Quarterly economic review – 30 June 2021
Global economy
The COVID-19 pandemic remains a major feature on the global stage, although global economic recovery continues, with the JP Morgan Markit Global Composite PMI remaining positive.
Inflation news has been mixed. If we focus on the US, businesses were still affected by restrictions on movement with stronger demand for goods following last year’s lockdowns driving prices higher. However, the effect of more permanent triggers on inflation such as rising wages are not yet clear. For example, the Atlanta Fed median wage growth tracker has drifted lower in recent months (suggesting worker bargaining power is limited) while the participation rate for workers remains well below pre-pandemic levels (suggesting there are still many workers on the sidelines).
Australia
The Australian economy continued to improve for most of the June quarter. Business and consumer confidence remained strong with the NAB Business Survey highlighting business conditions at record highs and confidence above long-term average levels. Also, the unemployment rate continued to fall, down to 5.1% in May and pleasingly we saw the labour force participation rate recover above prepandemic levels as workers re-joined the workforce (a sign of improved confidence in job prospects). We also saw household savings rates continue to fall from a record high of 22% in June 2020 to 11.6% in March this year with retail sales, for instance, beating expectations in April and May.
Our caution about further COVID-19 outbreaks last quarter unfortunately bore fruit in June. The Delta strain of COVID-19 triggered lockdowns across the country with the most severe example in Sydney. The speed of the outbreak’s spread is a concern for both public health and the economy, prompting increasing restrictions over a short period of time. There have been some limited attempts at government support, but these pale in comparison to the initiatives in 2020 such as rental relief and JobKeeper. The fallout from these lockdowns poses a downside risk to the economy. The severity will depend on how much longer they are extended and the extent that new stimulus mitigates the damage.
Fixed income and currencies
Global central banks such as the US Federal Reserve maintained a commitment to keeping interest rates low in the near term. However, the signs of this commitment weakened when the US Federal Reserve flagged a possible 0.5% increase in 2023.
The Reserve Bank of Australia (RBA) restated its view that it will take until 2024 before the economy is sufficiently strong enough to increase interest rates from their record low level of 0.1%. The RBA also ended its Term Funding Facility (an emergency support program for Australian banks) which saw fixed mortgage rates rise across most major banks as they lost a cheaper source of funding. In addition, the RBA announced plans to gradually decrease its activity in the bond market.
Concerns of ‘peak’ economic growth being reached on the back of declining stimulus saw bond yields fall with both global (up 0.9%) and Australian bonds (up 1.5%) recovering from their weak performance in the March quarter. Even the prospect of higher US rates was insufficient to weaken the demand for bonds amongst investors.
It was a more uneven story for the Australian Dollar (AUD). In line with the improving economic outlook it was rallying for most of the quarter until the change in US interest rate expectations in June. This reduced the relative attractiveness of the AUD given the lower relative interest rate. The COVID-19 lockdowns also dampened sentiment. Accordingly, the AUD fell 1.3% against the US dollar and 1.9% against a broad basket of international currencies.
Shares
The Australian market continued to rise from its March 2020 lows, finishing the June quarter up 8.3%. However, it was a very different story at a sector level. Despite rising oil prices, Energy stocks fell while Utilities struggled amidst weak wholesale electric prices with industry giant AGL falling 15% for the quarter. Buy-now-pay-later businesses such as AfterPay enjoyed strong performance, rising 16.4% on the back of ongoing success in the US market.
Global share markets also performed strongly with the successful vaccine rollout in the US and Europe key drivers. Cyclical stocks (companies benefitting from stronger economic growth) struggled with the tech-heavy Nasdaq Index in the US (dominated by names such as Apple and Microsoft) outperforming the broader US share market. Much of this relative outperformance arose late in the quarter amidst peak economic growth concerns and the belief that higher rates in the US would slow the economic recovery.
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