In review: Australian Q4 GDP: Reopening momentum sustained

Momentum in the recovery of the Australian economy from the onset of the covid-19 pandemic was sustained in the December quarter as real GDP exceeded the top end of the range of market estimates in rising by 3.1%. The reopening of the economy set the recovery in motion with activity rebounding by 3.4% in the September quarter. 

At the peak of the crisis, GDP had contracted by 7.3% from its pre-pandemic level at the end of 2019, though a strong 6.6% rebound over the second half of the year has now moderated the decline through the year to -1.1%. However, based on the forecast path in the RBA's February 2020 Statement on Monetary Policy, real GDP at the end of 2020 was around 3.7% below where it was anticipated to be in the absence of a significant shock from the pandemic.

In a global context, the impact of the pandemic was much less severe on the Australian economy over the first half of the year than in many other countries. The containment of the virus over the second half enabled the recovery in Australia to take shape through a sustained reopening, whereas offshore the pandemic and associated restrictions have continued to weigh heavily. Variant strains of the virus saw caseloads rising sharply over the Northern Hemisphere winter prompting the reintroduction of shutdowns in the UK and Europe, which has led to backsliding in the recoveries of those economies before the rollout of vaccines can change the course later on in 2021. Fewer restrictions meant that the US economy was more resilient, though output growth still slowed sharply in Q4 relative to Q3. Progress in the distribution of vaccines and additional fiscal stimulus supports a robust US outlook for 2021. Outperforming in the recovery has been the Chinese economy with activity now sharply above pre-pandemic levels led by the industrial sectors, with key commodity prices moving higher in response; a boost for Australian national income.  

From late October, the state of Victoria was unlocked from its 3-month-long shutdown to contain a second wave of the virus, while across the rest of the nation low caseloads allowed more restrictions to be rolled back. Reflecting these developments and a reduction in precautionary behaviour, indicators of mobility recovered to their highest levels since the early stages of the pandemic, with measures tracking retail and leisure activities leading as a wider range of opportunities for households to spend became available again.

The ongoing reopening also contributed to further progress in the recovery in the labour market, with employment approaching its pre-pandemic level after it had collapsed by 6.7% at its trough. Victoria's reopening drove the momentum over the quarter as employment in the state rebounded sharply to broadly align with the levels across the other states. Hours worked have also continued to rise in an economy now much less restricted, advancing by 3.3% in Q4 following on from the 4.8% rebound in Q3. While the unemployment rate was still elevated at the end of the year (6.6%) it had declined sharply from its earlier peak in July (7.5%). 

Notable in the December quarter was the very sharp rise in consumer sentiment reflecting confidence in the ability of the health authorities to keep the pandemic contained and allow the economy to remain open, improving labour market conditions and the strength of the monetary and fiscal stimulus response that was now working to boost spending after supporting households through the shutdowns.  

An encouraging aspect of the 3.1% rise in GDP in Q4 was that it was more broad based in composition than in Q3 where activity rebounded by 3.4%. Household consumption continued to lead the way rising by 4.3% nationally, which incorporates a 10.4% surge in spending in Victoria as the state reopened. This strength in household consumption was sustained despite aggregate real income contracting in the quarter (-3.3%) on the tapering of fiscal support, with ABS analysis reporting that payments through the Federal Government's JobKeeper (wage subsidy) scheme had stepped down to $11.9bn in Q4 from $35.8bn in Q3. Fiscal support and the effects of shutdowns had earlier seen the household saving ratio elevate to a record high in Q2 (22.0%) and this was now being drawn on to support spending with the economy opening up more widely. Meanwhile, policy stimulus from Federal and State Governments was key in turning around earlier weakness in the residential construction cycle as activity in the sector posted its best outturn in more than 5 years, with new home building and alteration work on the rise. Business investment saw its strongest quarter since Q3 2017 after the instant asset write-off threshold was lifted to $150k from $30k in last year's Federal Budget and access was greatly expanded to include firms with turnover of less than $500m from $50m previously. There was also good news from the agricultural sector, with farm GDP surging by 33.3% in Q4 as favourable seasonal conditions drove grain output after drought breaking rain at the start of the year. All in all, with the economy still left with a sizeable output gap from the covid shock, the rollout of the vaccine and policy support remains key. The RBA reiterated its commitment to its 3-year yield target at its March meeting and maintained the guidance that the cash rate was expected to remain at 0.1% "until 2024 at the earliest", while it expanded its quantitive easing program by $100bn earlier this year.  

