• Alexander Funds Management

Late 2020 Roadmap

The last few weeks of 2020 look like being a period of growing optimism about what lies ahead in 2021 including and perhaps especially in Australia. Although COVID-19 continues to cast a pall, as it has through almost all 2020, there is justifiable hope that an effective vaccine(s) will become available in the first half of 2021. Where COVID-19 infection rates have surged over recent months such as in the United States and Europe there are some instances where the infection rate appears to have peaked such as in Germany and France. Governments and central banks are keeping fiscal and monetary accelerator pedals close to flat to the floorboards to underpin strengthening economic activity over time.


There are other slow-burn positives for the economic outlook too. The fractious US presidential election and immediate messy aftermath with President Trump’s refusal to concede will be defused by the next hard-wired steps in the US electoral process – the Electoral College vote in December sealing President-elect Joe Biden’s victory and the inauguration ceremony on January 20th 2021. President-elect Biden has committed to work towards healing divisions in the US as well as sustaining fiscal spending to aid economic recovery. He will start that work by end-January 2021. He may have to negotiate with a majority Republican Senate, but at worst that slows and perhaps scales down fiscal stimulus but is unlikely to stop it entirely.


Another slow-burn positive for the economic outlook is the weekend signing of a multi-lateral free trade agreement including Australia and several key trading partners (China included) in East and South East Asia. The agreement may present an opportunity for Australia to stem its deteriorating trade relationship with China as well as providing opportunity to diversify its export markets.


As far as Australia’s immediate economic outlook is concerned there are several data releases between now and the end of the year that are likely to show that while Australia had a slower post-recession economic growth rebound in Q3 than the US, Europe and China, unlike those countries and regions it is likely to experience very strong GDP growth in Q4.


Australia’s Q3 GDP report is due out first week of December and unlike the near 8% q-o-q lift for the US or more than 12% q-o-q lift for Europe is unlikely to come in much better than 3% q-o-q.


Two reasons for the comparatively subdued rise in Australian Q3 GDP. The first is that Australia’s GDP fall in Q2 was less than in the United States or Europe – a higher recession base for Australia lessens the initial bounce out of recession. The second reason is the Victorian COVID-19 shutdown limiting ability to spend and cutting business and household confidence in a fifth of the Australian economy through all Q3.

In Q4 Australia’s GDP growth rate is set to receive boosts from Victoria coming out of shutdown plus suppression of COVID-19 infection around Australia to the point where businesses and households can operate in a “COVID-safe” relatively normal fashion. The shape of Government spending support is changing but it is still substantial and now backed (probably increasingly) by RBA purchases of government securities. The RBA has stated that very low official interest rates will be in place for at least three years. Unsurprisingly, surveys of business confidence and consumer sentiment are rising strongly and are likely to show further increases in December.


There will be several data releases covering October and November that will be released before the end of the year hinting at the stronger Q4 GDP report to be released in early March next year. This week, the October labour force report is expected to show that employment fell by around 30,000 causing the unemployment rate to lift above 7% from 6.9% in September. The softer October labour force report (survey conducted first two weeks of October) is the last weighed by the Victorian lockdown. The November labour force survey due in mid-December is likely to show a sharp employment rise, perhaps above 100,000, and the unemployment rate falling back below 7%.


Preliminary October retail sales are also due later this week. While retail sales, according to anecdotal evidence, were rising in much of Australia in October they were down in Victoria and nationally sales likely fell by around 1.5% m-o-m. Watch out, however, for the preliminary November retail sales numbers due out mid-December which are likely to show a big monthly rise, possibly above 3% m-o-m.


Numbers relating to housing activity – housing finance, prices and home building approvals – have all been rising strongly even with Victoria in lockdown and are likely to continue rising in the October and November reports due before the end of the year. A combination of very low home loan interest rates; the promise of easier loan approval conditions; generous incentives for first-time homebuyers; and the new appeal in a COVID-19 world of buying the best home possible to meet the needs of comfortable living with good home office conditions, are all generating stronger housing demand.


Australia’s November economic readings mostly due for release through December and early January look set to be very strong heralding Q4 GDP growth shaping up to be much stronger than in other major economies. This mostly good economic news over the next month or two is also doubly good because it will not threaten higher inflation – the economy can run hot-to-trot for some time before using up the spare capacity from the recession – and will coincide with an extended period of very low interest rates under no threat.

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