Australia's September quarter national accounts were the highlight from a full calendar of events over the past week. The reopening effort from the national Covid-19 shutdown generated a stronger-than-expected rebound in real GDP growth in Q3 of 3.3% (-3.8%Y/Y) as the easing of restrictions enabled household consumption to come back strongly (7.9%) after collapsing in Q2 (-12.5%) (see chart of the week). The outcome also reflected the strength of the policy response that shielded incomes from the severe dislocation that occurred in the labour market as the pandemic hit. Our feature review of the September quarter national accounts with in-depth analysis and key charts is available here.
Chart of the week
The reopening saw households re-engaging widely in activity across the economy as services consumption lifted by 9.8% (from -17.9% in Q2) and goods consumption incresed by 5.2% (-3.4% in Q2). Key back in the September quarter - as it will be looking ahead to the time when fiscal support tapers - was the strength of household balance sheets. Real growth in household disposable income lifted a further 3.3%q/q from 3.5% in Q2, lifting the pace through the year to a 12-year high at 7.6%. Together with the earlier impact of the restrictions, household saving soared up in Q2 to 22.1% before declining fairly modestly to a still very elevated level at 18.9% in Q3. This indicates households retain plenty of scope to put towards consumption down the track as conditions in the economy normalise further and emergency supports are withdrawn.
The effect of policy stimulus also flowed through to dwelling investment (0.6%q/q) as a 5.1% rise in alteration work in response to the HomeBuilder scheme was able to overcome a 9th straight quarterly decline in new home building (-2.1%). Given the level of uncertainty around the economic outlook, business investment was understandably weak again (-4.1%q/q), though the authorities will be looking for the measures contained in the recent Federal Budget around expanded asset write-offs to be gaining traction towards the end of the year. Meanwhile, net exports weighed sharply on growth in the quarter (-1.9ppts) driven by a 6.5% lift in import volumes as domestic demand conditions improved on the reopening. Public demand continued to be a support for the economy led by consumption spending to be up by 6.2% through the year, contrasting sharply with the weakness in private demand (-6.7%Y/Y).
After contracting by 7.3% over the first half of the year, Q3's 3.3% rebound still leaves Australian GDP 4.2% below its pre-pandemic level. Meanwhile, hours worked remain 7% down on their end-2019 level reflecting the impact of elevated spare capacity in the labour market. While the recovery to date has been stronger than expected, the RBA emphasised at this week's Board meeting where policy settings were left unchanged (see here) and then at its appearance before the House of Representatives Economics Committee that it was still likely that the remaining progress would be "uneven" and "drawn out". While RBA Governor Philip Lowe highlighted that there was reason to be optimistic on the outlook given the building momentum in the economy and potential vaccines on the horizon, the reality was that the nation was "likely to experience a run of years with unemployment too high and wage increase and inflation too low". As such, the RBA expects it will not be increasing its rates structure for at least 3 years, while it will also be keeping its bond purchase program "under review".
Details from the other key data points out during the week were upbeat. Indicators on the housing market continue to flash green on the support of policy stimulus measures; dwelling approvals surprised to the upside lifting by 3.8% for the month in October with detached house approvals at a 20-year high (see here), housing finance commitments extended their recent surge since the reopening with a 0.7% rise in October (see here), and house prices nationally according to CoreLogic increased for a second straight month with the pace rising to 0.8% in November from 0.4%. On the household consumption story, October's retail sales report was potentially a sign of things to come as a 5.1% reopening rebound in Victoria lifted national turnover by 1.4% in the month (see here). Lastly, the trade surplus widened to $7.5bn in October as a monthly record on the value of iron ore shipments drove exports up by 5.4% (see here).
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Turning to developments abroad, the reflation theme was the main influence in markets as recent weakness in the US dollar broadened out and was sustained throughout the week, with the US Treasury yield curve steepening on rising inflation expectations. Resonating here was the idea that positive news on vaccine developments could help achieve wider and more sustained reopening of economies, while there was renewed optimism around prospects for Congress to come to terms on a fiscal stimulus package with the Democrats scaling down their base for negotiations with the Republicans from $2,400bn to around $900bn. Market expectations for more fiscal stimulus were enhanced by Friday's US labour market report where employment on nonfarm payrolls was considerably weaker than forecast in November at 245k against the consensus estimate of 469k. There was a slight move lower in the unemployment rate fell from 6.9% to 6.7%, though this came alongside a decline in the participation rate (-0.2ppt) to 61.5% as more people left the labour force. A new fiscal stimulus package would help to support the recovery in the economy and this reinforces the optimistic narrative in the markets. A steeper US Treasury yield curve has prompted speculation that the Federal Reserve might look to cap the rise by shifting the focus of their asset purchases out to longer-dated maturities. There was little insight on this issue from Federal Reserve Chair Jerome Powell as his Testimony appearance this week, other than the commitment that asset purchases would be left in place until such a time that it was no longer required.
Meanwhile, over in Europe the appreciation of the single currency against the dollar to its highest level since April 2018 has been the focus of attention ahead of next week's policy meeting by the European Central Bank. At its previous meeting, the ECB's Governing Council pledged to "recalibrate its instruments" to keep financial conditions favourable following the recent setback to the economic recovery from the reinstatement of shutdowns to curb the spread of the virus. Expectations are, therefore, elevated going into the meeting, with a Bloomberg report indicating that the Governing Council might be leaning towards agreeing to a 12-month extension of its pandemic emergency purchases programme out to mid-2022 and potentially increasing its size by €500bn from €1,350bn currently. Commentary from ECB officials has also indicated that additional support via the TLTRO (cheap funding to the banking sector) scheme is likely. Here, the current iteration of the TLTRO scheme has a special discount period in place where banks can obtain funding from the ECB at a rate up to 50bps below the deposit rate (currently -0.5%) between mid-2020 to mid-2021, depending on their lending activity. Speculation is that the availability of the minimum -1.0% TLTRO rate will be extended by 12 months to mid-2022.
