Growth, inflation and labour market all easing
Rising restrictions to combat a resurgence in the spread of COVID-19 towards the end of 2020 slowed the global recovery but did not derail it. In Australia, the economy continues to recover at a rapid pace.
Rising restrictions to combat a resurgence in the spread of COVID-19 towards the end of 2020 slowed the global recovery but did not derail it. While the restrictions put in place will also affect Q1 growth, 2021 is shaping up as a strong year. A reduction in COVID-19 cases, vaccines being rolled out, loose monetary policy settings and, particularly in the US, continuing fiscal support will all support growth. We have revised up our US forecasts significantly (from 5.0% to 6.0% in 2021) in expectation of a further fiscal stimulus package of around $1.9 trillion. Bond yields have risen globally, partly on the back of higher growth and inflation expectations. This has negatively impacted equity markets and also seen some rise in volatility. However, overall, financial conditions still appear accommodative. We expect global GDP growth of 6.2% in 2021 (previously 5.8%) and 4.6% in 2022. With vaccine roll-out still at an early stage in most countries, the risk of another COVID-19 wave cannot be ruled out.
In Australia, the economy continues to recover at a rapid pace. The Q4 national accounts showed GDP rising by 3.1% in December to be 1.1% below its pre-COVID level in Q4 2019. The better-than-expected outcome for GDP and ongoing strength in the NAB survey and other timely indicators, is consistent with the strong labour market recovery – with unemployment falling to 6.4% in January. Incorporating this stronger starting point into NAB’s forecasts, we now forecast GDP to reach its pre-virus level in Q1 2021, seeing year-average growth of 4.6% in 2021 and 2.5% in 2022. For the labour market, we now see unemployment falling to 5.3% by end 2022 – just above its pre-virus level. While we forecast the economy to recover its pre-virus level of activity in Q1, spare capacity will remain which will take at least until 2022 to work through. Accounting for the usual lags between activity, the labour market and ultimately inflation, this suggests that inflation could return to the target in 2024. This outlook warrants the RBA leaving the cash rate unchanged to at least 2024 and extending QE by another $100bn late this year. That said, it also supports our view that the RBA should limit YCC to the April 2024 bond, where the RBA will have difficulty credibly committing to an unchanged cash rate past this date. We think the RBA has until mid year to decide on YCC, in the meantime our focus is on the impact of the end of the JobKeeper wage subsidy and reduction in the JobSeeker payment, which could well see a slowing in momentum in the labour market.
Find out more in NAB’s World on two pages March 2021
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