- The economic data has been stronger than expected;
- And this has led to upward revisions to forecasts;
- The biggest uncertainty remains the rollout of the vaccine;
- That uncertainty means a full opening of international borders may be pushed back until at least the second half of next year.
The economy has started the year in a lot better nick than anyone had thought. But the economy rarely travels in a straight line. JobKeeper has come to an end, as have rent and interest payment holidays. It will take a few weeks to get a better understanding of the economic impact from the end of the JobKeeper. If the turbulence hit from the end of JobKeeper is too severe the RBA and Government will almost certainly step in to pilot the economy to a smoother path.
The big ‘If’ is the future path of the virus. That comes down to the efficiency (and effectiveness) of the vaccine. News about the New Zealand trade bubble was a plus for the tourism industry. The recent Government announcement about the AstraZeneca vaccine is a very significant fly that has flown into the ointment. At a minimum full opening on the international border may now have been pushed back until at least the second half of next year.
Even once the rollout bumps are ironed out a key question will be how long will it take for consumers and firms to fully regain their mojo. The good news is that over time the restrictions have become onerous. But as a society we have been hard-wired to accept that the right number of new COVID cases is zero. So it will be interesting to see how governments’ react in the event COVID cases emerge even after a widespread immunisation.
The global economy has also got better in dealing with COVID. The decline of economic activity associated with ‘lockdowns’ has not been as large as what occurred last year. The improved heath and economic outcomes (further turbo-charged by the recent substantial US fiscal package) has led to the IMF to upgrade (again) their 2021 world economic forecast. Upward revisions to Australian economic growth forecasts have also taken place.
The current strength of the labour market is consistent with higher wages growth. But not at the pace that the RBA wants (3%-plus). The RBA again made it clear at its April meeting that it is not looking to change the cash rate until 2024. Everyone agrees that there will be no rate change this year or next. But there is starting to be more debate about the rate outlook in 2023.
To read my full update, click here.
We live in interesting times.
Peter Munckton - Chief Economist