Tracking Australia's Q4 Recovery

In this year's final piece, I take a look at how Australia's economic recovery from the Delta lockdowns is tracking and what it might mean for the RBA's QE program. With much of the nation locked down due to the Delta wave, the Australian economy contracted by 1.9% in the September quarter. But the ensuing recovery has been incredibly robust and by some measures has been more rapid than the rebound from the national 2020 lockdown. 

Mobility indicators — closely aligned with economic activity — in Sydney and Melbourne have surged following reopenings and are higher than before the Delta lockdowns. On average, mobility has also accelerated across the other capitals despite these cities mostly avoiding harsh 2021 restrictions. Whereas earlier lockdowns were eased only after caseloads fell to very low levels, the authorities pivoted in the Delta wave focusing on vaccination targets as the threshold for the reopenings. Confidence in the vaccination program has likely been key in offsetting concern about the circulation of the virus and this is consistent with the higher levels of mobility.   

Omicron is now seeing cases accelerate again, though, to date, there is limited evidence of people voluntarily restricting movement. As seen last year, mobility starts rolling over in the lead-up to Christmas as people head for their summer holidays, so while Covid could be a factor in the emerging dip, its overall effect is likely to have been minimal so far. 

Driving the recovery has been surging household spending. Since hitting their Delta low in August, Australian retail sales have risen by 6.3% for the period to October as non-food sales have soared (13.1%). Eased restrictions enabling people to get out and about has supported very strong spending on clothing and footwear (35.2%) and at cafes and restaurants (25.9%).

Key to the rebound has been the run-up of savings that households accumulated during the lockdowns. With spending opportunities limited and incomes being supported by fiscal measures, the household saving ratio lifted by 8ppts in Q3 to 19.8% and is just off the peaks seen last year. This has been working to support consumption following reopenings. 

Beyond the period of the official statistics, indications from high-frequency data sources are that spending has then accelerated through November and into December. National retail and recreational visits are at the highs seen 12 months earlier and patronage at restaurants has rebounded to be at elevated levels.

When it all washes through, it is quite likely that retail sales volumes will have risen at a record pace in the December quarter, surpassing the 6.3% reopening rebound after the 2020 national lockdown. Bear in mind that Q4 retail volumes will be coming off a larger fall (-4.4% in Q3) than was seen during the national lockdown (-3.5%).

In the labour market, the recovery has exceeded expectations with both employment and hours worked rebounding back above pre-pandemic levels in November. Employment surged by a record 366.1k and in a single month more than recovered the fall sustained during the lockdowns (-359.5k). Hours worked lifted 4.5%m/m and were just off the highs seen prior to the Delta wave.  

The rapid rebound in employment and hours worked has seen the labour market tighten considerably. The unemployment rate has fallen to 4.6% from a Delta peak of 5.2%, while broader measures of underutilisation have reversed their increases recorded over the past few months. Importantly, these outcomes have occured alongside a rebound in labour force participation to pre-Delta levels.

Signs are that the strength in the labour market has further to run, with the ABS's payroll jobs index lifting further over the second half of November, remaining sharply above pre-Delta levels. Meanwhile, labour demand measured through job vacancies are at their highest as a share of the labour force in a decade. 

   

When the RBA returns from its summer break in 2022, it will review its QE program. Since the pandemic, the RBA has added around $340bn of Australian and state and territory government bonds to its balance sheet, with around $260bn of this accumulated in the QE program and around $80bn acquired in support of its now-discontinued 3-year yield target.     

QE program purchases are running at a $4bn weekly pace after being tapered from $5bn in September. RBA Governor Philip Lowe recently said the Board was keeping its options open but its base case was that there would be a further taper in February ahead of ceasing new purchases by May. This largely reflects the RBA wanting to see a faster pace of wages growth to give it confidence it can deliver sustainable inflation in the 2-3% target band. Currently, wage and price pressures are much more subdued in Australia than in other major economies.    

