Asia-Pacific

Australia & New Zealand

Omicron could add to inflationary pressure

If Omicron were able to evade existing vaccines, a renewed period of lockdowns would be required which would force the RBA to step up its bond purchases. Inflation would fall initially as crude oil prices would continue to weaken, but disruptions to transportation networks coupled with continued strength in goods demand would add to the upward pressure on goods prices. However, for now the activity data suggest that the economy is roaring to life after the recent lockdowns and we’re sticking to our above-consensus GDP forecast of 5% for next year.

3 December 2021

Australia International Trade (Oct. 2021)

While it’s early days, the October trade figures suggest that net trade will turn into a drag on GDP growth yet again as imports rebound after the end of lockdowns.

2 December 2021

Australia CoreLogic House Prices (Nov.)

Housing demand remains very strong, but rising interest rates and lending restrictions should result in a further slowdown in house price growth next year.

1 December 2021
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Australia GDP (Q3 2021)

With private consumption now rebounding strongly as lockdowns have ended, output in states not affected by lockdowns continuing to rise, and capital spending resilient, we expect GDP to surpass its pre-Delta peak this quarter already and to keep surprising to the upside next year.

Market pricing on RBA still too optimistic

The rapid rebound in activity from the recent lockdowns coupled with a further pick-up in underlying inflation should prompt the Reserve Bank of Australia to taper its bond purchases in February and to end them in August. However, we believe that the financial markets are too optimistic about both the timing and the scale of rate hikes.

Diverging outlook for monetary policy

While the RBNZ has lifted interest rates by 50bp and signalled that as much as 200bp of tightening is still to come, the RBA’s central scenario remains that interest rates won’t be raised until 2024. While we have pencilled in the first RBA rate hike for early-2023, there are good reasons for the RBA to be more dovish. While New Zealand’s household savings rate was back at pre-virus levels just before the latest lockdown, it was still well above it in Australia. And while New Zealand has recently recorded a record trade deficit of 3% of GDP, Australia has recorded a record trade surplus of 5% of GDP. With New Zealand’s domestic demand overheating, it’s no surprise that most measures of core inflation are now at or above the top-end of the RBNZ’s inflation 1-3% target range, whereas underlying inflation in Australia has only recently climbed into the RBA’s 2-3% target range.

Border reopening won’t ease labour shortages much

Australia’s government isn’t keen on opening the immigration floodgates once the border reopens to migrants next year and we still expect the unemployment rate to fall to 4% by 2023. Nor do we expect migration to ease labour shortages in New Zealand much next year. Nonetheless, New Zealand’s labour market is already very tight and with the RBNZ set to keep tightening monetary policy, we expect unemployment to creep higher over the next couple of years.

Australia - Retail Sales (Oct. 2021)

The 4.9% m/m jump in retail sales in October brought them very close to their May peak and supports our view that consumption will reverse nearly all of the plunge during the lockdown this quarter.

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