AMP Chief Economist Shane Oliver has significantly boosted his estimate of the size of the contraction of the Australian economy in the September quarter after the NSW lockdown was extended by another four weeks yesterday and restrictions on movement imposed in more areas of the city’s west.
His upgraded estimate – a 2% quarter on quarter crunch instead of the 0.7% estimate he issued last Thursday, came also after the latest Consumer Price Index data showed the expected surge in the June quarter to an annual rate of 3.8%.
“We had already revised down our September quarter GDP forecast to -0.7% but with the NSW lockdown extending to end August, the total direct cost of the lockdowns since end May has now been pushed to around $14bn and with less time to now rebound at the end of the quarter.
“Even though other states are likely to keep growing (helped by the ending of the Victorian and South Australian lockdowns) GDP growth could now contract by around 2% or so in the current quarter.
“That said providing the lockdown ends this quarter (and the Victorian and SA experience highlight that lockdowns do still work against the Delta variant) we should see a strong rebound in the economy in the December quarter,” Dr Oliver wrote yesterday.
In fact a fall of 2% and the high CPI increase would see the economy lurch into an even deeper bout of stagflation in the September quarter that could continue until the end of this year.
Looking at the CPI’s impact, Dr Oliver said that he now expects the Reserve Bank to make changes in its monetary policy stance at its meeting next Tuesday.
“With underlying inflation remaining subdued – the trimmed mean was only 0.1% above the RBA’s forecast for the year to the June quarter – and the ever-extending NSW lockdown set to depress September quarter GDP and adding to uncertainty, the RBA is likely to be very dovish at its meeting next week.
“We expect it to delay its decision to slow bond buying from September until early next year and state that its stands ready to do whatever it can to help the economy. It may even consider shifting the target bond for its 0.1% bond yield target out to the November 2024 bond,“ Dr Oliver forecast.The surge in the June quarter CPI is a one off – mostly due to a big change in the comparative base with the 1.9% slide in the June quarter dropping out, leaving the 1.6% rebound in the base, plus the impact of higher petrol and oil costs, higher fruit, vegetable and meat prices and higher motor vehicle costs.
But we can be sure that it will fall sharply in the September quarter when the 1.6% rise in the same quarter of 2020 drops out of the comparison.
The 0.8% rise in the three months to June in the Australian Bureau of Statistics (ABS) report on Wednesday confirmed the forecasts from some economists for a 0.9% rate and a 3.9% annual rate.
That is the highest annual rate since 2008 when petrol prices surged to $US150 a barrel. The annual rate bit 5.0% in the September quarter of that year.
By the June quarter of 2009, it was running at a subpar 1.4% because of the collapse in oil and other prices as the GFC whacked global activity and demand and the Reserve Bank was fretting about deflationary forces.
A more accurate picture of underlying inflation each quarter comes from two measures, – the trimmed mean and the weighted median. Both rose 0.5% in the quarter from the March quarter, well short of the 0.8% rise in the headline rate.
That left the annual inflation rate at 1.6%, up from 1.1% in the year to March but well under the RBA’s target range of 2% to 3% ’sustainably’ over time.
The ABS pointed out that a better view can be had by looning at the progress of inflation from the quarter before the Covid impact hit (the three months to March, 2020). “Over the five quarters from the March 2020 quarter to the June 2021 quarter, inflation rose 1.9 per cent,” the ABS pointed out.
The annual rate, which would normally see a response from the Reserve Bank (or some pointed warnings), was expected as big falls in the cost of child care and petrol that occurred in the June quarter of 2020 fell out of the comparison.
Food and non-alcoholic beverages increased 0.5% over the June, 2021 quarter. Vegetables prices were up 5.5% cent and fruit by 4.7% due to a shortage of pickers as the international borders remain closed due to the coronavirus pandemic and the impact of widespread autumn rains in Queensland and NSW.
Cyclone Niran reduced banana crop yields (in an echo of Cyclone Yasi in 2011, the last mega boom and bust year) also boosted prices.
Beef and veal prices were also up, by 3.6%, as farmers re-built their herds in the wake of the breaking of the long drought across much of the country in 2020 and early 2021.
State government schemes to encourage spending at local businesses offset the price rises in the overall figure, cutting out of pocket takeaway and fast-food costs by 0.7%, reducing restaurant prices by 0.6% and housing prices (helped by the after-effects of the HomeBuilder Scheme from the Federal Government).
Petrol prices rose by 6.5% through the quarter while medical and hospital services lifted by 2.4% due to the annual increase in private health insurance premiums.
Motor vehicle prices rose by 2.2% due to increased demand combined with supply constraints such as the global semi-conductor shortage. That shortage is expected to be a factor going into 2022.
The biggest quarterly result occurred in Perth where prices jumped by 1.9%, driven largely by the ending of a one-off rebate to electricity consumers. That drops out of the September figures.
The cost of furniture also rose over the quarter, jumping 3.8%. The ABS said this was due to the high demand for timber with supply constraints pushing up prices and thanks to the high demand, especially from online sellers.
There was also a sharp lift in domestic holiday travel and accommodation costs which jumped by 17.5% — not because of a “seasonal rise in demand” as some reports claimed but because demand reappeared as more domestic routes opened up. That lifted costs after domestic travel (and overseas travel as well) was curtailed by the lockdowns in the June 2020 quarter and demand vanished.