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GDP — Q4 | Expenditure: GDP (E) 3.0%q/q, -1.1%Y/Y

Household consumption (4.3%q/q, -2.7%Y/Y) — The economic recovery continues to be driven by the rebound in household consumption, which lifted by a further 4.3% in Q4 as a wider reopening led to more opportunities to spend, though it was still 2.7% lower through the year. Overall, household consumption contributed 2.3ppts to the 3.1% rise in real GDP in Q4.

Dynamics around the mix of household consumption in Q4 extended what was seen in Q3, with the areas most heavily affected by the earlier restrictions over the first half of the year leading the rebound. Services consumption advanced a further 5.2%q/q on strength in transport (19.3%), hotels, cafes and restaurants (17.5%), personal services (11.8%) and recreation and culture (9.1%) but was still well below its pre-pandemic level (-7.8%Y/Y). Goods consumption expanded by 2.8% in the quarter taking it further above its level at the end of 2019. Substitution effects have contributed to this strength, with spending diverted away from services still heavily restricted such as overseas travel into new vehicles (22.2%Y/Y), household goods (11.3%Y/Y) and clothing and footwear (5.2%Y/Y).  

Real growth in household disposable income pulled back by 3.3% in the quarter as the eligibility for the Federal Government's JobKeeper wage subsidy scheme was tightened and the level of payments was lowered, but growth through the year was still strong at 4.5%. With aggregate income contracting, the lift in household consumption resulted in a decline in the saving ratio from 18.7% to 12.0%. Overall, the high level of saving still has Australian households well placed to sustain robust consumption growth as fiscal supports are wound back further.   

Dwelling investment (4.1%q/q, 0.6%Y/Y) — Residential construction activity posted its strongest quarterly outturn in more than 5 years rising by 4.1% to be up slightly on its pre-pandemic level (0.6%). Policy stimulus has been key in turning the cycle after a stretch of 8 consecutive quarterly contractions between mid-2018 to mid-2020. The Federal Government's HomeBuilder grants, state government incentives for first home buyers and low interest rates spurred new home building to a 3.4% rise in Q4 (-5.1%Y/Y) and alterations advanced a further 5.2% (10.6%Y/Y) after surging by 7.6% in Q3. Meanwhile, buoyant conditions in the established housing market in which capital city house prices were rising again after declining through the middle of the year drove ownership transfer costs—fees associated with real estate transactions—substantially higher in Q4 (15.2%), which contributed 0.2ppt to GDP growth.  

Business investment (2.6%q/q, -5.1%Y/Y) — Though the pandemic and associated uncertainty has hit firms' investment spending and forward-looking plans hard, a bright spot emerged in the December quarter. Business investment lifted by 2.6% in Q4—its strongest quarterly rise in more than 3 years—led by a surge in demand for machinery and equipment (8.1%q/q) in response to the greatly expanded tax incentive measures included in the most recent Federal Budget, though the category is still 4.8% lower through the year. Meanwhile, non-residential construction remained weak in Q4 (-0.9%) having fallen by 5.9%Y/Y. There has been some improvement in investment plans based on the recent ABS Capital Expenditure survey, though the outlook, particularly offshore, is still highly uncertain. 

Public demand (1.0%q/q, 6.5%Y/Y) — Spending associated with the health response to the pandemic continued to drive public consumption, rising by a further 0.8% in Q4 to be up by 7.4% through the year. Underlying investment advanced by 1.8% in the quarter following on from a 2.9% rebound in Q3 and is expected to contribute more significantly to output growth over the year ahead as state governments rollout capital spending plans outlined in recent budgets.     

