cash Rate September 2021: Australia’s Planned Recovery NOT So Predictable?

Good day everyone, I’m back with the update, the economic and RBA update for September 2021. It’s been a while, but let’s get into it.

  • We’re going to talk about the Delta disruptor.
  • We’re going to be looking ahead to the $64 million question about how consumers will respond once our two biggest economies open up?
  • We’re also going to see how the housing market is powering on.

So, let’s get into the numbers.

Firstly, I want to talk about COVID.

It’s obviously the biggest challenge that we have both domestically and globally as well. And whilst it been the big news story – this Delta strain – whilst I’ve been away, has also ruined our V-shaped recovery in terms of the global economic recovery. It’s obviously a highly contagious strain and it’s definitely impacting our planned recovery but, like most nations around the world, is also being impacted by its ability to easily penetrate populations across the globe. Okay. So the high vaccine rates is really the only way that we can curb the hospitalisation numbers and ultimately the deaths. So that’s why I’m focusing in on the health issue because it’s also going to be an incredibly important economic issue as we move forward. So when we are looking at the economic recovery today, Australia has managed the crisis very, very well. So not only have we reduced the numbers of infected people, that has also led to reduced numbers of deaths and also meant that the economy was able to open up and do really well.

So when we look at the quarterly GDP numbers at the end of June, we can see here that the Australian economy is larger than the pandemic before.

Our economy has grown 1.6% in real GDP, relative to pre-COVID levels.

Now to put that into context, the US has grown only 0.8%. And every other developed nation – let’s go through them: Japan negative -1.5%, Canada -2%, France negative 3.2, Germany -3.3%, Italy -3.8% and the United Kingdom -4.4%. So that just gives you the context in terms of how well we’re being able to manage that.

Now, of course, the biggest news in town really is around vaccinations and obviously the debate that’s been going on around, Should I be vaccinated or should I not be vaccinated? And that sort of vaccine hesitancy that we’ve seen out there. So, I have been consistent with my approach for property spruikers – you know how I don’t like the property spruikers. Well, I’m also going to be talking about anti-vaxxers and the spruiking message that they’ve got out there. So I feel strongly about obviously property spruikers and that’s why we do the work that we do, but there’s also the misinformation that we’re seeing from anti-vaxxers as well. So it’s important to just follow the data. Okay. So we do need to acknowledge that there are potential health risks, including the very, very low risk of death when being vaccinated, but as a numbers man, I can tell you that the hospitalisation rates and also the death rates from both short and long-term COVID are being significantly impacted by those people who are unvaccinated versus vaccinated.

So all I’m saying to you is it’s ultimately your choice and it’s really important that you aren’t seduced by misinformation or half-truths to tell a story. So be informed, but ultimately if you want the cards stacked in your favor, it’s probably best that you are vaccinated, and it obviously means that we all benefit from everyone doing this together. So that is an important message from an economic point of view, which I’ll round out at the end of this summary.

So, now let’s turn our attention to the Australian economy and the RBA today kept the cash right on hold at 0.1%.

Now that’s the most important decision for all of us mortgage holders, right? They will continue to keep a watchful eye and make some appropriate tweaks. So you remember the other leavers that they were pulling around the bond and the money markets to ensure that there’s appropriate liquidity. And then obviously money stays cheaper for longer to stimulate the economy. So in things like their quantitative easing program – that will probably slow in 2022. So we will start to see these tweaks, but always just remember from the layperson’s point of view, and from our point of view, that they’ll do what they’ll need to do in terms of massaging us through this period, whilst also keeping an eye on inflation as well. So bearing in mind that there were some tweaks, there will continue to be some tweaks and then we’ll see some more action on this in regards to 2022. We did see the June quarter GDP numbers come through and those numbers were stronger than most economists expected. There was even talk that there might have even been a negative number, and we might’ve had this quick recession that no one was anticipating, but no, the consensus was 0.4% rise.

The actual number came in under 0.7 in terms of the growth for the quarter. Now that means that the overall economic activity grew by 1.6%. And that is now above those pre-pandemic levels that I mentioned earlier. Now, that is also important to note because it was prior to the lockdowns that we’re seeing in New South Wales and also in Victoria and some of the smaller lockdowns that we’ve seen in Queensland. Now that means on annual terms, the economy has grown by 9.6% to the year to June. Now this is the strongest on record, but we always need to understand that the reason why it is super strong – it’s because we had a collapse in the economy in regards to the COVID events of last year. So that is now obviously meant that those numbers are artificially inflated, but it also means that we need to understand that there is a good reason to be optimistic because that was still pretty solid numbers.