The RBA has also mentioned it could end new purchases in February, with the strength of the recovery discussed and the accelerated taper schedule recently announced by the Fed in particular potentially tilting the balance that way. This is the option I see as more likely at this stage, however; it will probably require the RBA to upgrade its 2022 forecasts for unemployment (4.25%) and inflation (2.25%) in February, with December's labour force report (due 20/1) and the Q4 CPI data (25/1) to be highly influential here. The Board will also be assessing the headwind of Omicron over the summer, but the Australian economy has shown its resilience over 2021 and this is a recovery that has a lot of momentum.         

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All the best for the holidays and, as always, thanks for reading. 

Macro (Re)view (17/12) | Shifting tones

In the strongest sign yet of the rapid recovery in the Australian economy from the Delta lockdowns, employment surged by a record 366.1k in November in a significant upside result on consensus for a 200k rebound (reviewed here). This more than recovered the job losses seen over the course of the lockdowns and took employment back above pre-pandemic levels. While Omicron is a risk to the momentum, it is not surprising that eased restrictions and a tightening labour market sees consumer sentiment firmly in the optimistic range going into 2022, with the Westpac-Melbourne Institute index printing at a 104.3 reading in December. Furthermore, the latest reading on job vacancies (+252k in November) and indications from the November NAB Business Survey suggest that labour demand beyond this initial rebound remains very strong. 

Importantly, there has also been a strong response from the supply side as many people came back to the labour force once the lockdowns eased. The participation rate rebounded to 66.1% to be around the levels prior to the Delta outbreaks, though in New South Wales (64.9%) there still remains a shortfall. As restrictions on businesses eased and venues reopened, hours worked across Australia increased by 4.5% in the month to be up 2% on pre-pandemic levels. The configuration of surging employment and hours drove a decline in the unemployment rate from 5.2% to 4.6% (vs 5% expected). Underemployment (7.5%) fell to pre-Delta levels and broader underutilisation (12.1%) is at a 9-year low.

In speaking about the economic recovery this week, RBA Governor Philip Lowe said the Board was open to discontinuing bond-buying in February if the strong momentum was sustained over the summer. This would also be consistent with the more accelerated tapering schedules now being followed by other central banks (discussed below), which is something Governor Lowe reiterated the RBA will consider when it reviews its QE program in February. A strong Delta recovery was also contributing to an improved budget position for the Government, with MYEFO revising the deficit in 2021/22 up to 4.5% of GDP from 5% forecast in May (reviewed here). In its post-MYEFO issuance update, the AOFM advised the borrowing requirement for 2021/22 was now expected to be around $105bn, down from around $130bn anticipated after the May Budget. Net debt, therefore, is seen tracking a lower profile with the 2024/25 peak reduced from 40.9% of GDP to 37.4%.

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Offshore, the messaging from global central banks has clearly shifted after a week that saw meetings from the Fed, ECB and BoE among many others. In spite of Omicron, the pandemic seems to be assessed as having a diminishing impact on economies, with high inflation now posing a more pressing risk to sustaining recoveries. In the US, the Fed's FOMC met expectations in announcing a faster taper of QE, with the clip to double to a $30bn/month reduction from January. In the post-meeting press conference, Chair Jerome Powell said that with the labour market making strong progress towards maximum employment and due to high inflation, QE would be wound up in March 2022, a full quarter earlier than previously signalled. 

Beyond tapering, the updated Summary of Economic Projections now has 3 rate hikes next year as Committee members' median projection, whereas in the September forecasts 1 hike in 2022 was seen as a 50/50 proposition. This comes on the back of a significant upgrade to the inflation outlook through the remainder of this year and into next. In 2021, headline PCE was lifted to 5.3% from 4.2% and to 4.4% from 3.7% on core PCE. The pace then moderates in 2022 but remains well above target at 2.6% (from 2.2%) on headline and 2.7% (from 2.3%) for the core rate. Even with the pandemic intensifying, rapid growth is anticipated in the US economy next year (4% from 3.8%) supported by strong household incomes and spending and this sees the Committee's maximum employment objective within reach as the unemployment rate falls to 3.5%. Thereafter, the median 'dot' shows a further 3 hikes in 2023 and 2 more in 2024, taking the policy rate to 2.1% — a significantly higher level than seen by markets (around 1.5%). 