Net exports (-0.1ppt in Q4, -1.0ppt yr) — Reopenings in economies offshore helped drive export volumes up by 3.8% in Q4, with rural goods rising due to better seasonal conditions after the earlier drought, though resources exports only lifted modestly. Import volumes continued to advance on the domestic recovery (4.9%q/q), led by consumption and capital goods. Services trade remains heavily affected by the international border closures. 

Inventories (-0.1ppt in Q4, 0.1ppt yr) — After contracting sharply over the first half of the year in response to the weak economic conditions, inventory levels stabilised over the second half. The 0.1ppt subtraction to growth in Q4 comes after a 1.0ppt contribution in Q3. 

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GDP — Q4 | Incomes: GDP (I) 3.3%q/q, -1.3%Y/Y

The December quarter real GDP income estimate lifted by 3.3% after rebounding by 3.4% in Q3; this latest outcome reducing the decline through the year to -1.3% from -3.9%.    

Since plunging by 7.5% in the June quarter when the shutdown hit incomes hard, Australian nominal GDP has rebounded over the reopening phase rising by 4.0% in Q3 and then by a  further 4.2% in Q4. This latest outcome turned the annual pace positive to 0.6% from -3.7%.

Supporting national income in the December quarter was the effect of rising commodity prices as global activity came back online, with industrial demand in China notably strong. In response, the nation's terms of trade accelerated by 4.8% in the quarter, which swung annual growth to 7.3% from -2.1%. 

The extent of fiscal support being delivered to the economy was wound back in the December quarter reflecting tightened eligibility criteria for the JobKeeper wage subsidy scheme with lower payments and reduced cash flow support for businesses. Government taxes less subsidies lifted to an in-take of $27.7bn after around $64bn in policy support measures had been delivered into the economy over Q2 and Q3. The tapering was reflected through the 2.2% contraction in total factor income in the quarter, though it was still 5.3% higher than a year earlier.  

Analysis from the ABS reports that JobKeeper payments were $11.9bn in the December quarter; some $23.9bn lower than in the September quarter, while support under the Boosting cash flow for employers initiative declined to $6.7bn in Q4 from $13.5bn in Q3. Accordingly, reduced government transfers weighed on business profits. Private sector non-financial corporations profits pulled back by 7.5% in Q4, lowering annual growth to 11.7% from 18.2%. Gross mixed income fell by 12.7% (13.6%Y/Y), with the larger retracement reflecting the fact that small businesses had been the major beneficiaries of the government transfers. Movements in financial corporations' profits have been much more subdued, rising by 0.9% in Q4 to be up by 2.1% through the year having been restrained by weak demand for credit and low interest rates.

Improving labour market conditions has helped drive growth in wages and salaries, which advanced by 1.5% in Q4 after rising by 2.4% in the previous quarter. This increased growth through the year to 2.0% from 1.4%. The 1.5% rise in wages compares with a 3.3% lift in hours worked across the economy in the December quarter.    

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GDP — Q4 | Production: GDP (P) 3.1%q/q, -1.0%Y/Y

The December quarter's GDP production estimate came in at 3.1%, as the contraction through the year moderated to -1.0% from -3.6%. The service sectors continued to recover through a wider reopening with more restrictions being eased, with gross value added across these industries rising by 3.7% after Q3's 5.1% rebound to be 1.1% lower through the year. Goods-related industries also saw gross value added rise but at a slower pace of 1.2% in the quarter (-3.4%Y/Y).   

Within the service sectors, household services followed up its 9.1% rebound in Q3 with a further 3.2% lift in Q4 as eased restrictions saw demand for personal services (9.9%), hotels, cafes and restaurants (7.9%) and recreation and culture activities (8.5%) continue to recover, though overall it was still 1.6% lower than its pre-pandemic level. Business services posted a 4.0% gain in Q4, with professional services (4.7%) and activity in real estate (7.4%) improving further, taking the category to within 0.7% of its level at the end of 2019.

The agriculture sector saw gross value added in Q4 surge up by 26.8% (20.0%Y/Y), adding 0.5ppt to GDP growth in the quarter as favourable seasonal conditions after the earlier drought led to a strong grain harvest (84.4%Y/Y). This had spillover effects through the supply chain, reflected by the 4.5%q/q rise in the goods distribution sector with transportation (6.1%) and wholesalers (3.6%) the beneficiaries. Meanwhile, the goods production sector was weak in Q4 (-0.2%) weighed by mining (-1.0%) and utilities (-0.9%).

