Dr Shane Oliver
Head of Investment Strategy and Economics and Chief Economist
The vaccine rollout is proceeding extremely rapidly in southeast Australia, more quickly than many thought. Particularly in New South Wales, the Australian Capital Territory and Victoria, people have had an incentive to get vaccinated and participate in the re-opening. The improvement in vaccine supply has made that possible. In the other states, the process has been slower.
Nevertheless, Australia has gone from being among the low-end to the high-end of developed countries in terms of first doses, and full vaccinations.
We now have nearly 76 per cent of all Australians – not eligible adults but all Australians – that have had one dose, and 68 per cent that are fully vaccinated. It’s an impressive outcome.
The 76 per cent number is similar to the United Kingdom and above the United States and Europe, and we still have some way to go in Queensland, Western Australia, South Australia, Tasmania and the Northern Territory.
So what does this mean for the economy in the short-term, over the next six months, and for financial markets?
The success of the vaccine rollout has brought forward the re-opening of the Australian economy, and it provides confidence that the reopening will be durable.
There may well have to be some restrictions imposed again at some point, in some states and regions, if cases increase following the re-openings. But evidence suggests that while vaccines are not perfect in stopping people from getting COVID, they are highly effective in stopping people from getting seriously ill.
Australians are going to have to learn to live with COVID. It means there will still be COVID cases circulating through the community. However, if the caseload is not pressuring the hospital system, then the reopening can continue even if at times some restrictions, hopefully short of full lockdowns, are reimposed.
We are now seeing a rapid re-opening in New South Wales and Victoria and the AMP Capital economic tracker in those states, which is based on credit card transactions, confidence readings and mobility indicators, suggests activity is stronger than in the US, and is back to where it was before the delta outbreak.
In short, because there has been the rapid rollout of vaccinations and they are working in preventing serious illness, the economic recovery is getting back on track and that’s likely to continue over the next six months.
While the high vaccination rate allows the economy to re-open, it’s the combination of low interest rates and pent-up demand which will help drive increased spending. On AMP Capital estimates, there’s roughly eight per cent of gross domestic product in savings in bank accounts for households in Australia.
That reflects people not being able to spend through the lockdowns, but at the same time getting an income from either their employer or from the government.
Some of that money will be used to pay down debt, and some will be spent, which will drive the economy.
At the same time, we are seeing higher levels of job vacancies, business confidence is almost back to where it was prior to the delta outbreak and consumer confidence is above average. These factors are consistent with a solid recovery in the economy over the coming months and quarters.
The key uncertainty is another coronavirus outbreak and an upswing in cases, similar to what has occurred in the United Kingdom and Europe. But providing hospitals cope, and serious illnesses and deaths are held down, the economic recovery should continue.
Inflation is a risk, though not as great in Australia as overseas. Other parts of the world are more affected by supply chain disruption.
Much of the world spent more time disrupted than Australia was. Melbourne is an exception to that, but mostly Australia has been operating more normally compared to other countries over the whole period of the pandemic.
That’s meant there has not been the same level of disruption to supply chains in Australia, though it is still an issue because Australia imports many consumer goods. Energy prices have gone up, and most have felt that at the petrol bowser too.
There is also an issue with labour shortages in some industries, mainly low-skilled industries such as hospitality, and in some skilled areas.
While supply chain disruption, energy prices and labour shortages could all slow the economy down, they won’t be enough to derail the recovery.
Those factors could cause higher-than-expected inflation which, in turn, could cause the Reserve Bank of Australia (RBA) to raise interest rates earlier, though that probably won’t be any time in the next 12 months.
The RBA has said interest rates will rise in 2024, or maybe 2023. That’s sooner than they were saying a month ago. We think the central bank will have to start raising interest rates at the end of next year.
At this point of the economic cycle, the biggest gains in equity markets are behind us. Typically, in any bull market, at the start markets are extremely cheap after a huge fall when investors are negative. That’s when you get the easy gains. Markets go from under-valued to fair value and sometimes over-valued.
Now is a more constrained environment for share markets because equities are no longer cheap, and investors are no longer super bearish. Much money has already come back into the market and the share market is now more dependent on earnings growth continuing.
It is likely that there will be more volatility in the S&P/ASX200. In recent months when it has dipped 5 per cent or so, it has found a bottom and risen again. But the pace of increases are slowing and we should expect more of that into next year. Providing the economic recovery continues and interest rates remain relatively low, the trend should remain up, though there will be increased volatility.
There is potential for further growth in house prices, but peak momentum in the property market was in March this year when prices were rising two to three per cent a month.
The slowdown will continue for the simple reason that affordability is now much worse. Also fixed rate mortgages are starting to rise and there’s been a widening in the APRA serviceability margin from two-and-a-half per cent to three per cent.
Putting all that together, compared to six weeks ago a fixed mortgage rate borrower will have to show that they can service a loan that is about one percentage point higher. That will impact the market at the margins.
Also, there is a pickup in home listings. Vendors were less enthusiastic about selling during the lockdowns and now they are putting their properties on the market.
Even with all these things, house prices will still grow by around five per cent next year, and then when the Reserve Bank starts to raise interest rates, house prices will start to come down.
The near-term outlook is positive for the Australian economy. The vaccination roll-out has been faster than anticipated just a few months ago, and the economic outlook is all the better for it.
While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) (AMP Capital) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs.