Out With a Bang
Australian economic growth is accelerating out of recession at a quickening pace, forcing repeated upgrades of market and official economic forecasts. The RBA lifted its GDP growth forecasts for 2020 and 2021 in the August and November Monetary Policy Statements. It also lowered its unemployment rate forecasts in both quarterly statements. Now it is Treasury’s turn to revise its forecasts in the Mid-Year Economic and Financial Outlook (MYEFO) out on Thursday this week.
It is worth keeping in mind that the Budget and associated Treasury economic forecasts were much later than usual this year because of COVID-19. It is only 10 weeks (about 2 and a half months) since the Budget forecasts were announced on 6 October. Yet in that brief period economic growth and everything that hangs off it has improved noticeably more than expected. On Thursday, Treasury’s Budget GDP forecast of –1.50% in 2020-21 is likely to be lifted by at least a percentage point. The Budget 7.25% unemployment rate forecast is also likely to be reduced by at least a half percentage point.
These revisions to key economic parameters will make a material difference reducing the forecast Budget deficit for 2020-21. Their impact on the Budget position will also be reinforced by something else that has improved since early October, key international commodity prices, especially iron ore prices. Higher than expected commodity prices mean that company tax receipts will beat initial Budget forecasts.
In the MYEFO, the revised Budget deficit forecast for 2020-21 may be below $A200 billion from the Budget-time forecast of $A213.7 billion. There is also likely to be a substantial downward revision to the 2020-21 $A112 billion Budget deficit forecast.
The prospective MYEFO revisions are a continuation of the upside surprises evident in Australian reports of housing activity, household consumer spending and international trade since mid-year. In turn, the better numbers in those sectors helped to generate a better-than-expected rebound in Q3 GDP, +3.3% q-o-q and a string of better-than-expected monthly employment readings.
Australia is on the verge of a cycle of sustained economic growth where rising employment rather than government income support programs are providing the confidence for households to spend more. Westpac consumer sentiment rose 4.1% in December to a seven-year high. In turn, businesses are reporting better operating conditions and are becoming more optimistic. The November NAB business survey showed increases in business conditions to +9 from +1 in October while the business confidence reading lifted to +12 from +5 in October.
The latest November labour force report is due on Thursday this week. The market expects employment to rise by 50,000 after the unexpected 178,000 (market forecast –50,000) increase in October. Buoyant labour market conditions are expected to promote another increase in the labour force participation rate to 66.0% from 65.8% in October.
The recession forced down participation, but it has recovered since mid-year, a mark of greater optimism. The expected lift in participation cancels any fall in the unemployment rate from rising employment and the market expects the unemployment rate which is expected to stay at 7.0%.
If the November labour force report beats market expectation, a reasonable chance on the experience of recent months, it will add to the sense that Australia’s economic recovery is increasing momentum.
Two more economic reports before Christmas that may reinforce the sense of economic growth gathering pace are the preliminary reports of November retail trade and international trade in goods and services, both due next week. Retail sales increased by 1.4% m-o-m in October and lifted at least as much again in November based on anecdotal reports from major retailers.
Australia’s international trade surplus rose in October by $A1.8 billion to $A7.5 billion mostly on a 5% lift in exports in the month. While Australia’s trade dispute with China has worsened in November, the biggest export commodity, iron ore, is unaffected, and has enjoyed rising volume and price in the month. Australia’s trade surplus in November may beat the October number. Big trade surpluses in October and November set the scene for a strong net export contribution to Q4 GDP, a turnaround from the 1.9 percentage point growth detraction in Q3.
2020 is going out with a bang as far as Australia’s economy is concerned. The deepest recession since the 1930s in the first half of the year has been followed by the sharpest recovery since. Evidence of the sharp recovery looks set to show in the early months of 2021. More importantly, recovery should broaden and become sustainable.