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GDP — Q4 | Prices

There was little impulse from prices in the December quarter. While economy-wide inflation through the GDP deflator picked up by 1.1% in the quarter and the annual pace elevated to 1.8% from 0.1%, there are a couple of points to highlight. Firstly, this captures the impact of the strong boost in the terms of trade, and secondly, a low base effect accelerated the annual rate. Adjusting for the terms of trade impact, the gross national expenditure deflator was broadly flat in Q4 (0.1%), while the annual pace eased to 0.4% from 0.8%.   

Similarly, the household consumption deflator—the closest proxy in the national accounts to the Consumer Price Index (CPI)— was 0.2% higher in Q4, though the pace through the year softened from 0.5% to a 57-year low of 0.3%. The headline CPI measure on a seasonally adjusted basis came in at 0.9%Y/Y in the December quarter.       

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GDP — Q4 | Productivity

Hours worked across the Australian economy continued to rebound in Q4 with a 3.3% rise following Q3's 4.8% lift. Overall, hours worked increased by 8.3% over the second half of the year, though this was after collapsing by 10.9% through the first half. Compared with pre-pandemic levels, hours worked were still 3.5% lower, while in the market sector they remain down by 5.0%.   

The rise in hours worked in Q4 of 3.3% was almost in line with the increase in output (3.1%), with GDP per hour worked holding flat in Q4 (2.5%Y/Y). Growth in GDP per capita advanced by 3.0% in the December quarter, though it was 1.8% down on its pre-pandemic level at the end of 2019.   

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GDP — Q4 | States

The key dynamic in the Q4 quarter was the reopening in Victoria from its shutdown over August to late October, which contributed in the order of 1.6ppts to national GDP growth. Victorian state demand rebounded 6.8% on the reopening effort, though it still contracted by 3.4% over 2020 to vastly underperform the rest of the nation. Household consumption surged in the state rising by 10.4% in Q4 (-7.2%Y/Y), albeit from a very weak base after declining in each of the first 3 quarters of the year. Also supporting the rebound was residential construction (3.0%q/q) and business investment (6.1%q/q), with the latter led by machinery and equipment (14.6%q/q). Strength in public demand over the past year (9.1%) has helped attenuate the impact of the pandemic crisis on the state economy.       

State demand in New South Wales posted a 2.9% rise in Q4, reducing the decline through the year to -0.7% from -3.1%. Household consumption extended its 10.4% rebound in the previous quarter with a 3.1% lift in Q4 but was 3.4% lower through the year. Activity in residential construction advanced by a further 2.1%, though this has been weighted towards alteration work. Business investment lifted by its most in a single quarter in more than 3 years with a 3.8% rise in Q4 as machinery and equipment spending surged by 15.4%. Meanwhile, public demand remains a source of strength rising by a further 1.3% to 6.6%Y/Y.    

For the other states, the Queensland economy continued to outperform with state demand firming by 2.0% in Q4 to be 2.4% higher through the year. Household consumption was solid posting a 2.3% lift, though it was in residential construction where the strength really stood out through a 9.6% surge in activity on the back of policy stimulus. It was a subdued tone in South Australia where state demand was 0.6% higher in Q4 but flat over the year. Household consumption growth was modest at 0.9%q/q and while residential construction lifted 2.6%q/q, business investment was weak (-4.3%), centred on non-residential construction. Western Australian state demand advanced by 1.4% for the quarter to be 1.2% higher through the year. The pace of household consumption growth (0.3%) was softer than in the other states and has yet to return to pre-pandemic levels (-1.6%) despite fewer disruptions from the pandemic. Meanwhile, residential construction rose very sharply (8.9%) with additional incentives available in the state for first home buyers. State demand in Tasmania lifted 3.3% in Q4 to be up by 1.5% for the year. There were strong gains across residential construction (9.2%) and business investment (7.6%) as household consumption remained supported (2.4%).     