 

Taking a more gradual approach to normalisation is the ECB with the Governing Council recalibrating its QE programs at this week's meeting as President Christine Lagarde reiterated pushback to raising rates in 2022 in the press conference. While Covid has hampered momentum in the euro area — December's composite PMI reading turned out at a 9-month low of 53.4 — the recovery continues to make progress at the same time as inflation pressures are rising. The latest ECB Staff macroeconomic projections have GDP growth running at very elevated rates of 5.1% in 2021 and 4.2% in 2022. High energy prices and ongoing supply constraints drove substantial upward revisions to the inflation outlook this year to 2.6% (from 2.2%) and in 2022 at 3.2% (from 1.7%) to be well above the ECB's 2% target. 

In response, the Governing Council outlined its schedule for tapering QE, with the pace set to slow from €80bn/mth currently to €20bn/mth by October 2022. To get there, net purchases under the PEPP (the program the ECB introduced at the outset of Covid) will be dialled back from €60bn/mth currently to a "lower pace" ahead of being discontinued in March 2022. However, reinvestments from maturing securities will now run for at least another 12 months through to 2024 and will be made "flexibly" to guard against yield spreads across jurisdictions widening too sharply. Should the pandemic cause the recovery to falter, the ECB has not ruled out restarting the PEPP.  

To help smooth the transition away from PEPP, the Governing Council elected to temporarily accelerate purchases in the APP program, where the current run-rate is a much lower €20bn/mth. In Q2 next year, the pace will lift to €40bn/mth before easing to €30bn/mth in Q3. A small and time-limited boost to the APP was one of the options being touted by ECB officials during recent weeks, but the key surprise was the commitment to open-ended purchases of €20bn/mth from October 2022 onwards until shortly before the Governing Council starts raising rates. 

Lastly, in the UK this week, the Bank of England surprised markets by hiking its policy rate by 15bps to 0.25%. After an expected hike was resisted at the November meeting, markets had been of the view that with the pandemic becoming a headwind to the economy again, rates would stay unchanged. Indeed, the accompanying statement said the Bank had already lowered its November estimate of Q4 GDP by 0.5% due to these effects, however; the Monetary Policy Committee still voted 8-1 in favour of hiking. Key factors were the labour market was assessed to have achieved the required progress that had prevented a hike at the previous meeting, while this week's inflation data came in significantly stronger than the Bank's forecasts as the headline CPI surged to 5.1%Y/Y in November. 

Australia MYEFO 2021/22: Deficit narrows on Delta recovery

The Mid-Year Economic and Fiscal Outlook (MYEFO) update to the 2021/22 Federal Budget was presented by the Australian Government today. After coming through the recent Delta lockdowns, the Australian economy is recovering sharply, with the Budget deficit for 2021/22 forecast to narrow by $7.4bn and by $2.3bn over the next 4 years. Much of the increase in forecast Government revenue is offset by new policy spending. 

  

MYEFO 2021/22 | Budget Profile

On Budget night back in May, the deficit for 2021/22 was forecast to come in at $106.6bn (5% of GDP). Despite the significant setback to the economy from the Delta lockdowns with real GDP contracting by 1.9% in the September quarter, the deficit is now forecast to narrow by $7.4bn to $99.2bn (4.5% of GDP). The deficit is then projected to reduce over the out years to 2.3% of GDP by 2024/25. Compared to the May Budget, this leaves the nation's finances modestly better off, by $2.3bn, over the forward estimates. 

 

The profile for net debt has improved relative to May. Previously, net debt was projected to rise from 34.2% of GDP in 2021/22 to 40.9% in 2024/25. This has been revised to 30.6% of GDP in 2021/22, while the peak is now lower at 37.4% of GDP in 2024/25. A lower borrowing requirement due to a narrower deficit and valuation effects from higher bond yields are the driving factors. 

