Economics Wrap: The Good, the Bad, and the Ugly

By Glenn Dyer | More Articles by Glenn Dyer

The economy moves further into centre stage this week in Australia ahead of the 2021-22 federal budget tomorrow week.

Before then the Reserve Bank will leave monetary policy on hold following its meeting tomorrow now that it and the Morrison government are on the same page about stimulating the economy for as long as possible without whacking demand with big spending cuts.

The fact that the government is a year away from an election (the last one was two years ago this month) means a budget based on the old conservative mantra of debt and deficit would not go down well with voters after the experiences of the past year with Covid, the lockdowns, a jump in unemployment and no prospect of a rapid improvement, despite the obvious rebound in the Australian economy.

RBA governor, Philip Lowe will reiterate in his post-meeting statement tomorrow that while the recovery is stronger than expected it still sees wages and inflation remaining subdued for many years with the weaker than expected March quarter inflation data being consistent with this.

That message will be repeated in the second Statement On Monetary Policy for the year to be released on Friday.

It is also the message that Federal Treasurer, Josh Frydenberg went to lengths to explain in a speech on Thursday which signalled the budget would continue to stimulate, not cut for the next year at least.

Dr Lower and the monetary policy statement will repeat that it does not expect to raise interest rates until 2024 at the earliest.

The AMP’s chief economist, Dr Shane Oliver says “The focus is likely to be on what it says about its bond buying programs, where we expect a tapering later this year.”

He wrote at the weekend that Friday’s Statement on Monetary Policy “is likely to see a slight upwards revision to near term growth and headline inflation forecasts and a downwards revision to its unemployment forecasts.”

Last week’s consumer price index on Wednesday and producer prices on Friday confirm that price pressures remain weak in commodity prices such as copper, iron ore, gas and oil.

Our terms of trade rose in the March quarter as export prices jumped 11.2%, easily exceeding the tint 0.2% rise in import prices. Through the year export prices were up 8.6% and import prices fell 6.2%.

In Australia Producer prices at the final level of demand rose 0.4% in the March quarter but are down 0.2% over the year. That weakness over the past year was despite a sharp rise in the prices of key commodities such as oil, gas, copper, iron ore and coal.

There is also the usual start of the month data in Australia this week.

Dr Oliver says we can expect CoreLogic data for April (today) to show a slowing in monthly home price growth from March’s breakneck pace of 2.8% to a still very strong 1.8%, the March trade surplus to increase to $8.5 billion helped by surging iron ore exports (the goods surplus was above $8 billion in March for the 4th month in a row at $8.1 billion), housing finance to rise further (both out tomorrow) and building approvals to show a further 5% rise. There’s also car sales for April as well.

The expected strong rise in house prices today and housing finance and building approvals data will support the credit data for March from the RBA on Friday.

Total housing credit growth rose 4.1% over the year to March. That is modest growth but, the annualised pace has picked sharply to 8.4% for owner occupiers which is at its fastest since 2017.

Dr Oliver says “investor lending is accelerating. A further rise in credit growth is likely as the housing boom continues and this will likely put further pressure on the RBA and APRA to cool things down.”

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China’s on holiday for most of this week but ahead of the break that started on May Day there were more signs the economy is stuttering a little

The regular government survey of manufacturing for April revealed that China’s factories expanded at a slower pace and missed forecasts last month as supply bottlenecks (especially computer chips) and rising costs weighed on production and overseas demand eased from the high levels in the three months to March.

Surging offshore demand had seen exports rise sharply in the first quarter, with imports finally jumping sharply in March under the influence of rising demand at home and higher global prices (for iron ore, copper, oil and gas and a host of other commodities.

April’s trade data is out next Friday at the end of the Labor Day holiday period and that will test the thesis that the surge in imports in february and march continued into last month, with imports high again.

The official manufacturing Purchasing Manager’s Index (PMI) fell to 51.1 in April from 51.9 in March, the National Bureau of Statistics (NBS) said on Friday.

That left the index well above the 50 point level that separates expansion (above) from contraction. But it is now well down from the 52.1 reading in November 2020 which is the most recent high.

It remained above the 50-point mark that separates growth from contraction on a monthly basis but was below the 51.7 expected in a Reuters poll of analysts.

“Some surveyed companies report that problems such as chip shortages, problems in international logistics, a shortage of containers, and rising freight rates are still severe,” NBS statistician Zhao Qinghe said in a statement accompanying the official PMI.

That contrasted with a private-sector survey, also released on Friday, which showed factory activity in April expanded at the fastest pace in four months although businesses in that release also reported a sharp surge in input costs.

The independent Caixin China General Manufacturing Purchasing Managers’ Index (PMI), which gives a snapshot of the country’s smaller manufacturers, rose to 51.9 in April from 50.6 in March, suggesting an unevenness in the wider sector.

The official PMI, which largely focuses on big and state-owned companies, showed businesses again laid off workers in April after lifting hiring in March for the first time in nearly a year. A sub-index for employment dipped to 49.6 from 50.1 in March.

A index for new export orders stood at 50.4 in April, down from 51.2 a month earlier.

In the services sector, activity expanded for the 14th straight month, but at a slower pace, dragged down by a sub-index for construction activity. The services index dropped to 54.9 in April 2021 from a four-month high of 56.3 in the prior month.

But it was still the 13th straight month of growth in the service sector, as the rebound from Covid continues to take hold for China’s consumers.

But it would seem that as we saw with some of the data for March there are signs activity in the Chinese economy has cooled a little and is certainly nowhere near as strong as in the US or Australia at the moment.

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Meanwhile the eurozone economy dipped into its second technical recession in a year.

Thanks to new lockdowns and restrictions amid a third wave of coronavirus infections the area saw GDP shrink 90.6% .

Gross domestic product (GDP) in the region fell by 0.6% quarter-on-quarteraccording to preliminary data released by Europe’s statistics office Eurostat. That was after a 0.7% slide in the December quarter.

The successive contractions were much smaller than the massive falls of 11.6% (quarter on quarter) in the three months to June and 3.8% at the start of 2020.

Year-on-year, the GDP dropped 1.8% in the first quarter, easing from a 4.9% slump in the three months to December.

Most of the region’s largest economies — Germany (down 1.7%), Italy (down 0.4%) and Spain (down 0.7%) — saw a decline in activity during the first three months of the year.

French GDP grew 0.4% according to the first estimate with economists putting that down to the delay in implementing new lockdowns.

The sharpest fall in activity happened in Portugal (down 3.3%), which has faced a wave of new Covid cases and led to the country’s second lockdown.

 

 

Glenn Dyer

About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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