Australian Q4 GDP 3.1%; Momentum strong

Momentum in the recovery of the Australian economy from the covid-19 pandemic was sustained at a faster-than-anticipated pace over the final months of 2020, as real GDP growth topped the range of market estimates in advancing by 3.1% in the December quarter. This follows on from the 3.4% rebound in the September quarter during the initial stages of the reopening. 

The onset of the pandemic and associated shutdowns led to output contracting by 7.3% over the first half of 2020, before the easing of restrictions enabled the recovery to start and then gather momentum during the second half over which activity rebounded by 6.6%. Overall, real GDP was still 1.1% down on its pre-pandemic or end 2019 level. However, based on the RBA's forecasts from its February Statement on Monetary Policy, real GDP at the end of 2020 was 3.7% lower than where it was anticipated to be in the absence of a significant shock from the pandemic, and this is the situation policymakers have sought to remedy. At its March meeting, the RBA Board reiterated its commitment to its 0.1% yield target on 3-year Commonwealth Government bonds and remaining with the forward guidance that the macro conditions required for an increase in the cash rate are not expected "until 2024 at the earliest". Furthermore, the RBA had earlier this year expanded its bond purchase program by an additional $100bn to contain yields at the longer end of the curve and place downward pressure on the exchange rate. While the economy must still weather the tapering of fiscal measures that supported incomes during the peak of the crisis, the elevated level of the household saving ratio should help smooth the transition. 

Australian households continued to drive the recovery forward in the December quarter on a wider reopening effort as the state of Victoria emerged from its shutdown. Household consumption growth lifted by 4.3% in the quarter following on from Q3's 7.9% surge, though it was still down by 2.7% through the year. Leading the way was Victoria where spending rebounded by 10.4% in Q4 after declines in each of the previous 3 quarters (-7.2%Y/Y). Real growth in household disposable income contracted 3.3%q/q reflecting the tapering of fiscal supports, and this led to a decline in the saving ratio from 18.7% to 12.0%. 

The easing of restrictions led to an increased range of opportunities to spend, with the consumption of discretionary services rebounding sharpest over the second half of the year after being most heavily affected by the emergence of the pandemic. But goods consumption has elevated sharply (6.2%Y/Y) benefitting from substitution effects to areas of in-home spending, as well as retail and new vehicles supported by the stimulus measures.  

In addition to household consumption, activity in the December quarter was supported more broadly than in the previous quarter. Residential construction activity lifted by 4.1% in Q4 (0.6%Y/Y) as new home building (3.4%) and alterations (5.2%) were responding to strong demand associated with the Federal Government's HomeBuilder scheme and low interest rates. Business investment posted its strongest quarterly rise of 2.6% in more than 3 years (-5.1%Y/Y) as improving economic conditions combined with the expanded tax incentives in the most recent Federal Budget to drive demand for capital goods (8.1%q/q). Import volumes continued to reflect reopening dynamics (4.9%q/q), supported by household consumption and capital goods investment. This outpaced a 3.8% rise in exports, though it was notable that this was driven by the agriculture sector as production rebounded on better seasonal conditions after the earlier drought. Reflecting this, farm GDP surged by 33.3% in Q4. Overall, net exports subtracted modestly from growth (-0.1ppt), as did inventories (-0.1ppt).  

Link to the full review here 

 

RBA keeps policy unchanged in March

The Reserve Bank of Australia Board kept its monetary policy settings unchanged at today's meeting. Much of the focus of the meeting was around the RBA's recent activity in the bond market after the sharp steeping in global yields of late. Recently, the RBA stepped up purchases in support of its 0.1% yield target for 3-year Australian Government bonds, and yesterday it purchased longer-term bonds at twice the usual daily pace under its quantitive easing (QE) program. 

