What’s ahead for our economy?
Clearly Australia’s economy was massively hit by Covid-19 and the associated lock downs in March and April.
But since then activity has rebounded more quickly than most economists expected.
While recent developments in Victoria are concerning, Australia still remains much better placed that other countries (especially the USA) to reopen its economy.
Recently NAB Bank reported that consumption in late June was already back to early 2020 levels.
Also, the NAB Monthly June survey saw big improvements in business conditions, forward orders and confidence (which even turned positive). Also the evidence suggests that the worst of the job shedding is probably behind us.
That caused the bank to improve its economic forecasts for the second quarter of the year suggesting GDP might now fall by around -5% compared with our previous expectations of an -8.5% fall.
The NAB forecasts a lower peak unemployment rate this year of a touch over 8% but still around 7% by late 2021 and a touch below 6% by late 2022.
Nominal wages growth is still expected to be around 1% next year and inflation still around 1½% by late 2022 – and the RBA on hold.
Obviously much still depends on a second wave of the virus and any future policy developments.
However, NAB sees major structural challenges for some industries – especially as they don’t expect international borders to be opened meaningfully until mid-2021 at the earliest.
That means population growth will halve to around 0.7% with obvious ramifications for industries such as construction, education, and international travel-related.
We also see house prices falling by at least 10% and commercial property much more – with flow on challenges to related SMEs in CBDs.
While I agree with the NAB forecast that the value of some properties will drop considerably, remember there isn’t one Australian property market.
Therefore I see A grade homes and investment properties holding their values well or only dipping in value slightly; new apartments and established apartments in our CBD’s as well as houses in newer outer suburbs are likely to drop significantly in value.
Here’s more details of the NAB Forecasts
While the economy was massively hit by virus and associated lock downs in March / April, activity has rebounded more quickly than expected.
Our internal consumption data now suggests that consumption in late June is already back to early 2020 levels.
Also, the NAB Monthly June survey saw big improvements in business conditions, forward orders and confidence (which even turned positive).
Also the evidence suggests that the worst of the job shedding is probably behind us.
That suggests that Q2 GDP might now fall by around -5% compared with our previous expectations of an -8.5% fall.]Normally that would see Q3 expectations revised up but now we are trying to take on board the extent and length of the Victoria lock down.
We are expecting a bounce of around 3% in Q3 (4% without the Victorian virus return).
As a result our new forecast for 2020 GDP is around -1¾% (revised from -4.3%).
For 2021 we are expecting growth of around 1.6% (but 2½% through the year) while 2022 forecasts are unchanged at around 2¾%.
That means that GDP gets back to pre-COVID levels by late-2021.
That also sees a lower peak unemployment rate this year of a touch over 8% but still around 7% by late 2021 and a touch below 6% by late 2022.
Nominal wages growth is still expected to be around 1% next year and inflation still around 1½% by late 2022 – and the RBA on hold.
We continue to expect a gradual phasing out of JobKeeper (or a replacement targeted at poorer performing industries).
Also we don’t see JobSeeker payments fully scaled back to “Newstart” levels.
We also see the October Budget being centred at increasing household incomes (via tax cuts) and increased infrastructure spending (brought forward and increased maintenance).
We also assume the banks will continue to act as shock absorbers.
Obviously much still depends on virus and policy developments.
However, we see major structural challenges for some industries – especially as we don’t expect international borders to be opened meaningfully until mid-2021 at the earliest.
That means population growth will halve to around 0.7% with obvious ramifications for industries such as construction, education, and international travel-related.
We also see house prices falling by at least 10% and commercial property much more – with flow on challenges to related SMEs in CBDs.
While recent developments in Victoria are concerning, Australia still remains much better placed that other countries (eg the USA) to reopen its economy.
Clearly we will continue to monitor the Victorian situation closely.
The May labour force survey showed a further deterioration in the labour market, following the large hit in April.
The unemployment rate rose to 7.1% from 6.2%.
Employment declined by a further 228k, taking the decline over the past two months to 835k.
The participation rate declined further and is now at its lowest level since 2001.
Had the participation rate not declined so substantially over the past 2 months the ABS estimates the unemployment rate would have reached 11.3%.