So, irrespective of the fact that we had a pretty ordinary couple of quarters, right in the heart of the release of the pandemic we’ve certainly been able to bounce back from that. Household consumption rose 1.1% for the quarter, business investment picked up by 2.3% on the back of spending on machinery equipment in response to the government tax incentives. Now again, in the September quarter is almost certain to go into negative territory with our two biggest economies in sustained lockdowns, but most economies are now starting to see that the December quarter, where we hopefully will be coming out of these lockdown periods are easing out of lockdowns in October, November.

We’ll start to see, hopefully, those numbers improving, but short-term economic outlook is a little bit benign – but again, looking at in the medium to longer term it, looks a little bit better than that.

Trade & Unemployment

In terms of trade, the Australian reported a record current account surplus of 20.5 billion in the June quarter. This is a 1.5 billion increase from the 18.9 billion surplus that we had in March. This is the ninth consecutive surplus that extends the longest run of current account surplus in the year history of the series, and wait for it, that was way back in 1959. Looking at the unemployment story whilst I’ve been away, we did see in July that employment actually increased by 2,200 jobs in the month and the unemployment rate fell to 4.6%, which is the lowest in 12 years. Now, the fall in the unemployment rate was mostly reflective of the participation rate dropping from 66.2 down to 66%. So that is also the reason why the unemployment rate dropped. Now, it was also masked by the fact that the sample was taken in early July before the more severe lockdowns that kicked in, in New South Wales and then ultimately in Victoria.

So it’s definitely clear that August’s numbers and obviously September’s numbers will probably say the unemployment rate kick up into the fives. But again, looking at what most of the forecasts are coming out from the economists, from the banks, they’re basically saying that we’ll probably move to low fours by the end of 2022. So that’s a positive story in the medium term for unemployment. Wages growth, which is a big focus for the RBA. The June quarter only saw wages grow by 0.4% and to be 1.7% higher over the year. Public sector wages growth grew by 0.4 in the June quarter. To match that, the annual growth for the public sector is only 1.3. However, the private sector over that 12 month period is 1.9. Now it’s my view that it’s probably too early to look at wages growth with a lot of companies potentially resetting wages and annual reviews into the new fiscal year.

Wage Growth

And so I expect that wage growth story will improve, or was going to improve during that time sort of September quarter, but now we obviously are seeing again with some of these uncertainties around lockdowns, that there might be a question mark still rising there, but medium term on the believer that there will be some wages growth coming through as we do see demand shortages in the labor market. So we’ll wait and see what happens there. Consumer confidence and sentiment, well naturally, we’re going to expect that there’s going to be a hit to consumer confidence whenever we have a lockdown. So the monthly consumer sentiment index fell 4.4% to 104.1 in August. Now this is the lowest reading since September 2020. That said, it’s still a good reading. There’s more optimism than pessimism as we start to live with COVID going forward.

Time To Buy A Dwelling

On the property front, the one we look at there is basically the affordability measure in terms of time to buy a dwelling. Well, when I left in June and now back in here in September, that number was at really high levels, but it’s now fallen by another 8.3% and the reading in August has it at 89.9. So there’s more people thinking it’s not necessarily a great time to be buying property, but there’s still pent-up demand in the marketplace there. Retail spending, we did see retail spending continue to be plagued by the lockdowns. So retail sales fell by 2.7 to be 3.1% lower over the year to July. This follows a 1.8% fall in June. Retail sales have now fallen 4.4% over the two months. Now in saying that we also learned what happens after lockdowns, and that is we do see a spike in spending and a real bounce back. So we expect that to also be the case as we’d lead into to the December quarter and into Christmas.