The decision statement from Governor Philip Lowe outlined that the RBA remains committed to its yield target policy and would make further purchases "as necessary" to hold 3-year yields around the 0.1% level of the cash rate. Also, the Governor noted that yesterday's higher than usual QE purchases ($4bn instead of $2bn) were made to "assist with the smooth functioning of the market". This was done by a bringing-forward of purchases and does not appear to point to move to a faster pace of purchases, though the Governor has put markets on notice through the line that the RBA was "prepared to make further adjustments to its purchases in response to market conditions". Commenting more generally on the sell-off in bond markets, Governor Lowe partly attributed rising bond yields to higher inflation expectations, though that had led to elevated volatility in other corners of the markets, including on the exchange rate with the domestic currency "in the upper end of the range of recent years". 

The rates market continues to factor in an adjustment to the yield target policy later on this year with the target sliding up from 0.1%. However, given the RBA's recent actions in the bond market together with Governor Lowe reiterating the forward guidance that the conditions required to justify an increase in the cash rate (inflation sustainably within the 2-3% range underpinned by a tight labour market with a materially higher pace of wages growth) were not expected to occur "until 2024 at the earliest" suggests to me that will not be the likely outcome at this stage. Furthermore, the transmission of the RBA's current policy settings was seen as working through keeping financing costs very low, a lower currency than otherwise, ensuring an ample supply of credit and boosting balance sheets. A move to tighter policy would remove some of this accommodation and slow the economic recovery.    

Other points of interest in Governor Lowe's statement were around the housing market with the emphasis being on lending standards remaining sound with house prices rising at a time of low interest rates. On inflation, while a pick-up in the pace is expected, this would be occurring on the reversal of pandemic-related price effects and would be viewed as temporary.  

Australian dwelling approvals fall back in January

Australian dwelling approvals fell much more than expected in January as detached approvals retraced from record highs ahead of the tapering in Federal Government HomeBuilder grants. January's 19.4% fall came after a 12.0% acceleration in December, with approvals still sharply higher than a year earlier.

Building Approvals — January | By the numbers

• Dwelling approvals (seasonally adjusted) dropped 19.4% in January to 15,926 against the median estimate for a 2% decline coming after December's 12.0% surge, with growth over the year easing to 19.0% from 24.0%. 
• House approvals pulled back off a record high falling 11.2% in the month to 12,390 but were still 39.0% higher than a year earlier.  

• Unit approvals were 39.0% lower in January at 3,536, widening the decline over the year to -20.9% from -17.3%.  

Building Approvals — January | The details 

Australian dwelling approvals retraced recent strength with a sizeable 19.4% fall for the month in January. House approvals had soared to a record high in December rising by 16.1% ahead of the end-of-year deadline in the tapering of HomeBuilder grants from the Federal Government from $25k to $15k. This ended a run of 6 consecutive monthly gains for detached approvals, but the uptrend is still well and truly intact with the level nearly 49% above the low point from last June, with conditions improving through a range of policy stimulus measures. Approvals in the higher-density segment fell by a much larger 39.1% in January to their lowest monthly total in 9 years. In general, the relative weakness in higher-density approvals compared with the detached segment reflects the headwinds of the pandemic, particularly very weak migration flows and this is weighing on developer forecasts for demand for this type of housing, while the stimulus measures have mostly been directed towards the detached segment of the market.   

Approvals for alteration work to existing houses declined 12.7% in January to around $0.84bn, though this was after a 10.5% rise in December. Today's result combined with base effects to lower annual growth to 10.0% from 40.2%. 

Turning to the states, approvals declined across the nation in January. The largest declines were in Queensland (-33.3%) and Tasmania (-24.8%) after those states recorded the fastest rates of growth in December at 25.4% and 65.9% respectively. 

But even with January's weakness, house approvals are still at very high levels. The HomeBuilder policy has been particularly effective in boosting approvals in states outside of New South Wales and Victoria, likely because fewer houses in those states qualified for the support under the initial $750k price cap, though they have now been raised from January onwards ($950k for NSW and $850k for Vic). 

Building Approvals — January | Insights 

There was elevated volatility in today's numbers coming after the pull forward of approvals into December before the tapering of HomeBuilder grants. Holidays through January may also have had some effect on the approvals numbers. But overall the key themes remain intact with detached housing approvals strong while higher-density approvals are mired in weakness.