MYEFO 2021/22 | Overview  

Since May, Government receipts (revenue) have been revised up by $50.1bn for 2021/22 and by $109.1bn through to 2024/25. Driving these upgrades are a stronger-than-expected recovery in the labour market and high commodity and asset prices, boosting the tax in-take. Receipts as a share of GDP now track an upgraded profile relative to that forecast in May, reaching 24.2% by 2024/25. 

Government payments are now seen coming in $42.7bn higher for 2021/22 than in May, rising to $106.8bn over the 4 years. The key factors in this are increased spending associated with the pandemic during the Delta lockdowns and spending on essential services, notably the NDIS, aged care and childcare. As a result, payments as a share of GDP have lifted since May, though they remain on a downward trajectory from 28.7% in 2021/22 to 26.5% by 2024/25.

As highlighted in the previous section, since Budget night, the projected deficit in 2021/22 has narrowed by $7.4bn. The Delta outbreaks led to the Government ramping up income support for households and businesses, and this drove a $30.7bn increase in policy spending this financial year. The net cost of new policy through to 2024/25 is $44.8bn. Coming ahead of next year's federal election, this figure has $16bn of policy spending 'not yet announced' baked into it.   

The cost of new policy is more than offset by stronger economic conditions than previously anticipated, generating a projected windfall. In 2021/22, this boosts the Budget by $38.7bn and by $47.1bn over the forward estimates. 

MYEFO 2021/22 | Forecasts

In the near term, the growth outlook for 2021/22 has been downgraded from 4.25% to 3.75% after the trajectory of Australia's expansion was disrupted by the Delta lockdowns. However, growth is still well above trend this financial year and the forecast for 2022/23 has been increased to 3.5%. 

A strong pace of growth and negative net overseas migration due to the border restrictions has seen the unemployment rate forecast falling from 5% to 4.5% this financial year. The labour market is projected to gradually tighten thereafter, with a low unemployment rate resulting in wages growth (3%) and inflation (2.5%) reaching the levels seen by the RBA as consistent with full employment in 2023/24. 

Treasury retained the assumption that the iron ore price will retrace to US$55/t (by Q2 2022). From their current elevated level, this sees the terms of trade holding flat in 2021/22 ahead of a correction in 2022/23 (-18%). This weighs on the outlook for nominal GDP growth over the out years.   

Global activity provides a supportive outlook for the Australian economy. The recovery from the pandemic is well underway in many economies offshore and robust rates of growth are seen over the next couple of years. Delta was a headwind in 2021, but growth has been upgraded in 2022 for Australia's major trading partners to 4.5%.  

MYEFO 2021/22 | Summary

The resilience of the Australian economy is highlighted by the narrower deficit in 2021/22 despite the significant contraction to GDP seen in the September quarter. Higher Government revenue generated by the stronger-than-anticipated recovery will continue to support spending over the next 4 years, with a further $44.8bn of new measures in the pipeline. 

Australian employment surges 366.1k in November

The hit to the Australian labour market from the Delta lockdowns was cast aside in November as employment and hours worked more than rebounded from the declines seen over the winter and early spring. Unemployment and participation returned to their pre-Delta levels ahead of what is shaping up to be a strong economic recovery into 2022.

Labour Force Survey — November | By the numbers

• Employment (on net) increased by a record 366.1k in November, coming in significantly above consensus for a 200k rise. October's decline was revised to show a larger fall of -56k from -46.3k previously. 

• Headline unemployment fell to 4.6% (vs 5.0% expected) from 5.2% in October. 

• Labour force participation returned to its pre-Delta level as it rebounded from 64.7% to 66.1%.  

• Hours worked surged by 4.5% in the month to be 2.7% higher over the year. 

Labour Force Survey — November | The details

Australia's labour market is rebounding at a rapid pace from the recent Delta lockdowns seen across large parts of the nation. November's rise in employment of 366.1k was a record increase and more than restored the decline of around 360k seen over the course of the lockdowns. Key contributors were the states coming out of lockdown, with New South Wales +179.8k and Victoria +141k. Overall, Australian employment has rebounded to be 1.4% above its pre-pandemic level. Meanwhile, with employment surging and restrictions on businesses easing, hours worked lifted by 4.5% in the month, driving it back up to 2.0% above its pre-pandemic level.   

