Australia & New Zealand
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Australia & New Zealand

Australia & New Zealand Chart Book

Australia & New Zealand Chart Book

Surging inflation puts pressure on monetary policy

Trimmed mean inflation rose to 2.1% in Australia in Q3, the first time it has entered the RBA’s 2-3% target band since 2015. Even more strikingly, trimmed mean inflation in New Zealand rose to 4.4%, way above the top end of the RBNZ’s 1-3% target. One driver of the strength in both countries has been the surge in the cost of building a new home, which rose 3.3% q/q in Australia and 4.5% in New Zealand. Construction businesses are still reporting high input costs so home building inflation could push underlying inflation even higher in the quarters ahead. Rising food and energy prices provide additional upward pressure. Indeed, central banks have started to respond. If the labour market remains resilient, the RBNZ could hike rates by 50bp in November. And while stronger wage growth will be necessary before the RBA begins hiking, we think the strength in underlying inflation will encourage the RBA to continue tapering its asset purchases from February.

29 October 2021

Australia & New Zealand Chart Book

Early signs of second-round effects from soaring prices

The RBA expects headline inflation to drop back from 3.8% in Q2 to 1.5% by mid-2022. By contrast, we now only expect it to fall to 2.5% over this period, reflecting the pass-through from soaring coal, gas and food prices. We also expect the recent weakening of the Australian dollar and the surge in shipping costs to lift “core” goods inflation. The Bank may be able to ignore even a lengthy period of above-target inflation as long as wage growth remains subdued. Unfortunately, there are early signs that the surge in consumer prices will have second-round effects. Union officials’ inflation expectations have surged and if our inflation forecasts are correct, they are unlikely to fall back much. A push by union officials to offset rising living costs coupled with severe labour shortages provide fertile ground for wage hikes in upcoming enterprise bargaining agreements. Surging consumer prices also point to a stronger minimum wage hike next year. That matters because collective agreements and the minimum wage together determine the wages of around 60% of Australian workers. All told, we expect wage growth to reach 3% by the end of next year, stronger than the RBA’s forecast of 2.5%.

30 September 2021

Australia & New Zealand Chart Book

Delta not clipping the wings of RBNZ hawks yet

New Zealand has entered a draconian lockdown and new infections continue to rise. The lockdown prompted the RBNZ to refrain from hiking interest rates at its August meeting and financial markets were only pricing in a 50% chance of a rate hike in October at the start of this week. However, that probability jumped to 80% following hawkish comments by Deputy Governor Hawkesby on Tuesday.  He noted that the Bank had considered the case for a 50bp hike at its August meeting and that the outlook for monetary policy wasn’t closely linked to lockdowns. Indeed, the Bank’s August Statement acknowledged that while a renewed virus outbreak would pose the biggest downside risk to economic activity, the “economy is resilient to periods at higher alert levels if there is significant government support provided”. We still assume that the more contagious Delta variant will prove too difficult to control to allow a marked easing of restrictions over the coming weeks and expect the Bank to delay the first rate hike until next year. But if the measures succeed in reining in the outbreak before long, the RBNZ may still hike in October.    

26 August 2021
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Australia & New Zealand Chart Book

Vaccination threshold may be hit in four months

With new virus cases hitting fresh highs this week, Sydney’s lockdown has been extended until end-August and looks set to last for months given the high transmissibility of the Delta variant. Melbourne also briefly re-entered lockdown this month, though restrictions have now been lifted. Other states may manage to keep Delta at bay, but with NSW accounting for one-third of nationwide output, we’re forecasting a 1% q/q decline in Q3 GDP. However, we expect growth to rebound in Q4. The government has now announced that the domestic economy will fully reopen when 70% of the eligible population are fully vaccinated. We estimate that may happen in about four months if daily vaccinations reach 0.8% of the population by the end of this quarter and stay there until year-end, from 0.6% over the past week.

Australia & New Zealand Chart Book

Vaccine campaigns running into supply constraints

With the more contagious delta variant spreading in Australia, half of the population is now in lockdown. This highlights the Achilles heel of both countries’ virus management: their slow vaccine rollout. Just 8% of New Zealanders and 5% of Australians have been fully vaccinated. Daily jabs in both countries are equivalent to around 0.4% of the population, far below the 0.8%-1% rates currently seen in continental Europe. Vaccine supply is the main constraint. Australia’s vaccine campaign is strongly reliant on the locally-produced AstraZeneca vaccine, whose usage is only recommended for those above 60 due to concerns about blood clots. We estimate that this age group will be fully vaccinated by the end of July. New Zealand is relying exclusively on the Pfizer vaccine and warned this week that supply will be “pretty tight” until mid-July. While New Zealand has been able to prevent a fresh outbreak, it remains a major risk to the recovery.

Australia & New Zealand Chart Book

Fiscal policy to remain loose for longer

Australian Treasurer Josh Frydenberg noted in October that the Government would not pursue budget repair until the unemployment rated was comfortably below 6%. However, the unemployment rate fell much more rapidly ahead of the May Budget than almost anyone had anticipated, reaching around 5.5%. The Treasurer responded by noting that the conditions for reducing the budget shortfall aren’t in place yet and unveiled additional stimulus measures in the Budget. And while the recent sharp decline in spending means that the New Zealand government is on track to shrink the structural deficit in 2020/21, the government unveiled considerable fresh spending in its latest Budget, too. The upshot is that the structural budget balance in both countries will remain deeply in negative territory for years to come.

Australia & New Zealand Chart Book

Economic recovery facilitates house price surge

House prices are now surging in both countries. House price cycles in the Australian housing market tend to lag those in New Zealand a little, which is consistent with the forward indicators pointing to a rapid lift in the pace of annual Australian price growth in the months ahead. (See Chart 1.) Indeed, annual price growth should rise further as last year’s lockdown provides a favourable base in both countries. But we don’t think the rapid pace of price gains can be maintained for long. The strength in the New Zealand housing market has already prompted the RBNZ to reimpose macroprudential limits and we think APRA will follow suit before long. What’s more, the erosion of housing affordability and the boom in housing supply relative to population growth will eventually weigh on prices. That’s why we expect the pace of price growth to ease in the years ahead.

Australia & New Zealand Chart Book

Wage growth near its trough

Labour markets in both countries have tightened in recent months. In Australia, the unemployment rate has fallen from a peak of 7.1% to just 6.4% in January. And other measures of spare capacity have tightened even more sharply. The underemployment rate is now below its pre-virus level at 8.1%, on par with the lowest rate since 2014. And job vacancies and surveys on the difficulty of finding labour show businesses are struggling to find staff. Admittedly, the 0.6% q/q jump in wages in Q4 was partly driven by one-off factors but given the tightness in the labour we think wage growth will rise in earnest before long. In New Zealand, the unemployment rate fell in Q4 despite the end of the wage subsidy scheme. Annual wage growth continued to weaken from 1.9% to 1.6% but our expectation of a further tightening in the labour market should support an increase before long. We expect wage growth to rise from 1.4% in Australia and 1.6% in New Zealand in Q4 to around 2.5% in both countries by the end of 2022.

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