Australian Current Account +$14.5bn in Q4; net exports -0.1ppt

This morning the ABS published the last of the remaining inputs before tomorrow's December quarter national accounts. Net exports are set to subtract 0.1ppt from quarterly GDP growth, though public demand will likely add 0.3ppt to activity. 

Balance of Payments - Government Finance  — Q4 | By the numbers

• Australia's current account stayed in surplus for a 7th consecutive quarter, widening to $14.5bn in Q4 from $10.7bn and came in higher than expected ($13.0bn).  

• The trade surplus rebounded by $4.4bn in Q4 to $18.1bn, helped by strength in commodity prices.   
• The income deficit widened to $3.2bn in Q4 from $2.7bn. 
• Net exports are expected to subtract 0.1ppt from GDP growth in Q4 — lower than was expected (-0.3ppt). 

• The separate ABS Government Finance data for Q4 reported underlying public demand advanced by 1.1% in Q4 to $130.1bn and is likely to add 0.3ppt to quarterly GDP growth.  

Balance of Payments - Government Finance — Q4 | The details 

Australia's run of current account surpluses has extended to a 7th consecutive quarter. This is very unusual in a historical context for the nation—indeed the last such stretch of this duration occurred between 1972-73. Driving the current account wider in Q4 was the trade balance, with the surplus there expanding to $18.1bn from 13.7bn in the previous quarter. Export earnings rebounded in Q4 by 7.9% but contracted in the previous 4 quarters, mostly associated with weakness in the global economy due to the pandemic. Import spending advanced by a further 4.0% in Q4 reflecting improving demand conditions with the domestic economic recovery gathering momentum.

Adjusting for price movements, export volumes lifted 3.8% in Q4 (-11.7%Y/Y) but were outpaced by a 4.9% rise for imports (-9.6%Y/Y). Exports were supported by increased demand for Australian rural goods (23.5%qtr), while non-rural goods (includes resources commodities) lifted modestly (1.5%qtr). Service exports advanced (1.2%) but remain at a very low level due to the impact of the international border closure. 

Imports of goods advanced strongly (5.2%qtr) with gains coming across the board led by consumption (10.1%) and capital goods (9.1%)—both speaking to the effects of rising demand with the recovery in the domestic economy gathering momentum. Services imports lifted 2.7% for the quarter, but as with exports are heavily lower through the year with overseas travel prohibited. 

The wider income deficit for Q4 at $3.2bn was driven by weaker returns to domestic investors in offshore markets (-9%), while foreign investors saw returns from Australian assets down 6% in the quarter.   

In the December quarter Government Finance data, the ABS reported consumption spending lifted 0.8% in Q4 to $104.6bn and is expected to add 0.2ppt to GDP growth in Q4. Meanwhile, underlying investment was up 2.3% for the quarter to $25.5bn, contributing in the order of 0.1ppt to GDP growth. Based on these gains, public demand was 1.1% higher through Q4 and will add 0.3ppt to quarterly output growth.   

Balance of Payments - Government Finance — Q4 | Insights 

Today's outturns were a net positive with the subtraction from net exports not as severe as forecast by markets, while public demand is stronger than was being factored in. The momentum in the Australian economy was sustained over the final months of 2020 after activity rebounded by 3.3% on the reopening. Output growth for Q4 is likely to come in around the 2.5-3.0% range. 

Preview: RBA March meeting

In a busy week on the Australian economic calendar, the RBA Board's monthly policy meeting comes up today. It is expected that Governor Philip Lowe's decision statement will confirm no changes in monetary policy settings at 2:30PM (AEDT). The recent sharp rise in global bond yields has been met aggressively by the RBA. Last week, the RBA raised its bond purchases to $12bn, its most since the early phase of the pandemic, as it underscored its commitment to keeping 3-year Australian Government bonds trading around the 0.1% level it targets on the cash rate. And yesterday, $4bn of purchases were made under the bond purchase program, which is twice the usual daily pace for purchases of Australian Government bonds. Recall that at the February meeting, the Board announced a $100bn expansion of the bond purchase program. 