November's employment outcome incorporated a 237.8k rise in part time employment and a 128.3k increase in the full time segment. Overall, full-time employment is 2.1% above its pre-pandemic level but the part-time segment is significantly lagging at -0.1%, with the disparity reflecting the much larger hit to the latter during the recent lockdowns. 

Between May and October, total hours worked contracted by around 5% on the back of the lockdowns and associated restrictions. In November alone, hours worked rebounded by 4.5%. part-time hours soared by 8.5%m/m while full-time hours increased by 3.6%m/m.  

Hours worked in Victoria rebounded by 9.7%m/m to be 1.6% higher than their pre-pandemic level. New South Wales saw a larger hit to hours worked during its recent lockdown compared to Victoria. Even after a further rise 5.6% in November following gains of 2.7% and 3.8% in the previous two months, hours worked in New South Wales are only now back at pre-pandemic levels. Total hours worked across all other states and territories remain elevated at 3.8% above pre-pandemic levels.

Encouragingly, participation levels have rebounded sharply since the lockdowns were lifted. Australia's participation rate (66.1%) is broadly back to the levels seen prior to the Delta setback. Victoria (66.8%) has led the way, though New South Wales (64.9%) still has some way to go in getting back to pre-Delta levels (around 66%). 

Measures of labour market spare capacity were on the rise during the lockdowns reflecting the loss of employment and hours worked. The reopening in November drove a sharp reversal in this trend. Unemployment fell to 4.6% from 5.2%; underemployment was down from 9.5% to 7.5% and underutilisation declined 2.6ppts to 12.1%. Underutilisation (including both unemployed and underemployed workers) is now at a 9-year low.    

Labour Force Survey — November | Insights

The Australian labour market is back on track rebounding sharply in November from the recent Delta lockdowns. Forward-looking indicators of labour demand are pointing to ongoing strength, with national job vacancies sitting at a very elevated 252k in November according to data out earlier in the week. The snap-back seen in participation suggests there is the supply of labour coming back to meet this demand, albeit with some progress still required in New South Wales. Rising caseloads may present some risk to the near-term momentum, but underlying conditions are very strong. 

Preview: Labour Force Survey — November

Australia's labour force survey for November is due to be published today at 11:30am (AEDT). After the Delta lockdowns hit the labour market hard through the winter and into spring, reopenings backed by high levels of vaccination now have a strong rebound in train. Employment is expected to have surged back in November, while the easing of restrictions should also see many people coming back to the labour force. 

As it stands | Labour Force Survey

Employment continued to fall in October with a 46.3k decline posted for the month. This came against the market consensus for a 50k rise and took the fall in employment through the Delta lockdowns to 333.7k. Much of this fall in employment has been in the part time segment (-250.3k), but in October the full time segment drove the headline fall (-40.4k). 

Hours worked nationally were broadly steady on the month (-0.1%m/m) around varying lockdown impacts. New South Wales (3.9%m/m) continued to rebound as restrictions were easing, though with Victoria still locked down hours worked in the state fell further (-4%m/m). Total hours were 2.1% below pre-pandemic levels in October reflecting large falls in New South Wales (-5.2%) and Victoria (-7.1%). Hours worked across the rest of the nation were 3.3% above pre-covid levels.

With many people starting to return to the labour force in New South Wales, the national participation rate posted its first increase since May lifting from 64.5% to 64.7%. This is well down on its level of just above 66% before the Delta lockdowns. Participation in Victoria continued to fall as the state's lockdown continued. 

October's fall in employment and rise in participation saw Australia's unemployment rate rise sharply, from 4.6% to 5.2%. Broader measures of spare capacity continued to increase as underemployment lifted to 9.5% and underutilisation hit 14.7%.  

Market expectations | Labour Force Survey

Today's report reflects post-lockdown conditions with employment forecast to surge by 200k on the median estimate (range: 150k to 280k). This is expected to drive a decline in the unemployment rate from 5.2% to 5.0% (range: 4.7% to 5.5%), with the outcome to a large extent hingeing on the response from the participation rate to reopenings.  

