Key insights from the week that was.
Westpac-MI consumer sentiment fell again in June. Affected by the current Melbourne lockdown, sentiment fell 5.2% to be down almost 10% in two months and back at levels last seen in January when sentiment was impacted by lockdowns in New South Wales and Queensland. Interestingly, not only did sentiment fall sharply in Victoria (-7.5%), but also in the smaller states. In contrast, NSW saw only a 1.1% fall.
Discussed by Chief Economist Bill Evans is the guidance the detail of our survey is providing on the outlook for consumer spending. Most notably: ‘time to buy a major household item’ fell 4.1% to be 8% below average, indicating a shift away from durable goods purchases as the economy opens up; and ‘time to buy a dwelling’ fell 7.1% in June to be almost 19% below average, pointing to building concerns over affordability. To our mind: the strength of the consumer outlook will depend heavily on services spending and therefore will remain susceptible to further lockdowns; also, investors seem likely to increase their share of home sales, though that may push more owner occupiers to consider renovations to their current dwelling, buoying GDP.
Being for May, the latest NAB business survey was out in the field after the Federal Budget but ahead of the Melbourne lockdown; so it is not surprising that it produced another strong set of outcomes. Business conditions rose to a fresh record high in the month; and, while it fell 3pts in May, confidence remains at an elevated level versus history. Pleasingly, momentum is being seen across the economy, and businesses are responding favourably to the investment incentives put before them.
A full view of our revised growth forecasts for Australia can be found in the June edition of Market Outlook. The outlook for household and business spending were also key topics of conversation in the companion podcast to Market Outlook.
There were several key data and events offshore this week. Most notable for China was the trade data. Exports and imports both disappointed in May, but that resulted in another strong outcome for the trade balance. As detailed in our June Market Outlook, trade remains at the heart of China’s current and future economic development.
It is important to recognise though that, for China, trade is no longer simply about increasing export volumes. Instead, the focus is on maximising the profitability of trade and distributing the resulting national income equitably across the nation. Ahead, we expect their export industry base to continue shifting more towards complex manufacturing, and for import-competing firms to receive strong support. Robust current account surpluses and a long pipeline of investment are expected to result, buoying income and GDP into the medium term.
Turning to the US, there the focus has been on the May CPI print. Like the April read before it, May was another upside surprise, headline prices rising 0.6% to leave annual inflation at 5% — another record high back to 2008. Our detailed assessment of US wage/ price pressures and our podcast discussion both preceded the latest CPI read, but the views expressed there remain highly relevant.
As in April, May saw sharp increases in prices related to economic re-opening, fiscal stimulus and supply disruptions, most notably in used car prices which are now up 30% in 12 months versus just 3%yr for hard-to-get new cars. Components of demand that are restarting such as tourism also saw abrupt moves, while energy is still up 29%yr. Inflation in the remainder of the CPI basket remains contained however. For this to change, the pockets of wage pressures seen in low skilled professions need to broaden across the economy – an outcome we perceive to have a low likelihood as long as the overall level of employment remains well below its pre-pandemic peak. With the FOMC on the sidelines for the foreseeable future, we expect the US dollar to continue to trend lower, likely till late-2022.
Finally to Europe, the ECB left the policy stance and their forward guidance on it unchanged at the June meeting. Their growth forecasts were revised up to 4.6% and 4.7% in 2021 and 2022 (previously 4.0% and 4.1%). Inflation forecasts for those two years were also lifted (1.9% from 1.5% for 2021; 1.5% from 1.2% for 2022), but the forecast for 2023 was left unchanged at 1.4%, well below the ECB’s target of near-2.0%yr. In the press conference, President Lagarde was constructive on the outlook and saw balanced risks, but was wary over the implications of tighter financial conditions. We would add that the Euro’s uptrend is also important to monitor, having a capacity to impact competitiveness and the outlook for inflation.
