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Economic and Financial Market Update: Things Are Getting Better

06 November 2020

Summary:

The September quarter was a decent one for the Australian economy;
It looks like October was better still.
And there are reasons to be optimistic about the remainder of the year;
But it is not yet clear that the ‘underlying’ economic momentum is strong enough;
It may be that further support from the RBA and Federal and state Government’s will be needed;
The good news is that will do more if they need to do more.

The RBA cut rates at its November meeting. They also announced a quantitative easing (QE) program (buying $100b of Government bonds). The aim of the program is to reduce financing costs in the economy. The RBA would also be hopeful of a lower $A.

The RBA expects the unemployment rate will peak at 8% around the end of this year, before declining to about 6% by end-2022. I think the risks are that the unemployment rate will be higher than those forecasts. The RBA also think ‘underlying’ inflation won’t reach 2% over the next couple of years. Certainly right now household, business and financial markets expect inflation to stay low.

The RBA will be hoping that the economy will recover enough such that it will not have to do more than the $100b program. In any event interest rates are already rock bottom. What the economy needs is more spending. And if the private sector is not doing enough then it is down to Governments to get things moving. The Federal Government Budget was a plus. In coming weeks we will get a look at state government budgets.

A bounce in Q3 growth is consistent with feedback from firms. Companies said that conditions in the September quarter improved although remained some distance from ‘normal’. Order books were getting fuller. The export outlook was better albeit still tough. Firm are giving thought about adding a few more staff although they are some distance from going on a hiring binge. Margins remain tight. One positive for some firms was pricing.

The Budget and talk of lower interest rates looks to have helped things in October. The existence of the Homebuilder program means that the short-term outlook for the construction sector has improved. The pickup in construction has had a positive flow-on to manufacturers. The opening up of the economy has seen service sector firms become more confident.

The opening up of the Victorian economy should see the economy get a further boost through November and December. It is not yet clear though that the ‘underlying’ economic momentum is strong enough. In six months’ time if the economic outlook doesn’t improve then the RBA will have to extend its QE program. But even more certainly Government(s) will need to provide even more fiscal support.