  

What to watch | Labour Force Survey

After the October report disappointed expectations heavily, risks are skewed to an upside surprise on the employment outcome today. Since the survey period in October, the ABS's high-frequency payrolls index has surged by around 3% driven by New South Wales (4.4%), Victoria (4.9%) and the ACT (6.9%) coming out of lockdown. Backing this up, the employment index in the NAB Business Survey for November lifted sharply over the month to +11 from a +6 reading. The participation rate is also of strong interest today with a lot of ground needing to be made up to get back to the levels seen prior to the Delta setback. 

Macro (Re)view (10/12) | Policy optionality key in 2022

The RBA Board left its policy rate and QE purchases unchanged at this week's meeting as it delivered an upbeat assessment of Australia's post-lockdown recovery taking shape (reviewed here). Signs of rebounding household spending, tightening labour market conditions and a constructive outlook for business investment were cited as consistent with the economy returning to its pre-Delta trajectory in the first half next year. Ahead of the Delta shock, the RBA had commenced the QE taper process but the winter lockdowns prompted it to delay going any further than the modest reduction previously announced, from $5bn to $4bn per week. When the Board returns in 2022 the QE program will be reviewed in February where the options under consideration shape as a more accelerated taper (to say $1-2bn/wk) or to end new purchases.

The criteria guiding the decision will be the updated set of RBA staff economic forecasts that will be available at the February meeting, the taper schedules of other central banks and general bond market functioning. Governor Philip Lowe is due to speak next Thursday (16/12) and the minutes for the December meeting will be published a few days later (21/12), so more insights could come to hand before year end. However, under the stated criteria, the RBA appears to be giving itself optionality to end the new purchase phase in February if deemed appropriate to do so. A February stop on QE would have markets sensing they are on the right track with their expected start to the hiking cycle (second half of 2022), though the RBA presents a much more patient case with the required wage and inflation dynamics taking longer to build. However, Governor Lowe noted this week there is considerable uncertainty around the responsiveness of wages to low levels of unemployment in the current cycle and the reference to underlying inflation hitting the midpoint of the 2-3% target at the end of 2023 was removed from his latest statement. Also in Australia this week, national housing prices were confirmed to have risen by a further 5% through Q3 despite lockdown disruptions in major markets (reviewed here). 

Moving offshore, inflation pressures in the US continued to rise as the headline CPI rate accelerated in November from 6.2% to 6.8%yr while the core rate elevated from 4.6% to 4.9%yr. These outcomes were in line with consensus estimates; perhaps a noteworthy development given this is a market well attuned to upside surprises on inflation. The underlying detail remained consistent with recent themes. Energy prices surged to 33.3%yr driven by high petrol prices (58.1%yr); durables inflation hit a record high (14.9%yr) reflecting very strong consumer demand; and services inflation (ex-energy) continued to rise (3.4%yr) in line with the pandemic recovery effort. Meanwhile, inflation in the housing components firmed, with owners' equivalent rent rising to 3.5%yr to be at its fastest since early 2017. An acceleration in the Federal Reserve's tapering schedule is widely expected to be announced at next week's meeting, with the reduction in monthly QE purchases likely to be increased from $15bn to in the order of $30bn. That would see purchases fading out by around March next year and would give the Fed the optionality to move more quickly towards raising rates should inflation pressures continue to persist.     

Ahead of the ECB's meeting next week, discussions around potential options for smoothing 'cliff edge' effects from the end of the net purchase phase of the PEPP program (scheduled for March 2022) continue to be discussed. A Reuters story suggested that one plan under consideration was a temporary and time-limited boost to the regular QE program — the APP. Either a new envelope of purchases could be granted through the end of 2022, though the total would be "significantly lower" than the current pace of €80bn (across both PEPP and APP), or monthly APP purchases (€20bn) could be accelerated for a shorter period but then scale down as economic conditions improve. Another plan reported by Bloomberg indicated that more flexibility in the reinvestment of maturing PEPP purchases could be the preferred option. This would see an extension in the reinvestment period beyond 2023 and also expand the geographical allocation of bond buys. Also meeting next week is the Bank of England as uncertainty around the impact of the latest Covid wave on the economy amid the return of some public health measures is tempering expectations for the hiking cycle to commence. Although still seen as a close call, recent comments from MPC member Saunders, who had been in favour of tighter monetary policy, saying it might be advantageous to wait and see how the situation evolves potentially tilts the balance to no move next Thursday. 

