- The September quarter will be a tough one for the economy;
- But it may not be as bad as some fear;
- There are good reasons for optimism about next year;
- This assumes better outcomes on the health front;
- Rising vaccination rates makes this better outcome more likely.
It is no surprise that with all the dismal news business confidence was very weak in August. Firms indicated that conditions were above average in August. The weakness of business confidence is impacting firms’ decisions. Capex plans are lower than what they were expected in June (although budgets are at a reasonable level). There was a drop in employment intentions (although they are still high). Pricing pressures remain elevated.
Conditions differ between regions and sectors. NSW and Victorian firms are finding the going toughest. Those in WA, SA and Tasmania are having a better time. Firms that have business models that involve a large number of people (transport, recreation and accommodation and food services) are more negatively influenced by COVID. Mining is less impacted and is helped by the high level of commodity prices.
Consumers agree with firms that conditions worsened in Q3. Concern about the state of the economy is one reason they are saying they are not spending (another is that they can’t spend given that most shops in Sydney and Melbourne are shut). But when you ask households about the state of their own finances they are more optimistic. And like firms households remain optimistic about the future. One reason for the ongoing optimism of households is how they are feeling about the labour market. Unemployment concerns are below average across all states.
One thing that households have got more pessimistic about is buying a house. This reflects rising affordability concerns due to the sharp rise in house prices over the past year. Affordability worries is the reason why there is a declining share of home loans taken out by first-home buyers. But the rise in house prices (and an increase in rents) has attracted investors back to the residential market. This coincides with an uptick in the proportion of households nominating housing as a good investment.
The August employment data was weak. There was a big fall in the number of jobs, a rise in the underutilisation rate, a substantial decline in hours worked and a large drop in the participation rate. In short, there was a lot less work done in August.
But the month of August was almost certainly the low point in economic activity. The pace of vaccination means that NSW is on track to re-opening parts of the economy in early- to mid-October. The ACT will also likely reduce restrictions in that month. Victoria will take longer but should be re-opening by December. This means that GDP growth could be up in the order of +2% in Q4. This could prove optimistic if rising case numbers following re-opening (which has happened in other countries) leads to renewed government restrictions or an increase in consumer and business risk aversion.
The bottom line is that Q3 has been a difficult for one for society and the economy (notably in NSW, Victoria and the ACT). Economic growth will decline in the September quarter. But maybe not as much as some fear. Business and consumer optimism about the economy in 2022 and beyond remains generally positive. With interest rates set to remain at rock-bottom levels and fiscal policy supportive there are good reasons to believe that the economy will end 2022 in a better state than it will be at the end of this year. Obviously luck with the health outcomes will be required. But a dramatically improved vaccination effort means there should be more optimism on that front.
To read my full update, click here.
We live in interesting times.
Peter Munckton - Chief Economist