Business Investment

Again, the lockdowns are the big story here. The landscape was absolutely very positive for a ripe uptick in business investments, and that’s what we saw. So business confidence and capacity utilisation were growing around record highs. There’s been strong growth in profits and generous tax incentives have continued to encourage that investment. So prior to the latest lockdown the business sector had a spring in its step with a 4.4% pick up in business investment in the June quarter. This follows robust growth in the December and March quarters of three and 6% respectively. In terms of spending, plans remained resilient despite the survey being conducted in July and August, when much of the country was in lockdown and still is. And so we saw the estimate three for the 2021, 2022 was 127.7 billion in spending, which is around 17.5% high than the last estimate three from a year ago. So that’s a positive news story. Obviously, ongoing disruptions to the economy means that there’s still some uncertainty in that outlook and businesses generally don’t like uncertainty, and so that’s why we have this roadmap out of the current situation where we will see as we hit vaccination rates of 70 and 80%, the reopening of our economy over time. So hopefully our premiums will get on board with that because the economic output is going to be important with those reopening.

Credit

Private sector credit. So we did see credit extended to the private sector grew by a solid pace in July, up 0.7% for the month and 4% in the 12 months to July. And this is the fastest pace of growth in this sector for the last two and a half years. Growth was driven by credit extended to owner-occupies. And I’ll talk more about that owner-occupier story shortly and for business purposes.

Other personal credit, such as credit cards and personal loans continues to fall, which is not a bad news story. As that discretionary spending, we don’t necessarily love to see people are getting into too much credit risk in their discretionary nature. And we obviously, when we’re in lockdown, our savings numbers also increase. Business credit expanded 1.1% in July after a solid increase of 1.6% in June.

We were talking about those housing lending data numbers for the owner-occupier. Well, the value of housing lending approvals, excluding refinances, is up 0.2 in July to be, wait for it, 68.2% higher over the year. So that’s telling you that the property sector is relatively healthy. In addition to that, we saw refinances were up 6% in the month to be almost 60% up on a year ago. So people are taking advantage of shopping the market to get a better deal out there.

So, lending to owner-occupies edged up by a modest 0.4 in the month. Lending for construction, which was earlier boosted by the home builder program and obviously that is now ceased, fell by 4.7 in the month and it’s now 41.9% below its peak of February 2021. Now remember, you go back through our data, we were talking about these incredible numbers, which moved so much of the demand forward in terms of first home buyers. And now we’re starting to see a lag of that as first home buyers in the market, because of that moving forward that we saw during the home builders schemes and the incentives to stimulate the economy.

Turning our attention to investment lending. Well, in our business, we know there is still a huge desire to get into investment properties, and so investment lending grew by 1.8% in the month to be 98.7% higher than a year ago.

So just let that sit. This is the ninth consecutive month of growth. So investment lending is at its highest level since April 2015. So that would also mean that APRA and the banks will be very careful in terms of looking and managing what sort of risk is coming into the market, whether they need to put some macro prudential regulation in place. So at this stage, we haven’t seen any surprises there. And so hopefully the market will be allowed to do its thing because we don’t see systemic risk in that place at the moment.

Building Approvals

In terms of building approvals for July, as we continue our theme in looking closer at the property sector, residential building approvals continue to fall in July, impact of HomeBuilder we talked about earlier, continued to unwind as the lockdown swept through the country. So building approvals fell 8.6% in the month, although still they remain 10% above their pre-COVID levels as at December 2019.The decline in July was underpinned by a 12.3% decline in private multi-dwellings. So that is obviously the apartments and also the townhouses market. Private sector houses approvals also fell 5.8% in the month. Looking around the states because we want to have a look at this in more detail, the largest of clients was in South Australia at 16.9 followed by New South Wales at 11%, WA 10.5, and Victoria 9.2. Queensland buck the trend with approvals increasing by 9.7% in the sunshine state. As we have seen that migration and population push into Southeast Queensland is doing good things for that local economy. Our rural approvals in New South Wales, Queensland, WA, South Australia, still between 20 and 50% higher than their pre-pandemic levels. So even though we saw that negative fall in the month, still booming in terms of the demand for new housing. Victoria is the only one who’s behind the eight ball there with private sector approvals down 8.6% compared to their pre-pandemic benchmark as at December 2019. And remember there was a flood of people coming into Melbourne, almost a thousand people a week were relocating and moving into that Melbourne market. So we have seen that slow down a lot, and obviously that’s on the back all the six lockdowns that we’ve experienced here in Victoria.

Property Prices

In terms of property prices, we’ll round this out now…

The housing boom continues to push ahead in August despite the disruptions and those lockdowns.

