As a snapshot of conditions ahead of the emergence of the Delta variant and associated lockdowns, the Q2 national accounts reported that the Australian economy was performing strongly with the momentum from the reopening surge being sustained over the first half of the year. For the June quarter, real GDP increased by a stronger-than-expected 0.7% (vs 0.4% consensus), with the expansion in the economy rising to be 1.6% above pre-pandemic levels. Output was also 9.6% higher than at the depths of the pandemic recession, reflective of a recovery that had outperformed even the most optimistic set of forecasts. However, the trajectory has since shifted significantly with widespread lockdowns in place as caseloads continue to rise and what appears will be a period of elevated uncertainty through the transition to the national reopening plan. With the RBA Board to meet next Tuesday, it shapes as likely that it will push back the start of QE tapering, due to start next week with bond purchases dialing back to $4bn per week from $5bn. That was a move resisted by the Board at the August meeting, but with the economy now expected to contract much more sharply in Q3 than it previously anticipated and with the uncertainty associated with Q4, it is likely that it will now see the need to recalibrate policy to that outlook.
Robust domestic demand continued to underpin the Australian economy in Q2 on the support of stimulus measures and the tailwinds from high commodity prices, with the terms of trade advancing to a record high in the period. Household consumption was rising at a solid pace (1.1%), with the rotation back towards the services (1.3%) and discretionary categories (1.6%) indicative of the high levels of optimism seen at the time and the willingness to spend out of high accumulated savings. However, the 2.7% fall in retail spending in July (see here) due to the lockdowns and the disruptions to services are an abrupt shift. Residential construction rose at a more modest pace in the quarter (1.7%), but the sector was still in its strongest upswing in many years from earlier stimulus measures. Supportive dynamics were continuing to drive business investment (2.3%), with firms lifting capital expenditure to meet rising demand. Another key factor was the robust growth in public demand, with infrastructure spending a key aspect to the stimulus response from governments. Overall, domestic demand at 1.7%q/q was considerably stronger than the 0.7%q/q GDP outcome, with the spread relating to a sizeable subtraction to activity from net exports, due to disruptions to resources shipments (see chart below). A full review of the Q2 national accounts with in-depth analysis and key charts is available here.
Chart of the week
To the survey data through the week and the robust gains in house prices extended for another month, lifting by 1.5% nationally in August (18.4%yr) according to CoreLogic. Rising house prices and the tightening seen in rental markets in a few capital cities are fundamentals that continue to advance investor activity, with the segment keeping housing finance commitments at very elevated levels in July (see here). Meanwhile, dwelling approvals continued to retrace from record highs earlier in the year falling by 8.6% in July reflecting the end of the HomeBuilder scheme to new applicants (see here). Elevated commodity prices, notably iron ore, saw both the current account surplus for Q2 (see here) and the monthly trade surplus for July (see here) resetting to new record high levels.
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The August US non-farm payrolls report was the major event of the week for markets offshore, though it did little to resolve uncertainty around the tapering timeline from the Federal Reserve. Employment on non-farm payrolls came in at 235k in August, substantially lower than the median estimate for a 733k rise — albeit with that figure being formed from a very wide range of forecasts going into report that was between 400k to 1,000k. However, this miss was to some extent offset by revisions from the past two months that added on a net 134k to payrolls. The details of the report point to the effects of the spread of Delta and rising caseloads, with employment in leisure and hospitality flat in August after surging by 415k in July and with retail seeing a larger fall this month (-29k) compared to last month (-8k). Despite the large miss on employment, both the unemployment rate (5.4% to 5.2%) and underemployment rate (9.2% to 8.8%) were lower, as more people found jobs than lost them in the month. But the more significant issue remains on the supply side of the US labour market, with the participation rate unchanged at 61.7%, still 1.6ppts below its pre-pandemic level. Labour shortages and difficulties in finding staff continued to be reported by firms in both the ISM manufacturing and services surveys this week. On the back of this, average hourly earnings strengthened further rising by 0.6%m/m to 4.3%yr. Stemming from the speech from Fed Chair Jerome Powell at last week's Jackson Hole symposium, expectations for tapering to start as early as September had been priced out, while the August payrolls could now mean that it is delayed a bit longer with more data needed to assess the impact of Delta on labour market conditions.
An upside result on euro area inflation in August has provided an interesting lead-up to the ECB's policy meeting next week. The initial estimate for the headline CPI printed at 0.4%m/m as the year-over-year pace accelerated from 2.2% to 3.0% — a 10-year high and ahead of the 2.7% consensus forecast. The core rate also advanced from 0.7% to 1.6%Y/Y against 1.5% expected. A range of temporary factors were boosting inflation including higher energy prices, the unwinding of a cut in the value added tax in Germany and the later start for summer clothing sales from last year, delayed by lockdowns that had the shops closed. Meanwhile, survey data, including from this week's PMI readings, confirmed the continuation of supply chain constraints as another factor putting upward pressure on prices. Asset purchases under the ECB's PEPP program are currently running at an accelerated pace of around €80bn per month, with the high inflation readings leading to some speculation, particularly from the Governing Council's more hawkish voices, that tapering could soon be warranted. However, the core view of the ECB has been that high inflation will be transitory. Given the ECB's reformulated 2% inflation target, the more relevant factor for policy will be the inflation outlook in the updated economic forecasts that will be made available to the Governing Council at next week's meeting rather than the near-term volatility in the CPI.
