The Australian Federal Budget for 2021/22 delivered this week signaled the intent from the government to keep spending to sustain the robust momentum of the economic recovery, supporting an eventual return to full employment. With the economy rebounding from the COVID recession more rapidly than expected at the time of the December mid-year update and with the iron ore price highly elevated above forecasts, the improved revenue outlook has given the government scope to fund new spending initiatives for essential services in aged care and child care and extend existing measures for business tax write-offs and low- and middle-income tax relief. For the period over the remainder of the current financial year through to the end of 2021/22, Treasurer Frydenberg announced around $22bn in new policy spending on budget night. The deficit for 2020/21 is now expected to be $161bn (7.8% of GDP), revised down from $197.7bn (9.9% of GDP) in December, though the size of the deficit in 2021/22 is broadly unchanged at around 5% of GDP. New policy spending then exceeds the windfall generated by stronger economic conditions over the remainder of the forward estimates. A full analysis of the Budget and the policy measures is available here.
A key assumption within the Budget forecasts is that household consumption growth remains robust, supported by accumulated savings and an improving labour market. Retail sales data out this week came in slightly below estimates for the month of March with a 1.3% rebound after short state-based lockdowns, while Q1 volumes also missed on the downside contracting by 0.5% (reviewed here). Though soft on the surface, both nominal sales and real (inflation-adjusted) sales are still highly elevated above pre-pandemic levels at 10.5% and 5.2% respectively. Elements within the report pointed to a shift in patterns of household spending with fewer COVID restrictions now in place and the vaccine being rolled out, with sales volumes for cafes and restaurants (5.8%) rising fastest of all categories in the quarter as demand was either moderating or slowing in other areas that were boosted by the shutdowns, such as household goods and basic food. High-frequency card data from the major banks also suggest consumption patterns are rebalancing, with more spending on services as demand for goods-related areas moderates. Also this week, the NAB Business Survey reset record highs in April on both the confidence (+26) and conditions (+32) measures. With increasing signs of optimism amongst firms that this strength can prove longer-lasting than the reopening-generated boost, evidenced by new survey highs for forward orders and capacity utilisation, the decision by the government to announce the extension of the temporary full expensing allowances for a further year aims to capitalise on the momentum.
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With the stronger-than-expected US CPI report dominating markets offshore, debate around the persistence of inflation pressures and the Fed's commitment to its policy settings is once again strong. In April, CPI came in well ahead of estimates rising from 2.6% to 4.2%yr on the headline measure (vs 3.6% expected) to a 12.5-year high, while the core rate hit its fastest pace since 1996 accelerating from 1.6% to 3.0%yr (vs 2.3% expected). Led by both Fed Governor Lael Brainard and Vice Chair Richard Clarida, the message remained the same from the central bank this week that high inflation readings are expected to prove transitory. The basis for that expectation is partly due to mechanical base effects, with rising prices in a vibrant reopening economy being compared back to the early stages of the pandemic where firms were cutting prices to generate cashflow, and also to the many supply-side constraints highlighted in high-frequency activity surveys, including production bottlenecks and product and labour shortages. There were signs of these effects in April's data, with the largest contributions to inflation in the month coming from used cars and trucks (10%mth), airfares (10.2%mth) and hotels (8.1%mth). Meanwhile, surging goods-related demand saw durables inflation soar to its highest since the early 1980s rising from 3.7% to 7.3%yr, though by comparison services inflation is relatively contained at 2.6% due to pandemic restrictions and precautionary behaviour (see chart below). Adding to the volatility in the data this week, US retail sales were softer than anticipated in April coming in flat on the month (vs 1.0% expected), while control group sales contracted by 1.5%m/m (vs -0.2% expected). However, the weakness in April was offset by upward revisions to the readings in March, with retail sales up to 10.7%mth from 9.8% and control group sales up 7.6%mth from 6.9%.
Chart of the week
In the continent, the European Commission unveiled its spring 2021 forecasts in which its outlook for GDP growth was marked higher for 2021 to 4.3% from 3.8% previously and then in 2022 to 4.4% from 3.8%. A resurgence in the virus and the return of lockdowns led to the European recovery falling back over the past couple of quarters, but with the vaccine rollout gathering pace and restrictions set for a wider easing in the summer months the EU expects private consumption to rebound sharply, while order books for firms in the key manufacturing sector are likely to remain well-stocked from demand offshore as reopenings expand. The account from the ECB's April policy meeting hinted at this optimism, with the Governing Council generally assessing the risks to the outlook as "more balanced" over the medium term, though some members were of the view that they were now "marginally tilted to the upside". But with the reopening yet to take shape and more progress needed on the vaccine front, the risks over the near term continue to be assessed as being to the downside, and this dissuaded any discussion over potential tapering of ECB bond-buying at this meeting. In the UK, March quarter GDP growth declined by 1.5% (vs -1.6% expected) on the return to national lockdown, though the monthly data produced by the ONS indicates that the damage was done in January and that activity started rising again in February before lifting more sharply again in March as schools were gradually reopening.
