Westpac has lifted its economic growth forecasts for 2020 and 2021 from –3.0% and 2.8% to –2.0% and 4%, respectively. Our growth forecast for 2022 has been lowered from 3.5% to 3.0%.
As a result of this substantial near term boost to the growth forecasts we have also lowered our forecasts for the unemployment rate by December 2021 from 7.0% to 6.0% and 6.3% to 5.2% by December 2022.
Under these forecasts we expect that the level of consumer spending and the level of GDP will return to the “end 2019” levels by the June quarter 2021.
By end 2021 GDP will be around 2% above the end 2019 level but still around 3% below the level of GDP that would have been expected in the absence of covid.
These revisions follow the stronger than expected print for GDP growth in the September quarter (3.3%) compared to our forecast of 3.0% and our revised forecast growth rate in the December quarter of 2020 from 1.6% to 2.3%.
The dominant message from the September quarter national accounts was the 7.9% surge in consumer spending, including 9.8% for services and 5.2% for goods.
Consumer spending actually contracted by 1.2% in Victoria while it lifted by 11% in the other states.
As the Victorian economy (around 25% of the national economy) reopens in the December quarter and momentum remains positive in the other states we expect consumer spending to lift by a further 5% in the December quarter
The key to the revision for 2021 is the expectation that the recent lift in Consumer Sentiment to a seven year will be sustained; the increased momentum in the housing market will continue; a likely commitment by the government to continue to target a lower unemployment rate in the 2021 Budget; the huge boost to markets and global growth prospects with the advent of vaccines; the significant buffer of savings that will accommodate a large fall in the savings rate; ongoing reopening momentum; a likely upward revision to the government’s currently overly pessimistic net migration forecasts.
The headwinds from deferred loans and the tightening of insolvency laws are now seen to be less threatening for the economy as the economy has gathered such momentum in the second half of 2020.
The Household Sector and Consumption are the Keys
The outlook for 2021 will be dominated by the profile of consumer spending. We expect 2021 to be a strong year for consumer spending lifting by 5.7% over the year including a solid 2.2% increase in the March quarter.
Key drivers of that outlook will be household income growth; the savings rate; consumer confidence; dwelling prices; and attitudes to household debt.
In turn, household income growth will be impacted by wages growth; employment growth; the unwinding of the government’s income support measures and other government policy including new measures in the upcoming May Budget.
The withdrawal of the government’s income support measures which will be most intense in the December quarter is likely to see a contraction in household incomes over that quarter.
With the expected increase in consumer spending in the quarter associated with the seven year high in Consumer Sentiment and the reopening, particularly in Victoria, the savings rate, which fell from 22.1% to 18.9% in the September will fall significantly further in the December quarter.
Households will be comfortable to reduce the pace at which they are boosting their stock of savings through 2021 as Confidence remains high, partly boosted by global progress around the introduction of vaccines; rising dwelling prices and a falling unemployment rate. This decision will also be supported by the significant savings buffer that has accumulated during 2020.
As we move through 2021 household income growth will reflect improving employment growth and tax cuts; although it will be impacted by the drag from the withdrawal of government wage support programs and weak wages growth.
Accordingly, the fall in the savings rate will play a key role in accommodating that expected 5.7% lift in consumer spending
We expect that by end 2021 the household savings rate will have settled back to around 7% from the current 18.9%.
In addition we expect that the May 2021 Federal Budget will contain new policies to further support incomes on a more targeted industry specific basis while state governments with an estimated combined fiscal deficit of around $100 billion in fiscal 2020/21 will also be boosting demand.
Our forecasts for business investment; dwelling construction; government spending and net exports have been adjusted to reflect the stronger consumer; the advent of the vaccine; stronger global growth, and the increased momentum in the housing market. But, as we saw in 2020, the profile for the consumer has dominated the downturn and will largely dictate the shape and extent of the recovery
Implications for the Unemployment Rate.
Faster growth, particularly in jobs intensive consumer spending and new dwelling construction, leads to an upward revision to employment growth; the employment to population ratio; the participation rate and a lower forecast unemployment rate.
We have revised our employment growth forecasts in 2021 to 2.6% from 1.8% and in 2022 to 2.1% from 2.4%.
Our unemployment rate forecasts have been lowered from 7% to 6% (end 2021) and from 6.3% to 5.2% (end 2022).
Outlook for Interest Rates
The Reserve Bank is likely to revise its growth and unemployment forecasts.
For now, it expects the unemployment rate to fall from 8% to 6.5% in 2021 on a growth profile of –4% in 2020 and 5% in 2021. The 8% starting point is certain to be reduced while we expect the growth rate for 2020 will be revised up to –2%.
With a 2% uplift in the 2020 growth forecast the 5% forecast for 2021 is likely to be shaved – potentially back to something in the vicinity of Westpac’s 4%.
That may see RBA forecasts for unemployment lowered to near our 6% and 5.2% (from 6.5% and 6.0%).
By 2022, with the unemployment rate forecast in the mid to low 5’s by year’s end the RBA will struggle to maintain forward guidance that the cash rate will remain at 10 basis points until 2025.
We expect that the “yield curve control” policy will need to be adjusted in 2022. If our forecasts prove to be on track markets are likely to be speculating about an even earlier adjustment of the policy.
