September 2021 Economic Roundup
The bigger developed economies continue to lead global economic recovery and September economic readings were firm on balance. Very strong developed economy macro policy support for growth, however, is past its peak and the threat of step down in policy support, especially by central banks, is starting to cloud global growth prospects. Greater freedom from COVID restrictions through the northern hemisphere summer has supported greater spending in the US and Europe but Delta variant infection rates remain high, casting some doubt on whether freedom from restrictions can persist. The outlook for the world’s second biggest economy China, has become more uncertain amid a raft of social and economic policy changes, financially troubled major property developers and sliding economic indicators. The Australian economy was comparatively strong running into the lockdowns in New South Wales and Victoria and may suffer only one quarter fall in GDP as fast rising vaccination rates allow staged relaxation of restrictions in both states in October.
US economic statistics released in September show the early summer soft patch giving way to stronger growth. Almost all of the leading economic indicators have taken a turn higher. Housing activity has lifted in August with permits, starts and new home sales all defying market predictions of falls and rising respectively, 6.0% m-o-m; 3.9%; and 1.5%. Existing home sales fell in August by 2.0% m-o-m, but mostly because of constrained listings. September business surveys are firm with the regional Empire State (New York State) purchasing managers’ index lifting into very strong territory, +34.3 from +18.3 in August and Philadelphia Fed survey index jumping to +30.7 from +19.4 in August. The August ISM manufacturing PMI released early in September rose to 59.9 from 59.5 in July while the August ISM non-manufacturing PMI fell to 61.7 (still very strong) from 64.1 in July.
A key indicator of current household spending in the US, retail sales, was better than expected in August, up 0.7% m-o-m. Even with the ending of emergency unemployment relief in the US in September household income growth is supported by strong wage growth (August average hourly earnings rose 0.6% m-o-m, 4.3% y-o-y). However, one point of weakness in the US economic readings released in September was August non-farm payrolls up a disappointing 235,000 after back-to-back 900,000+ readings in June and July. Leading indicators of the US labour market are still strong pointing to the August softness in payrolls being temporary.
The sharp rise in US CPI inflation evident in the spring and early-summer showed some signs of topping out in September. The August CPI rose 0.3% m-o-m edging down annual inflation to 5.3% y-o-y from 5.4% in July while the core CPI reading (excluding food and energy prices) rose only 0.1% m-o-m reducing the annual reading to 4.0% y-o-y from 4.3% in July. Producer price inflation, however, was still elevated in August at 0.7% m-o-m, 8.3% y-o-y and on core reading 0.6% m-o-m, 6.7% y-o-y. At the Federal Reserve’s September policy meeting the commentary reflected more conviction about the strength of the US economic recovery and while still paying lip service to the theme that the current inflation surge is temporary and not a problem needing immediate policy action the Fed firmed its intention to start reducing bond-buying before the end of 2021 while indicating a first rate hike in 2022.
China’s monthly economic numbers continue to lose growth momentum other than those related to international trade. August fixed asset investment spending moderated in August to 8.9% y-o-y from 10.3% in July, industrial production to 5.3% from 6.4% in July and retail sales to 2.3% from 8.5% in July. The exceptions to the moderating trend were August exports, 25.6% y-o-y up from 19.3% in July and imports, 33.1% up from 28.1% in July. Policy change in China favouring a greener economy and rules clamping down on private business wealth creation and power are increasing the uncertainty premium of doing business in China at a time when the pace of economic activity is already slowing. The financial stress of China’s biggest property development company, Evergrande, came into sharper focus in September with its potential to damage China’s mammoth property sector (around 25% of GDP) and hurt China’s banks. While a restructuring and government bail-out of Evergrande seems likely it is not a given and represents another downside risk to China’s growth prospects.
Europe started to take the growth lead position from the US in Q2. GDP rose by 2.0% q-o-q, 13.6% y-o-y. Admittedly Europe is bouncing out of a deeper pandemic recession than occurred in the US, but it has the underpinnings from policy support to extend through the remainder of this year and next barring COVID setback to Europe’s greater freedom to spend and travel established in the northern summer. Economic releases in September continue to confirm the strength of Europe’s economic recovery, but inflation is also rising more than expected. The CPI rose to 3.0% y-o-y in August from 2.2% in July, while producer prices rose 12.1% y-o-y in July from 10.2% in June. Supply chain and delivery problems are acute throughout Europe. The European Central Bank continues to delay when it will need to react to higher inflation, but non-EU European central banks are starting to change policy course. Norway’s central bank hiked its cash rate from zero to 0.25% in September and the Bank of England at its September meeting indicated a rate hike will be delivered before the end of the year.
In Australia, Q2 GDP released at the beginning of September was stronger than expected at +0.7% q-o-q, +9.6% y-o-y driven by increases in household consumption, housing, business investment and government spending. While the beginnings of the latest lockdowns in New South Wales and Victoria placed only a light brake on the pace of growth in Q2, they will cause a fall in Q3 domestic spending. That fall will be reinforced by another quarter of decline in export volumes causing real Q3 GDP to fall at least 2% q-o-q.
While Q3 GDP growth will be negative the likelihood of a rebound in GDP growth in Q4 has improved. Vaccination rates have lifted more rapidly than expected through September and New South Wales and Victoria are both likely to achieve the 70% full vaccination rate in October, the first major benchmark for slowly freeing restrictions under the national plan. 80% full vaccination rates are likely mid-October/ early-November with more freedoms and a major boost to domestic spending in Australia’s two biggest state economies.
It will take time for the lift in economic activity to recover the employment and working hours lost during the lockdowns. Employment nationally fell by 146,300 in August and will have fallen again in September. While employment may start to lift again in October, it is likely to take until the second half of 2022 before employment growth recover to the trajectory it was on before the lengthy New South Wales and Victoria lockdowns. The unemployment rate, at a quirky 12-year low of 4.5% in August is a misleading indicator of labour market strength. Many who lost work in the lockdowns wouldn’t have wasted effort looking for work with so many businesses shut and not recruiting. Temporarily these people were not counted in the unemployment rate but they will return to the count in droves as businesses start recruiting again. There is likely to be a period when employment numbers and the unemployment rate rise. Again, it may be the second half of 2022 before the unemployment rate reflects properly the relative tightness of the labour market.
The weak patch in Australian growth, employment and wages means that even though the RBA is optimistic that economic growth will recover well in 2022, it is under no pressure to consider an early lift in official interest rates. The RBA is slowly reducing its bond purchasing program, it confirmed reduction of weekly bond purchases to $A4 billion a week from $A5 billion a week at its September policy meeting but also said that the weekly amount will stay at the new level until at least mid-February. As for rates, the RBA remains adamant that it will take until at least 2024 before wages grow above 3% y-o-y territory that might support inflation in the upper end of its 2-2% target band. While the RBA might not hike official rates, other central banks are starting to hike rates. Internationally longer-term bond yields are pushing higher in response and that pressure may feed through to Australian longer-term bond yields regardless of what the RBA chooses to do with official rates.