Hours worked recorded a smaller fall than last month but is now around 10% lower than pre-COVID levels.
Broader measures of unemployment were mixed in the month – the underemployment rate fell 0.7ppt to 13.1% while the underutilisation rate was stable at 20.2%.
Overall, while the pace of deterioration moderated in the month, these statistics paint a picture of a very weak labour market.
Both the ABS household COVID0-19 survey and the payrolls release point to a stabilisation in the labour market since May but show some signs of a stalling recovery in recent weeks.
We forecast that employment will rise 175k in June, but for the unemployment rate to rise further as individuals reenter the workforce.
Overall we expect the unemployment rate to peak at over 8% this year – less than previously expected – but for it to only recover gradually over the next two years – reaching 5.8% at end-2022.
Following the 1.1% decline in consumption in Q1 we expect a larger fall to have occurred in Q2 – where the peak of COVID-19 restrictions is likely to have been felt.
We expect a partial rebound in consumption from Q3 and then a return to around average growth over the next two years.
Indeed, monthly retail sales data showed that there was a large rebound in sales of nearly 17% in May following the large fall in April.
The NAB Cashless retail sales index released today points to a relatively small fall in June of 2.9% (but possibly a stabilisation in retail sales).
Further our internal spend data suggests while spending in some areas such as retailing has recovered, there are some sectors which remain weak.
At around 60% of GDP, the outlook for consumption is important.
The signs of a rebound in high frequency data is encouraging but it is likely that there is some ongoing impacts of prior hoarding and a shift to different consumption patterns with a larger number of people working from home.
There are risks around consumption growth, particularly for services should there be further outbreaks of the coronavirus.
Another risk lies with the recovery in the labour market and slower income growth, which could see the household sector weaken further.
Debt levels remain high and confidence may be impacted by ongoing domestic and global fallout.
Housing and construction
We expect a significant impact on both established housing prices as well as new construction as the ongoing impacts of COVID playout.
We expect house prices to decline by 10-15% over the next year or so, led by declines in Melbourne and Sydney, but also the other capitals as unemployment is expected to rise everywhere and the labour market fall out will see an increase in stress on households.
While we had expected construction to fall prior to COVID we now think the decline and duration will be more significant – with a slowing in population growth and decline in prices.
To date prices have held up relatively well in the established market but have clearly turned.
Prices fell across the 8 capital cities for a 2nd consecutive month (with Melbourne falling 3 months in a row).
We expect these declines to sharpen and continue for some time.
In June the decline in dwelling prices was led by declines in Melbourne (-1.1%) and Perth (-1.1%), followed by Sydney (-0.8%) and Brisbane (-0.4%) and Adelaide (-0.2%). Hobart rose by 0.4% in the month.
Over the past two months the largest declines have occurred in Melbourne and Perth.
The turn in house prices comes after a very rapid rise since May last year where prices troughed following the easing of prudential measures and further cuts to the cash rate.
Therefore despite the modest declines over the past two months prices remain 13.3% higher over the year in Sydney and 10.3% higher in Melbourne.
Perth which saw a later recovery remains weak and is 2.5% lower over the year.
Hobart continues to be has also performed relatively well and is around 6.4% higher.
Gains in Brisbane and Adelaide have been more moderate.
Despite the strong growth in prices in the established market over the past year new construction has continued to decline.
The national accounts measure of dwelling investment fell by 1.7% in the March quarter to be about 9.7% lower over the year.
The building activity survey to be released later this month will provide an update on the level of outstanding work and the pipeline of commencements.
We expect this to continue to decline with the level of work done – though falling – remaining high, which will see a rapid erosion of the existing pipeline.
Indeed, additions to the amount of work yet to be done are expected to have remained weak with residential building approvals remaining soft despite some improvement over the past year.
Indeed, the figures for May showed a very large decline with approvals now at their lowest level in 11 years.
While very low-interest rates are likely to support the market, the softening in population growth and rising unemployment are expected to offset this, and see a decline in both prices and new construction over the next year or so.
Source: NAB Research – The Forward View
Michael Yardney