The $12bn of purchases made by the RBA last week included $7bn directed towards defending the 0.1% yield target on 3-year bonds (the first purchases of this type since last December and most since April) and the usual weekly amount of $5bn of longer-dated bonds under the bond purchase program. The lift in bond-buying together with further commitment in today's statement from Governor Lowe to its forward guidance that the economic conditions to justify an increase in the cash rate are not expected to be reached "until 2024 at the earliest" may be used to lean against the view that has gathered a lot of support that the 3-year yield target may be in line for an adjustment in the upcoming months; a move which appears unlikely. The results of yesterday's bond auction show that around $1.1bn of the November 2024 bond was purchased. Currently, the RBA's yield target policy focuses on the April 2024 bond, but yesterday's auction could be a sign of things to come through a shift to the November 2024 bond when a decision on this comes from the Board.   

While the economic recovery has run ahead of the RBA's earlier expectations and tomorrow's national accounts are likely to show that the momentum was sustained over the final months of 2020, GDP will remain down on pre-pandemic levels and vastly below where it was forecast to be if the pandemic had not occurred. This has clear implications for the labour market and wages growth, two key areas for the RBA. Last week's Wage Price Index showed annual wages growth holding around record lows of 1.4% after a seemingly temporary boost in the December quarter. The actions of other central banks have also been emphasised as key in shaping RBA policy. With no signs that policy accommodation will be reeled in anytime soon, earlier tightening from the RBA would risk upward pressure on both the currency and bond yields and slowing the recovery in the domestic economy. 

Australian housing finance surges in January

Australian housing finance commitments have surged by 10.5% in January following on from an 8.6% rise in the month prior, with construction loans responding to the support of the Federal Government's HomeBuilder scheme and demand more generally being driven by low rates and state government incentives for first home buyers.  

Housing Finance — January | By the numbers

• Housing finance commitments ($ value, ex-refinancing) posted an 8th consecutive monthly rise with a 10.5% surge coming through in January to $28.8bn; well above the 2.5% lift expected and this was after an 8.6% rise in December. Commitments over the year are running at a 44.3% pace, up from 31.2%.  
• Owner-occupier commitments led with a 10.9%m/m acceleration to $22.1bn (prior: 8.7%m/m), elevating annual growth to 52.3% from 38.9%. 
• Refinancing by owner-occupiers lifted by 11.1% in January to $7.7bn (14.2%yr) after an 11.3% rise in December.  
• Investor commitments advanced 9.4%—its fastest rise in a single month since September 2016—to $6.6bn to be 22.7% higher over the year (from 10.9%). 

Housing Finance — January  | The details 

The acceleration in Australian housing finance activity continued into the new year supported by low rates, the Federal Government's HomeBuilder scheme and additional state government incentives for the first home buyer segment. As such, the strength in the first home buyer segment outpaces growth in the upgrader segment and for owner-occupiers as a whole.

Construction loans were very strong in January in rising by 15.7% in the month to be up 141% on a year earlier. The eligibility criteria for HomeBuilder was widened from the start of the year (price cap in New South Wales lifted to $950k and $850k in Victoria from $750k previously), though the grants have tapered in size to $15k from $25k.

On the investment side, growth in commitments has accelerated over recent months with January's 9.4% rise following gains of 8.2% in December and 6.0% in November, lifting the annual pace to 22.7% — its strongest since April 2017.  

On the approvals numbers for owner-occupiers, construction-related approvals reflect the boost from HomeBuilder rising by another 15.7% in January to 112.0%yr. Within this, approvals for the construction of new dwellings jumped 20.3% in the month (161.8%yr) and approvals for dwellings newly constructed lifted by a much smaller 2.2% in January (28.6%yr). Approvals to purchase established dwellings were up by 10.8% for January for an annual rise of 29.8%, which is its fastest since September 2009. 

The table below summarises the monthly and annual moves across the states for each of the major segments. In general, the states outside of the major two of New South Wales and Victoria have driven the upswing. 

Housing Finance — January | Insights

Policy stimulus continues to boost momentum in the nation's housing market and this is now translating into stronger house prices, with CoreLogic's home value index rising at its strongest monthly pace in the history of the series as capital city prices advanced by 2.0% for the month in February, though prices were only modestly higher over the year at 2.6%.