<h2>EXPERT INSIGHT</h2>

The word &lsquo;boom&rsquo; is used cautiously, principally because booms never end quietly. In other words, booms tend to be followed by busts. The case in point was the boom of the late 1980s that preceded the recession of 1991.

On Friday the Reserve Bank lifted its economic growth forecasts. The Reserve Bank now expects growth of 5.25 per cent on average over the 2021 calendar year. The growth forecast for the 2021/22 year is now 5.00 per cent, up from the 3.75 per cent forecast made in February. And growth in calendar 2022 is now tipped at 4.00 per cent, up from 3.25 per cent.

The jobless rate is now seen at 5 per cent at the end of 2021 before hitting the &ldquo;full employment&rdquo; level of 4.5 per cent at the end of 2022.

But over the next 18 months, underlying inflation is not expected to hit 2 per cent (1.75 per cent in late 2022).

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Economic nirvana? Perhaps. But it is also important to remember that growth and unemployment have bettered even the most optimistic Reserve Bank forecasts over the past year.

So it&rsquo;s worth considering the latest &lsquo;upside&rsquo; targets from the Reserve Bank. On the Reserve Bank&rsquo;s most optimistic assumptions, annual economic growth would hit 10.25 per cent in June and 6 per cent in December (admittedly from a low base). The jobless rate would hit the &ldquo;full employment&rdquo; threshold late this year but inflation still wouldn&rsquo;t exceed 1.5 per cent.

The Reserve Bank won&rsquo;t consider lifting rates until inflation is sustainably within the 2-3 per cent target band. So conceivably unemployment could hit 4.5 per cent by end year with the cash rate still locked at a record low of 10 basis points.

Too good to be true?

It&rsquo;s important to remember that these forecasts are from the Reserve Bank, one of the most cautious and conservative central banks.

But there appears a growing appreciation for the fact that inflation &ndash; not just here but across the globe &ndash; has been low for a number of years. And a key reason for that is technology &ndash; consumers can buy goods whenever they want from wherever they want. Also, organisations like Airtasker, Uber and Menulog have boosted completion and kept downward pressure on prices. In addition, businesses in white collar industries can also get work done offshore &ndash; and this is largely unaffected by Covid-19. While wage growth &ndash; a key component of inflation &ndash; hit record low levels in Australia at the end of 2020 &ndash; with the pace of pay rises easing since the height of the mining construction boom.&nbsp;

But what happened in 1988?

Cash rates had been falling ahead of the October 1987 sharemarket crash. The cash rate was around 18.8 per cent in August 1986 and had fallen to 11.3 per cent in October 1987. Rates hit lows of 10.65 per cent in February 1988.

But after the sharemarket crash, the feared economic downturn didn&rsquo;t arrive. Investors instead switched affections from shares to property, underpinned by lower interest rates. According to CoreLogic, home prices rose by 2.8 per cent in October 1987, lifting the annual rate from 5 per cent to 9 per cent. By late 1988, home prices were running at a 30-32 per cent annual rate &ndash; far higher than we are witnessing today.

To quell the &lsquo;irrational exuberance&rsquo; in housing and general &lsquo;conspicuous consumption&rsquo;, the Reserve Bank lifted cash rates over 1988 and 1989, with rates hitting highs of 18.2 per cent in November 1989.

Under the pressure of high interest rates, the economy contracted in December quarter 1989 and September quarter 1990 ahead of the recession in the first half of 1991. Interest rates were progressively cut from 1990 and didn&rsquo;t stop falling until 1994.

What are the implications for investors?

No two periods are alike. The environment in 1988 was starkly different to current times. But in all times, investors need to be aware of the risks and opportunities.

The Covid-19 pandemic shocked economies across the globe in 2020 and the response to the pandemic has varied. Those shocks are still reverberating. Australia has done well in suppressing the virus, and all levels of government and the Reserve Bank acted quickly in supporting businesses and families.

As a result, the economic recovery has been strong, but it is important not to be complacent. Risks lie to the upside and downside. For instance an extended closure of foreign borders may make it difficult for firms to fill open positions. Further, the longer that foreign borders are closed, the greater the risk that demand for homes will reduce, affecting the home building sector. Policymakers must be agile in continuing to watch for the threats to the economic recovery.

But if Australia continues on its current course, strong economic growth will boost employment and give increased security to those in work. A tighter job market should bring higher wage growth. Businesses are well placed to embrace low interest rates to lift investment. Low rates and government grants are boosting home construction and the buoyant house building should continue over 2021.

Note that the Reserve Bank won&rsquo;t be lifting interest rates until wage growth is closer to 3 per cent. At present wages are &ldquo;expected to pick up to a little under 2 per cent over 2021, before gradually increasing to around 2&frac14; per cent by mid 2023.&rdquo; Even on the &ldquo;upside&rdquo; scenario, wage growth won&rsquo;t hit 3 per cent before 2024, tempering &ldquo;boom&rdquo; expectations.

