In the strongest sign yet of the rapid recovery in the Australian economy from the Delta lockdowns, employment surged by a record 366.1k in November in a significant upside result on consensus for a 200k rebound (reviewed here). This more than recovered the job losses seen over the course of the lockdowns and took employment back above pre-pandemic levels. While Omicron is a risk to the momentum, it is not surprising that eased restrictions and a tightening labour market sees consumer sentiment firmly in the optimistic range going into 2022, with the Westpac-Melbourne Institute index printing at a 104.3 reading in December. Furthermore, the latest reading on job vacancies (+252k in November) and indications from the November NAB Business Survey suggest that labour demand beyond this initial rebound remains very strong.
Importantly, there has also been a strong response from the supply side as many people came back to the labour force once the lockdowns eased. The participation rate rebounded to 66.1% to be around the levels prior to the Delta outbreaks, though in New South Wales (64.9%) there still remains a shortfall. As restrictions on businesses eased and venues reopened, hours worked across Australia increased by 4.5% in the month to be up 2% on pre-pandemic levels. The configuration of surging employment and hours drove a decline in the unemployment rate from 5.2% to 4.6% (vs 5% expected). Underemployment (7.5%) fell to pre-Delta levels and broader underutilisation (12.1%) is at a 9-year low.
In speaking about the economic recovery this week, RBA Governor Philip Lowe said the Board was open to discontinuing bond-buying in February if the strong momentum was sustained over the summer. This would also be consistent with the more accelerated tapering schedules now being followed by other central banks (discussed below), which is something Governor Lowe reiterated the RBA will consider when it reviews its QE program in February. A strong Delta recovery was also contributing to an improved budget position for the Government, with MYEFO revising the deficit in 2021/22 up to 4.5% of GDP from 5% forecast in May (reviewed here). In its post-MYEFO issuance update, the AOFM advised the borrowing requirement for 2021/22 was now expected to be around $105bn, down from around $130bn anticipated after the May Budget. Net debt, therefore, is seen tracking a lower profile with the 2024/25 peak reduced from 40.9% of GDP to 37.4%.
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Offshore, the messaging from global central banks has clearly shifted after a week that saw meetings from the Fed, ECB and BoE among many others. In spite of Omicron, the pandemic seems to be assessed as having a diminishing impact on economies, with high inflation now posing a more pressing risk to sustaining recoveries. In the US, the Fed's FOMC met expectations in announcing a faster taper of QE, with the clip to double to a $30bn/month reduction from January. In the post-meeting press conference, Chair Jerome Powell said that with the labour market making strong progress towards maximum employment and due to high inflation, QE would be wound up in March 2022, a full quarter earlier than previously signalled.
Beyond tapering, the updated Summary of Economic Projections now has 3 rate hikes next year as Committee members' median projection, whereas in the September forecasts 1 hike in 2022 was seen as a 50/50 proposition. This comes on the back of a significant upgrade to the inflation outlook through the remainder of this year and into next. In 2021, headline PCE was lifted to 5.3% from 4.2% and to 4.4% from 3.7% on core PCE. The pace then moderates in 2022 but remains well above target at 2.6% (from 2.2%) on headline and 2.7% (from 2.3%) for the core rate. Even with the pandemic intensifying, rapid growth is anticipated in the US economy next year (4% from 3.8%) supported by strong household incomes and spending and this sees the Committee's maximum employment objective within reach as the unemployment rate falls to 3.5%. Thereafter, the median 'dot' shows a further 3 hikes in 2023 and 2 more in 2024, taking the policy rate to 2.1% — a significantly higher level than seen by markets (around 1.5%).
Taking a more gradual approach to normalisation is the ECB with the Governing Council recalibrating its QE programs at this week's meeting as President Christine Lagarde reiterated pushback to raising rates in 2022 in the press conference. While Covid has hampered momentum in the euro area — December's composite PMI reading turned out at a 9-month low of 53.4 — the recovery continues to make progress at the same time as inflation pressures are rising. The latest ECB Staff macroeconomic projections have GDP growth running at very elevated rates of 5.1% in 2021 and 4.2% in 2022. High energy prices and ongoing supply constraints drove substantial upward revisions to the inflation outlook this year to 2.6% (from 2.2%) and in 2022 at 3.2% (from 1.7%) to be well above the ECB's 2% target.
In response, the Governing Council outlined its schedule for tapering QE, with the pace set to slow from €80bn/mth currently to €20bn/mth by October 2022. To get there, net purchases under the PEPP (the program the ECB introduced at the outset of Covid) will be dialled back from €60bn/mth currently to a "lower pace" ahead of being discontinued in March 2022. However, reinvestments from maturing securities will now run for at least another 12 months through to 2024 and will be made "flexibly" to guard against yield spreads across jurisdictions widening too sharply. Should the pandemic cause the recovery to falter, the ECB has not ruled out restarting the PEPP.
To help smooth the transition away from PEPP, the Governing Council elected to temporarily accelerate purchases in the APP program, where the current run-rate is a much lower €20bn/mth. In Q2 next year, the pace will lift to €40bn/mth before easing to €30bn/mth in Q3. A small and time-limited boost to the APP was one of the options being touted by ECB officials during recent weeks, but the key surprise was the commitment to open-ended purchases of €20bn/mth from October 2022 onwards until shortly before the Governing Council starts raising rates.
Lastly, in the UK this week, the Bank of England surprised markets by hiking its policy rate by 15bps to 0.25%. After an expected hike was resisted at the November meeting, markets had been of the view that with the pandemic becoming a headwind to the economy again, rates would stay unchanged. Indeed, the accompanying statement said the Bank had already lowered its November estimate of Q4 GDP by 0.5% due to these effects, however; the Monetary Policy Committee still voted 8-1 in favour of hiking. Key factors were the labour market was assessed to have achieved the required progress that had prevented a hike at the previous meeting, while this week's inflation data came in significantly stronger than the Bank's forecasts as the headline CPI surged to 5.1%Y/Y in November.
