Updates out in Australia this week were on construction activity and private sector capital expenditure for the September quarter, providing some insights ahead of next Wednesday's national accounts. The Q3 national accounts are expected to show that the Australian economy rebounded from its Covid-19 shutdown as the easing of restrictions led to a greatly increased range of opportunities for households to spend, supported also by an unprecedented tide of fiscal and monetary stimulus measures, though the later reversal of Victoria's reopening weighed heavily. For a detailed preview of next week's national accounts see here.
Australian construction activity declined by more than expected in Q3 contracting by 2.6% against -2.0% forecast (review here). The impact of Victoria's shutdown accentuated the decline as restrictions limited worker capacity on sites as non-residential construction work in the state plunged by 14.7%q/q to be down by 3.4%q/q nationally. Weakness in private sector residential construction cycle persisted (-1.2%), albeit around a divergent outlook for houses and units. Work done in the detached housing segment was up in the quarter (1.1%) — so too alterations (4.6%) — on the support of a range of government stimulus measures, while very low interest rates have also spurred demand recently, particularly from first home buyers. But higher-density housing was down sharply (-6.2%) and is facing headwinds from low population growth dynamics due to the closure of the international borders, while the investor segment that has typically favoured this stock is confronting a market where vacancy rates are now much more elevated than before the pandemic (see chart of the week, below). Helping to offset some of the weakness in private sector construction activity was a 3.2% lift in public works. Going forward, more support will come from this area as the states and territories bring forward infrastructure projects to support the economic recovery.
Chart of the week
Capital expenditure by private sector firms remained weak in Q3 (-3.0%) as spending has been cut back or shelved to preserve liquidity, while elevated uncertainty around the economic outlook has understandably brought about increased caution (review here). The reinstated shutdown in Victoria had an outsized impact (-7.7%) on the national outcome, but it should improve in Q4. Buildings and structures capex was down by 3.7% over the quarter while equipment spending contracted by 2.2%. Firms' forward-looking investment plans in the current financial year were upgraded to around $105bn; some 6% higher than the level estimated 3 months ago, but have fallen heavily (-10.3%) when compared with intentions at the same stage for the outlook in 2019/20. Most notably, investment plans in aggregate by firms in services-related industries have rolled over since the pandemic emerged and point to a year to year fall in capex of 13.2%.
Also of note this week, a speech by the Deputy Governor of the Reserve Bank of Australia Guy Debelle provided an overview of the sweeping changes that have occurred in the Board's monetary policy stance in response to the pandemic crisis. The key point was that the transmission of the package of measures now in place to the real economy was occurring through lower borrowing costs for both households and businesses, but given the difficult outlook for the labour market the Board's expectation was that the cash rate would not be increased "for at least 3 years". The advanced PMI readings for November provided an encouraging analysis of the momentum of economic activity, with the composite index increasing in pace to a 4-month high at 54.7 with Victoria opening up more widely. Activity in the services sector was rising at its fastest pace in 4 months (54.9), while manufacturing was at a 35-month high (56.1).
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Turning the focus offshore to the US where the news that president-elect Joe Biden would nominate the former Federal Reserve Chair Janet Yellen to the role of Treasury Secretay was well received by the markets on the basis of familiarity and on the expectation that this could lead to the fiscal and monetary authorities working more hand in hand to support the recovery. While the Fed and Treasury have on the whole worked cohesively since the onset of the pandemic, some discord emerged last week after Treasury Secretary Steven Mnuchin called for an end to some of the Fed's emergency lending facilities. In media appearances before this news, former Chair Yellen had been a strong advocate for fiscal policy to play a more active role in the way out of this pandemic crisis. On matters closer at hand, the minutes from the Fed's policy-setting Committee's meeting in early November were published. While GDP growth according to this week's second estimate was reported to have rebounded by 7.4% in Q3 coming after a 9.0% contraction in Q2, the Committee judged that the pace of activity had since moderated and expressed concerns that the short-term risks to growth prospects, employment and inflation due to the pandemic "posed considerable risks to the economy's medium-term outlook". As a result, the Committee is open to doing more, with "many participants" being in favour of providing more guidance to the markets on its asset purchases, essentially establishing a more defined link between the pace and maturities of purchases to changes in economic conditions, but there was also some hesitancy put forward to this approach given the uncertainties of the situation and how best to respond to it. In the data this week, the drift down in personal income growth continued slowing to 5.5%Y/Y in October from 6.5% reflecting the withdrawal of fiscal support measures, while the rebound in personal spending since the reopening was starting to stall (-0.6%Y/Y). Also of concern was a second straight miss on initial jobless claims at 787k (vs 730k expected) following on from the downside surprise reported last week.
The situation in Europe was best highlighted by the flash PMI readings for November that conveyed an economy contracting at a sharp pace following the reinstatement of shutdowns across the continent to contain a resurgence in the virus. Economy-wide activity according to the composite index fell well into contractionary territory at a reading of 45.1 (vs 45.6 expected) from 50.0 in the month prior, making this its weakest outturn since the initial round of shutdowns earlier in the year, albeit this was nowhere close to the low of 13.6 in April. The services sector slowed further in the month falling to 41.3 from 46.9 with activity being heavily affected by tightened restrictions. While the continent's key manufacturing sector has again proved to be more resilient to the impacts of the pandemic, the level of activity slowed in the month (55.5 from 58.4) in a sign that the deterioration in overall economic conditions was weighing on industrial demand. The account of the meeting by the European Central Bank's Governing Council in late October released this week spoke of their concerns that this latest slowdown could have beyond the duration of the shutdown, noting that it would have to "consider the possibility that the pandemic might have longer-lasting effects both on the demand side and on the supply side, reducing potential growth". At this meeting and then over the period that has ensued, the Governing Council has maintained that it will "recalibrate its instruments" to updated economic forecasts when it meets again in December, with the account highlighting the effectiveness of both its PEPP and TLTRO programs. In the UK, Chancellor Rishi Sunak unveiled the 2020 Spending Review that showed emergency support measures since the onset of the pandemic have totaled £280bn, with much of this focus on income subsidies to prevent a surge in unemployment, putting the budget deficit on track to rise to a post-war high of 19% of GDP in 2020/21. According to OBR forecasts, the UK economy is anticipated to contract by 11.3% in 2020, driving the unemployment rate up to a peak of 7.5% by mid next year from 4.8% currently.
