• Stephen Roberts
    • Jul 26

July 2021 Economic Roundup

Mostly strong economic reports from the major developed economies continued during July. However, the spread of the Delta COVID-19 variant clouds an otherwise robust global economic growth outlook. An important underpinning for stronger growth remains in play, however; the commitment of governments to spend where needed, combined with ongoing backing from central banks maintaining monetary support even in the face of inflation pushing up more than expected in the near term. Australian economic reports were also strong in July and government and RBA policy support continue, but by international comparison Australia differs with a low COVID vaccination rate forcing a virus elimination strategy that will lead to sharp growth slowdown in the near term.


US economic statistics released in July remained consistent with strong growth but also elevated inflation. On the growth front, the first reading of Q2 GDP is due later this week and market analysts forecast around 8.6% annualised growth up from 6.4% in Q1. Strong consumer and business spending are the drivers priming rapid US GDP growth, but they are also adding to pressure on stretched global and US supply chains causing prices to rise.


Inflation was higher than expected in June with the CPI up 5.4% y-o-y from 5.0% in May and producer prices up 7.3% y-o-y from 6.6% in May. Supply chain problems are likely to ease over the next few months and annual inflation readings should settle down later this year and early next year. The Federal Reserve (Fed) has stated repeatedly that the current inflation upward blip, although bigger than expected, will reverse and provides no cause for any near-term monetary policy response. Over the past year, the Fed, like many of its central bank peers internationally, has shifted from a pre-emptive inflation-fighting policy line to one that is reactive, needing to see actual inflation above target and likely to stay consistently above target underpinned by tight labour market conditions and rising wages before tightening policy.


In terms of the US labour market, it continues to improve with non-farm payrolls up 860,000 in June after gaining 583,000 in May but is not unduly tight with the unemployment rate at 5.9% in June, up a notch from 5.8% in May. Just before the pandemic took hold in February 2020 the unemployment rate was 3.5%. Also, the US labour force participation rate has not recovered to pre-pandemic levels indicating a pool of workers still to re-enter the labour force slowing reduction in the unemployment rate and moderating wage growth as the economic recovery continues. If the Fed sticks to its guns as seems likely and waits for an inflation red light from the labour market, higher US official interest rates are unlikely before 2023.


China continued to register strong economic readings in July but with evidence that peak annual GDP growth has passed. China was the first economy to start to recover from the Covid-19 downturn back in Q1 2020 and is now the first to plateau, albeit at a robust growth rate. Q2 2021 GDP was up 7.9% y-o-y compared with 18.3% y-o-y in Q1. China as a manufacturing powerhouse continues to benefit from rising global demand for manufactured goods. June exports were up 32.2% y-o-y from 27.9% in May. In contrast, domestic economic indicators are showing signs of deceleration. June fixed asset investment spending was up 12.6% y-o-y compared with 15.4% in May. June industrial production was up 8.3% y-o-y from 8.8% in May and June retail sales were up 12.1% y-o-y from 12.4% in May. China’s growth rate looks set to slow further given less generous support from fiscal and monetary policy settings compared to the US and Europe. Annual GDP growth may continue to slide to around 6% y-o-y in the second half of 2021.


In Europe, greater freedom to spend and travel in the northern summer after the lengthy period of Covid-19 restrictions is allowing a strong bounce out of recession. European retail sales for example, jumped 4.6% m-o-m in May. Covid-19 infection rates are rising again in Europe but the pace of increase in hospitalisation has been manageable so far making any return to growth-crimping lockdown less likely. Leading indicators of manufacturing and services activity are holding around 60 and above pointing to strong expansion. The unemployment rate was down to 7.9% in May, the lowest rate since before the start of the pandemic. As is the case elsewhere internationally supply chain pressure is lifting producer prices (9.6% y-o-y in May up from 7.6% in April) and the CPI, up 1.9% y-o-y in May, is likely to rise above 2.0% in the next few months. The European Central Bank has tweaked its inflation target to make sure that it will not need to lift official interest rates for the next year at least.


In Australia, the economic data released during July related to May and June remained mostly robust. The first hint of the growth slowdown ahead from the COVID-19 lockdowns – notably those in Melbourne and Sydney – showed in the preliminary June retail sales reading down by 1.8% m-o-m. The fall in June retail sales was not enough to prevent retail sales from rising more than 1% in Q2. However, it will be a different story in Q3 with a sharp fall in retail sales likely in July and one that is unlikely to be offset by any increases in August and September.


After a strong Q2 GDP report (due in the first week of September) weaker household consumption spending and business investment will weigh down Q3 GDP. Well before Q3 GDP is released in early December the set-back to growth will show up in a reversal of the strength in monthly labour market readings so far this year. The most recent labour force report for June was still strong with employment up 29,100 and the unemployment rate down to 4.9% a twelve-year low. The labour force report is conducted in the first two weeks of each month so the next report for July will reflect some influence from the Sydney and Melbourne lockdowns with greater negative effect likely on the August report. The unemployment rate could jump to 5.5% or more over July and August and even when the lockdowns end recovery spending may not reduce the unemployment rate back to its 4.9% June level until mid-2022.


Some parts of the Australian economy will stay strong partly offsetting weakness in household consumption spending in New South Wales and Victoria. Spending on housing is likely to stay strong. The value of housing finance commitments in May was up 4.9% m-o-m, 95.4% y-o-y implying considerable spending on housing in the pipeline. International trade remains robust on global demand. Australia’s preliminary June trade data showed merchandise exports up 8% m-o-m.


Providing the Sydney lockdown does not extend beyond August, Australia’s strong growth rate will suffer only a pause through Q3. It is a pause that will allow the RBA to repeat its message of no interest rate increases next year or the year after with more confidence. Australia’s inflation rate is about to push higher. The Q2 CPI due this week is expected to see annual inflation push up from 1.1% y-o-y in Q1 to more than 3.5%. The sharp lift will part reverse in Q3. Nevertheless, a 3.5%+ annual inflation rate with the latest unemployment rate down at 4.9% could have made it hard for the RBA to continue its message of no rate hikes until 2024. It is an ill wind, but the COVID-19 Q3 growth pull-back makes the RBA’s rate guidance of no change before 2024 more credible.

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