But whether you call it a &lsquo;boom&rsquo;, economic nirvana or just a strong economic recovery, the economic outlook seems bright.

The current investment environment is positive for consumer discretionary, construction, construction materials and information technology sectors of the Australian sharemarket. Financials will benefit from the expectation of firmer borrowing, but super-low interest rates will cap margins and revenue.

Based on traditional valuations, the sharemarket may seem expensive on the current share price to earnings ratio (PE ratio) of 20.97 (the long-term average is 15.5). But valuations are more difficult to make in an environment of near-zero interest rates. Continued strong economic growth would serve to boost corporate earnings and justify current share prices.

The All Ordinaries index has hit record highs on numerous occasions over the past month. The benchmark ASX 200 is also expected to make new highs in coming weeks. The ASX 200 index is tipped to end the calendar year at 7,200 points.

The Reserve Bank has lifted its 2021 calendar year economic growth forecast from 4.00 per cent to 5.25 per cent

cjames

Is Australia headed for economic boom or economic nirvana?

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EXPERT INSIGHT

The good news is that the job market recovery continues – and continues quite spectacularly. More jobs were created in the past six months than any similar period on record. Looking at March alone, the labour market results are truly awesome except for the drop in full-time positions – and that was a payback from the outsized gain in February. Unfortunately however, Aussies will remain sceptical on the speed and scale of the recovery for at least one more month – when the first month of post-JobKeeper data is published.

But it is a case of so far, so good. More people are looking for work, more people are finding work and the jobless rate continues its progress to pre-COVID levels. And while significant spare capacity remains, there were good gains made in the latest month on the measures of hours worked, labour under-employment and under-utilisation.      

Looking ahead, there is indeed the uncertainty about what is the ‘true’ state of the job market after JobKeeper. But reassuringly, all measures of labour demand including job ads/vacancies show that there are plenty of businesses looking for staff. In fact, SEEK has today reported the highest number of monthly job ads in its 23+ year history.  

There are plenty of jobs to be had, but will Aussies fill the available positions? That is the key issue for policymakers, and ultimately the economy. Ultimately if Aussies won’t take up the jobs on offer, then more specific attempts must be made to bring in foreign workers. Otherwise, economic momentum will be constrained.  

The Reserve Bank is expected to stick to its script for now, vowing not to lift cash rates until 2024. That determination to maintain steady rates has been reinforced today showing the consumer inflation expectations fell from 4.1 per cent to 3.2 per cent in April. But clearly plenty of water will flow under the bridge before 2024.

What do you need to know? 

Employment rose by 70,700 in March (consensus: +35,000) after increasing by 88,700 jobs in February. Full-time jobs fell by 20,800 and part-time jobs rose by 91,500 positions. The number of people employed rose to a record high of 13.078 million.

The unemployment rate fell from 5.8 per cent to a 12-month low of 5.6 per cent in March (consensus: 5.7 per cent).

Hours worked rose from 1,762 million hours to a record high of 1,800 million hours (up 2.2 per cent) to be up 1.2 per cent over the year.

Participation rate: The participation rate rose from 66.1 per cent to a record high of 66.3 per cent in March (consensus: 66.1 per cent).

Spare capacity: In March, the underutilisation rate fell from 14.3 per cent to a 15-month low of 13.5 per cent. The underemployment rate fell from 8.5 per cent to 7.9 per cent – a 7-year low.

Unemployment across states in March: NSW 5.4 per cent (February: 5.6 per cent); Victoria 6.1 per cent (5.6 per cent); Queensland 5.9 per cent (6.1 per cent); South Australia 6.3 per cent (6.8 per cent); Western Australia 4.8 per cent (6.0 per cent); Tasmania 5.9 per cent (5.7 per cent); Northern Territory 5.6 per cent (4.9 per cent); ACT 3.4 per cent (4.1 per cent).

Employment across states in March: NSW (+14,700); Victoria (+6,100), Queensland (+23,300), South Australia (-600), Tasmania (+400), the ACT (-2,700), Western Australia (+32,600) and the Northern Territory (-1,600).  

What are the implications for investors?

One year on from the COVID lockdown and more Aussies are in jobs than ever before. Collectively Aussies are also working more hours than ever before. And the proportion of females employed has never been higher. We need to remember than when the jobless rate lifted to 7.5 per cent in May 2020, some economists were tipping that it would ultimately peak in excess of 16 per cent.

