With much of the nation locked down in the Delta-affected September quarter, the Australian economy contracted by 1.9%q/q. Although the decline was less severe than forecast (-2.7%), this was a significant disruption to an expansion phase that was full of running after earlier recovering from the 2020 Covid recession, with Australian GDP backsliding to be 0.2% below its pre-pandemic level. All indications are that the economy will more than rebound in Q4, but this was an unwelcome setback that has delayed the timing of the recovery and added to existing supply/demand pressures.
Household consumption was down 4.8% for the quarter, its second largest fall on record, as spending fell away by 8.4% in the jurisdictions in lockdown across New South Wales, Victoria and the Australian Capital Territory. Consumption of services was crunched by 5.8%q/q as hospitality and entertainment venues were heavily restricted. A smaller decline in goods consumption (-3.3%q/q) is typical of the redistribution of spending that occurs during lockdowns, in particular with online spending receiving a large boost. A key dynamic is that with the lockdowns curbing spending and with governments supporting incomes, the household saving ratio surged to 19.8% to be close to the record highs seen in 2020. With the pace of monthly retail sales accelerating from 1.3% in September to 4.9% in October (review here), households were clearly spending some of their accumulated savings once the lockdowns were lifted. This is likely to keep momentum in household spending rolling for some time into next year. However, it will also be important to consider where the spending occurs, which in large part depends on how the Covid situation and associated restrictions evolve, particularly given that the risks to the inflation outlook are to the upside. Before Q3, there was already a large imbalance between goods and services spending and this has been accentuated by the Delta setback.
Also a headwind to the domestic economy in Q3 was inventories (-1.3ppt), which became depleted due to pressures in global supply chains and associated product shortages. Business investment fell (-1.1%q/q) as firms delayed equipment spending during lockdowns, though forward-looking indicators suggest this will be deployed over the remainder of the financial year rather than being foregone. Restrictions on construction work and capacity constraints from labour and materials shortages stalled the upswing in the residential construction cycle in Q3. Bolstering the economy from a larger fall in output was a strong contribution from public demand (0.9ppt) as the vaccine rollout was stepped up. Net exports swung from a headwind in Q2 to add 1ppt to Q3 activity, but on weak detail with imports falling sharply. My feature-length review of the Q3 national accounts with analysis and charts can be accessed here.
In other developments this week, housing prices nationally were up by a further 1.3% in November to 22.2%yr. Rising affordability pressures and the ending of construction subsidies are curtailing the owner-occupier segment where a 4.1%m/m fall drove an overall contraction of 2.5% in monthly housing finance commitments (review here). Investor commitments remain on the rise and sit just off record highs, though credit growth to the segment (3% 6mth annualised) is running at less than a third of the pace seen for owner-occupiers (10%). An unwind from a recent rise in the higher-density segment saw dwelling approvals down 12.9% in October (review here). The trade surplus narrowed in October but remained high at $11.2bn on the support of elevated commodity prices (review here), which is also the key dynamic behind the rise in the nation's current account surplus to a record high in Q3 at 4.4% of GDP (review here).
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Offshore, many questions around Omicron remain unanswered but markets are on the move regardless. In the US, with momentum in the economy strong and inflation elevated, Federal Reserve Chair Jerome Powell said during a Senate testimony appearance this week that the FOMC would discuss accelerating its QE taper process "by a few months" at its upcoming meeting. The minutes from the previous meeting, where the Committee announced the taper, had already put this on the table in which "some participants" had argued for QE to be wound up sooner than its guidance implied for the middle of next year. Markets are taking a faster taper as a sign that the timing for rate hikes is also coming forward, with the yield curve flattening on the back of this, and this conviction appeared to be bolstered by Chair Powell saying that the Fed would move away from its characterisation of inflation pressures as transitory. A strong nonfarm payrolls report rounded out the week and indicated a December acceleration of the taper is likely. While there was a large downside miss on payrolls in November at 210k against 550k expected other aspects pointed to a tightening in the labour market. The unemployment rate fell from 4.6% to 4.2% and underemployment declined from 8.3% to 7.8%, with both measures at their lowest levels since the onset of the pandemic. Participation lifted slightly in the month to 61.8% but remains well below the level that prevailed before Covid at around 63%. If this lower level of participation persists, even decent employment outcomes (such as November's) have the potential to drive the unemployment rate a lot lower.
Over in Europe, November's inflation print came in well above estimates with the headline rate rising from 4.1% to 4.9%yr (vs 4.5% exp), its fastest since the introduction of the single currency. The core rate was left pushing record highs after elevating to 2.6%yr (vs 2.3%) from 2%. Increasing price pressures are coming mainly on the back of surging energy prices (27.4%yr) due to shortages. However, both non-energy industrial goods (2.4%yr) and services (2.7%yr) also advanced pointing to a broadening of inflation pressures, though there is some statistical volatility driving the latter. With the pace of inflation expected to ease back in 2022, ECB President Christine Lagarde again reiterated this week that the prospect of rate hikes next year was an unlikely outcome. But ahead of the next ECB Governing Council meeting in a couple of weeks, speculation continues on the path forward for the Pandemic Emergency Purchase Programme. The key issues are whether Omicron will delay the ECB's guidance for net purchases to end in March and, when the net purchases do eventually end, how it might go about smoothing out the process to prevent yield spreads from widening too severely.
