The Forward View – Australia: February 2021

GDP growth and the labour market continue to surprise.

By

Overview

  • The Australian economy continues to outperform our expectations – as shown by both the NAB Business Survey and NAB transactions data.  We now expect Q4 GDP to be around 2.5% and 2021 growth to be around 4%, before edging lower in 2022 to around 2.8% – albeit still be above trend.
  • Consistent with that growth outcome, the labour market has also improved more strongly than previously expected- with the peak in quarterly unemployment seemingly passed (7.1% in Q3 2020). We have also upgraded our 2021 unemployment forecast. We now see unemployment at 6% by end 2021 and around 5.4% by end 2022 (albeit the latter is not that much changed from previous forecasts).
  • We now see GDP reaching late 2019 levels by mid 2021 – albeit the gap from potential output if the virus had not happened is still unlikely to be regained until 2024.  Hence the RBA’s concern to keep its policy stance as supportive as possible.
  • Our outlook for wages and inflation are little changed – we continue to see inflation remaining below the RBA’s target to at least the end of 2022 – with an end 2022 core inflation rate of 1.7%.  Clearly to have core inflation firmly established in the 2-3% target range will be a 2024 issue at best.  All this is very much driven by expectations of very moderate wages growth.  A higher AUD is also not helping.
  • With a similar growth and inflation outlook it is not surprising that the RBA is providing as much support as possible.
  • Also it is highly likely that further fiscal support will be required – especially in areas where the economy is still struggling. It is critical that, while support will be loosened in better performing parts of the economy, the overall stimulus package is not withdrawn too quickly. Further micro reform would also clearly help.
  • Equally it is unlikely that the recovery process will be smooth. We are still waiting to see how the economy performs as JobKeeper and restrictions on rents are withdrawn.
  • There are uncertainties around the course of the virus and potential vaccines. Global trade is also looking promising but similar uncertainties loom large – including the trade relationship with China.
  • As per our recent forecasts there are important virus assumptions. Notably 1) the virus will continue to be contained domestically – without large-scale shutdowns; 2) Around half the population will receive a vaccine by mid-year and the full adult population by year-end; and 3) We should see limited state border closures and the beginnings of a gradual opening of international borders by early 2022.

For further details, please see The Forward View Australia – February 2021