RBA upbeat on recovery

The RBA Board delivered an upbeat assessment of conditions ahead of its summer break with the recovery from the Delta lockdowns gathering pace while also reiterating its patient approach to policy going into 2022. All settings (cash rate target 0.1% and QE at $4bn/wk) were left unchanged at today's meeting.

In his decision statement, Bank Governor Philip Lowe noted the indicators on household spending and the labour market had confirmed the economy was now rebounding strongly from the winter lockdowns that saw Q3 GDP contract by 1.9%. This momentum should see the economy back on its pre-Delta track by the first half of 2022. While the emergence of Omicron is characterised as "a new source of uncertainty" it is not expected to get in the way of the recovery. 

Governor Lowe pointed to some signs of a tightening labour market, including the high level of job vacancies and instances of labour shortages, however; wages growth remained around the lows seen prior to Covid. The responsiveness of wages to a tightening labour market is key to the inflation outlook but is a major area of uncertainty for the RBA given Australia's limited history with an unemployment rate in the low 4s, which is the range the Bank expects it will get down to by the end of next year. 

On inflation, the Governor points to pandemic-related price pressures the Board is prepared to look through, including petrol prices, new housing costs with subsidies rolling off and from global supply chains. Policy will react to the underlying CPI measure, and that is not seen reaching the midpoint of the 2-3% target band until the end of 2023 in the Bank's central scenario.

In line with the previous commitment given by the Board to review the QE program in February, little new insight was provided today. The one addition to the statement that might be of note was that the Governor stated the stock of purchases will reach $350bn by February. Central banks across the globe are in a transitional phase with their QE programs, with the focus turning away from new purchases to maintaining the stock accumulated throughout the pandemic as a means of providing ongoing accommodation.

This is worth pointing out given that the actions of other central banks are noted by the Governor as one of the Board's considerations when it reviews QE in February. The Fed is expected to soon accelerate its taper process; net purchases under the ECB's PEPP are guided to conclude in March and the BoE is close to reaching its targeted level of purchases. The RBA already commenced tapering in September and will also factor into its February review a new set of economic forecasts and overall functioning in the domestic bond market.

Overall, the RBA retains a significantly more dovish outlook on policy compared to markets where futures pricing has around 75bps of hikes discounted in 2022. Necessary pre-conditions to the hiking cycle are the RBA delivering sustainable 2-3% inflation, backed by a tight labour market and "materially higher" wages growth, all of which are some way off yet. However, the chances of a February conclusion to the QE program appear to be rising.   

Australian housing prices rise 5% in Q3

Australian capital city housing prices continued to rise at an accelerated pace in the September quarter despite lockdown disruptions slowing activity in the key Sydney and Melbourne markets. According to the latest data published by the ABS today, national housing prices increased by 5% in Q3 and by a record pace of 21.7% through the year on the back of significant policy stimulus measures in response to the pandemic and tight fundamentals. 

Following the record rise of 6.7%q/q posted in the June quarter, Australian capital city housing prices eased back to a still very strong 5%q/q rise in the September quarter. The Sydney (6.2%q/q) and Canberra (6.0%q/q) markets outperformed despite lockdowns, but restrictions appeared to weigh more heavily on the Melbourne market (3.6%q/q). Price growth accelerated in Q3 across Hobart (8.2%q/q), Brisbane (6.1%q/q) and Adelaide (5.9%) but slowed sharply in Perth (2%q/q) and Darwin (1.6%q/q).    