The economy has out-performed the ‘official’ forecasts from Federal Treasury and the Reserve Bank. If this out-performance remains significant then monetary and fiscal stimulus measures will need to be re-assessed. But that point is still some way off. Foreign borders remain closed, the vaccine roll-out is still slow and less than a month has passed since JobKeeper ended.

The record lift in jobs, together with the strengthening of job security will underpin consumer spending in coming months. And the desire to engage in retail therapy will be underpinned by the likelihood that the foreign border will be closed until much later in the year.

The improvement in the Western Australian job market is clearly a stand-out. The state led the nation in job creation in March and the jobless rate is the lowest for over seven years (since December 2013) – assisted in part by low population growth. The housing market will clearly be a key driver of the economy in 2021, courtesy of Building Bonus Grant and the HomeBuilder grant. In addition, the mining sector continues to be supported by solid demand and high commodity prices. Jobs growth in Queensland occurred following the announcement of the $200 travel voucher scheme, while interstate migration continues to support economic activity in the Sunshine State.       

 
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The number of people employed reached a record high in March: CommSec's Craig James

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<h2>EXPERT INSIGHT</h2>

The first indicators for 2021 – home prices and manufacturing activity – are exhibiting signs of economic strength, rather than weakness.

Home prices are rising across the country. In fact home prices only fell in two of the 88 regions in the past month. And over the past year all but 12 regions posted gains in home prices. The icing on the cake: data shows that in 39 of the 88 regions, home prices were at record highs at the end of 2020.

The outback regions of South Australia and the Northern Territory as well as the mid to far north coast regions of NSW were amongst those posting the strongest home price gains in December. The Sydney Eastern Suburbs (down 0.1 per cent) and Far West and Orana region of NSW (-0.4 per cent) were the only two regions to record falls in home prices in December.

Regional home prices continue to outpace capital cities and house prices are out-pacing apartment prices. Both reflect Covid-19 effects, especially the new reality that work can be done anywhere and at any time.

The manufacturing sector is expanding solidly. In fact many companies reported that “backlogs of work had risen simply due to a short-term inability to expand production capacity sufficiently to meet the recent surge in demand.” And further, “efforts to boost capacity were reflected in manufacturers taking on extra staff at a rate not seen for just over two years.”   

What do the figures show?  Home prices – December 2020

The CoreLogic Home Value Index of national home prices rose by 1.0 per cent in December to be 3.0 per cent higher over the year. 

In capital cities, prices rose by 0.9 per cent to be up 2.0 per cent over the year. House prices climbed 1.1 per cent, but apartment prices rose by just 0.2 per cent. House prices were up 2.6 per cent on a year ago and prices of apartments increased by 0.2 per cent.

In regional areas, home prices jumped 1.6 per cent with house prices up 1.7 per cent and apartment prices up by 1.1 per cent. Regional home prices were up 6.9 per cent on the year with houses lifting 7.1 per cent and apartments up 5.9 per cent.  

The average Australian capital city house price (median price) in December was $696,413 and the average unit price was $574,388.

Home prices were higher in all eight capital cities in December: Sydney (+0.7 per cent); Melbourne (+1.0 per cent); Brisbane (+1.1 per cent); Adelaide (+1.1 per cent); Perth (+1.1 per cent); Hobart (+0.7 per cent); Darwin (+2.3 per cent); Canberra (+0.6 per cent).

Home prices were higher than a year ago in seven of the eight capital cities in December: Sydney (+2.7 per cent); Melbourne (-1.3 per cent); Brisbane (+3.6 per cent); Adelaide (+5.9 per cent); Perth (+2.0 per cent); Hobart (+7.7 per cent); Darwin (+11.9 per cent); Canberra (+8.5 per cent).

Total returns on national dwellings rose by 6.6 per cent in the year to December with houses up 7.1 per cent and units up by 5.0 per cent on a year earlier. In contrast, the S&amp;P/ASX All Ordinaries Accumulation Index rose by 3.6 per cent over the year to December. 

What are the implications for investors?

Higher home prices boost household wealth and also serve to boost borrowing capacity. As such the lift in home prices is positive for consumer durables including demand for cars.

CoreLogic reports that annual home sales were around 8 per cent higher over 2020. CoreLogic notes: “More home sales implies more work for a range of industries including real estate professionals, removalists, conveyancers, financiers and building inspectors along with more spending on household goods such as home furnishings, white goods and appliances.”

The strength in manufacturing is positive for employment and related sectors such as retailing. The increases in input prices and selling prices need to be watched though.

Risks to the housing market – prices, sales and building – include policy mistakes, the scaledown of JobKeeper and JobSeeker, new waves of virus infection and the length of time that foreign borders stay closed.

CRAIG JAMES is the Chief Economist at CommSec
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Regional home prices continue to outpace capital cities and house prices are out-pacing apartment prices

Craig James

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