So CoreLogic National Home Value Index increased by 1.5% in the month and annual term dwelling prices increased by 18.4%, which is the strongest growth that we’ve seen since the late 1980s or over 32 years ago. That said, the monthly rate of growth is slowing. So it’s the fourth consecutive month where that is cooling off a little bit, reflecting growing affordability constraints. And obviously with some prices pushing above the means of some in those areas, and that is cooling the market as affordability starts to take ahold. The current lockdowns have resulted in a fall in listings and due to the challenges to actually inspect and buy a home. So we’ve seen a result in listings because people are saying, “Well, why would I list to sell if people can’t come out and look at my home and buy it,” which is all obviously reflected in a decline in the sales volumes, but as we talked about, it doesn’t necessarily mean that the prices are going in the wrong direction. So we still see that there’s obviously a lot of pent-up demand for property still right now.

So let’s walk through the numbers. It’s been a while since we’ve done this. So let’s walk through the results as at the 31st August from our good friends at CoreLogic. We did see that Sydney’s monthly gain was 1.8%, bringing their annual gain to 20.9% growth. So if you add also their yield, a really healthy return of 23.8%, resulting in the median house price now in Sydney of $1,039,000. Melbourne, a 1.2% growth in the month, annual is 13.1%, so lagging most of the other states. A total return 16% median house price, around that sort of $770K mark. Brisbane, 2% growth for the month, 18.3% annualised, at 23.1% return, median house price 612. Adelaide 1.9% for the month; for the annual return 17.9% and a 22.7% return when you factor in the yield, median house price in Adelaide now sits at around $522,000. Hobart 2.3% for the month; annualised 24.5%, total return of 30.2%, median house price $639,000.

Darwin, the only negative in the read this month, -0.1, annualised still 22%, add in the yield and it’s a healthy 29% return. Median values in Darwin are $486,000. Canberra, 2.2% for the month, 22.5% for the year. Add the yields in there, 26.8, a median house price of $816,000. Now, you notice there is an exemption there, and that is Perth. CoreLogic have indicated that they’ve got some irregularities in their numbers for Perth, so they’re doing some investigations around that. And so that’s why those numbers have been withheld in the latest data-set. Combined capital’s finished 1.5 as noted earlier. Overall annual 17.5, total return of 20.9% and the median property price, there’s no such thing but across the country, is $751,000. Combined regions, because everyone’s talking about the regional markets, grew by 1.6% for the month, annualised return of 21.6 for a total return of 27.1.

When you factor in the rental yield and the medium combined regional property market values of 493,000 across there. So that just gives you some idea in terms of how well the property market is shaping.

Forward forecasts are also suggesting that we’ll still see some strong growth, although not as strong as 2021 into 2022.

So the housing property story continues unless you do see some macroprudential interference in terms of the level of growth that we’ll achieve in this cycle. So let’s summarise these numbers, and let’s talk more about where the main conversation is at. It’s really around how we see the re-opening of our two biggest economies in the coming months. So what is going to happen and what is going to play out? So we are starting to have those conversations around the COVID and living with COVID, but that is obviously going to mean depending on the level of vaccinations and what percentage of people will be hospitalised. And unfortunately, what percentage of people, or what number of people may die from this pandemic.

So that is going to play in the psychology of every household in terms of how they adopt to these new situations. So if they’re seeing fearful images in the news and so forth, that may mean that they may spend a little bit more time at home and do less spending and less movement in and out and about in the economy. So will they return to living their lives normally, or will there be a more softer approach? We don’t really know what people’s expectations are because in the past when we’ve opened up, it’s because we’re basically are being able to reduce or get a zero community spread of the virus. That’s not going to be the case obviously, in our two biggest centers. So that is going to potentially see households behaviors might moderate or change until they feel more and more comfortable and more safe in terms of their movements when they’re out and about.

So that will be the case and ultimately we’ll know that time will be the judge of that. So we do see increased hospitalisations and some horror stories, then ultimately that could play an impact. We don’t know, it’s too early to call and have a read on that. More broadly speaking, obviously the economy’s again, in pretty good shape. People have been able to learn how to work from home and do the things that they need to do and that puts us in good stead. But the reality is, when we’re in complete lockdown we don’t have those freedoms. That also means that consumption from an economic point of view is significantly impacted. And that will have an ultimate impact on employment, jobs, and household wages, and so forth. So it’s an interesting time. We’ll see how it plays out over the next couple of months, and as we said, Time Will Be The Judge.

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

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