 

Annual growth in house prices lifted from 19.8% to 25.4% to be running at twice the pace of the increase in unit prices (12.4%). The spread between the two is now out its widest for the pandemic with the detached segment benefitting from preference shifts, construction subsidies and upgraders capitalising on rising housing prices. 

Conditions across most markets remained tight during the September quarter. Despite the expiry of some of the stimulus measures, demand was very strong supported by the low level of interest rates and the rise in household wealth since the onset of Covid. According to data compiled by CoreLogic, sales were running well above the longer-term average through the quarter compared with previous years. At the same time, the volume of listings remained very low. Some of this weakness can be attributed to the lockdowns in Sydney, Melbourne and Canberra as properties were withdrawn from the market, but listings throughout 2021 were already well below the levels of recent years when Delta struck. 

Source: CoreLogic charts
 

Across the cities, prices in the Sydney market lifted by 6.2%q/q (25.4%Y/Y), moderating from an 8.1% pace in Q2. Growth eased in house prices but was still very strong at 7.4%q/q (32.1%Y/Y) and substantially faster than the rise in unit prices 3.6%q/q (13.4%Y/Y). In the Melbourne market, price growth slowed from 6.1% in Q2 to 3.6% in Q3 (19.5%Y/Y) as restrictions weighed on activity. The slowdown was driven by houses (from 7.2%q/q to 3.8%q/q) as unit price growth was unchanged from the previous quarter at 2.9%q/q. 

Prices in the Brisbane market firmed from 5.7% to 6.1% in Q3, with annual growth now at its strongest since 2008 (19.7%). Houses are up 22.2% over the year compared to 9.2% for units. Over in Perth, the quarterly gain pulled back to a 2% rise as both house (2.2%) and unit prices (1.2%) slowed sharply, with the withdrawal of stimulus and affordability concerns likely contributors. The Adelaide market was up by 5.9%q/q, its strongest quarterly rise in 14 years as the pace of house prices picked up to a record pace of 6.8%q/q. Prices in Hobart are up 25.7% through the year, the fastest gain of all capital city markets with both house (26.3%) and unit prices (23.4%) rising at a record rates. In Darwin, prices slowed sharply in Q3 to 1.6% from 4.6% in Q2. In the nation's capital, the Canberra market continued to perform strongly despite its lockdown. Prices slowed in Q3 but were still up by 6%q/q and by 25.2% over the year.      

Preview: RBA December meeting

With the yield target recently discarded and the associated forward guidance tweaked, today's final RBA Board meeting for 2021 sees the focus turning to the economic recovery now underway from the Delta lockdowns. The decision statement from Governor Philip Lowe (due at 2:30pm AEDT) should confirm an unchanged policy stance (0.1% cash rate target and QE at $4bn/wk) and is likely to reiterate key recent themes: rate hikes are not on the radar in 2022 and that the QE program will be reviewed in February.

On the economy, the Board will feel vindicated in its earlier assessment that the winter lockdowns have delayed but not derailed the recovery. The 1.9% contraction in Q3 GDP turned out to be much less severe than the 2.5% decline forecast by Bank staff, and with restrictions easing key indicators on household spending, the labour market and mobility are all rebounding sharply. Supported by the high levels of vaccination in Australia, this momentum is expected to drive a robust rebound over the summer, albeit with the new variant an emerging risk. With the Board removing its 2024 guidance for rate hikes at the previous meeting, markets have pulled forward their expected start date for the hiking cycle into the second half of next year. This scenario has received direct pushback from the RBA and this is likely to be the case again today. As Governor Lowe outlined after the November meeting, hitting the 2-3% inflation target will require a labour market tight enough to be generating a "materially higher" pace of wages growth, a process that is expected to be gradual. 

With regards to the QE program, the Board has already committed to maintaining purchases at the $4bn weekly pace through February when the next review will occur. There seems little need for anything new to be said on the matter today. The key factors in the February decision will be how the recovery progresses over the summer, the actions of other central banks with their QE programs, and overall bond market functioning. When the Board returns in 2022, it should (hopefully) have a far better handle on all of this than it does today.