(Bloomberg) — Australia’s economy can run hot while dodging the runaway inflation that’s plaguing much of the world, said Reserve Bank board member Ian Harper, signaling monetary policy will stay ultra-loose for some time yet.
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Harper cited Australia’s relatively resilient workforce participation during the pandemic, in contrast with trends seen overseas such as mass resignations and people quitting the labor force. He said that was a key reason why Australian unemployment will take time to fall to levels needed to spark strong wages growth and subsequent price pressures.
“With a strong recovery in labor force participation, the likelihood of there being a breakout in wages is very low,” Harper, who’s also dean of the Melbourne Business School, said in an interview. “What’s been amazing is that even with the borders closed we can run this economy quite strongly without producing inflation.”
While Harper wasn’t speaking on behalf of the RBA, his views chime with those of Governor Philip Lowe, who has repeatedly said wages growth of “3 point something” is needed to push inflation sustainably within the bank’s 2-3% target band from 2.1% now. The RBA has maintained its dovish stance on inflation despite data showing a strong economic rebound is underway following harsh lockdowns this year along the country’s east coast.
Similar growth surges have been seen in major economies, but often accompanied by soaring inflation as lockdowns eased and rampant consumer demand blindsided producers of goods and services. While the RBA’s preferred measure is underlying inflation, the consumer price index grew 3% in the third quarter, far lower than the U.K.’s 4.2% in October and U.S. annual rate of 6.2%.
The RBA has left interest rates at a record low 0.1% since November 2020 and Lowe has pledged not to tighten policy until actual, not forecast, inflation is well within range. The bank doesn’t see that happening until late 2023, a doggedly dovish outlook compared to financial markets which are pricing in three rate increases next year.
In explaining why inflation was unlikely to run hot in Australia, Harper cited the example of Western Australia. The state has closed its domestic and international borders in a bid to keep Covid-19 from its shores, and is still not seeing signs of strong wages growth. Unemployment there is at 3.9% compared with the national rate of 5.2%.
“So we have a natural experiment that looks like the Australian economy is running with much lower levels of unemployment than people had experienced before, without actually producing a burst of wages growth and leading onto a burst of inflation,” Harper said.
“That is something that really does distinguish us from experiences elsewhere. And it’s another reason why various people, myself included, don’t think that we are on the cusp of runaway inflation.”
In Australia, labor force participation has hovered around 65-66%, largely driven by government support payments that allowed businesses to keep staff on their books even during lockdowns. That compares with 61.8% in the U.S., from a high of 63.4% before the pandemic, according to the U.S. Bureau of Labor Statistics.
Stronger-than-expected economic growth contributed to the RBA abruptly dropping its yield target last month. At its next board meeting in February, the central bank will review its A$4 billion ($2.9 billion) per week bond-buying plan. Economists expect it to further taper or drop the program altogether.
Harper didn’t comment on the path of monetary policy, but said there were reasons to believe that wages growth will pick up sooner rather than later. He was optimistic on Australia’s economic growth, citing an upbeat outlook for the corporate sector with both business investment and credit on the rise.
The latest official estimate of business investment and intentions showed firms upgraded their capex plans for the current financial year to the best since the mining investment boom ended in 2012. Crucially, non-mining spending is seen rising by 16% from a year ago, the strongest gain since 2000, led by a surge in demand and services.
“That’s very encouraging,” Harper said. “It looks like the business community is working through the impact of the pandemic.”
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China's economy grows 8.1% in 2021, slows in second half – Yahoo Canada Finance
BEIJING (AP) — Chinese leaders are under pressure to boost slumping economic growth while they try to contain coronavirus outbreaks ahead of next month’s Winter Olympics in Beijing.
The world’s second-largest economy grew by 8.1% last year, but activity fell abruptly in the second half as the ruling Communist Party forced China’s vast real estate industry to cut surging debt, official data showed Monday.
Growth sank to 4% over a year earlier in the final three months of the year, fueling expectations Beijing may need to cut interest rates or stimulate the economy with more spending on public works construction.
That slump is likely to worsen, leading to “more aggressive measures to boost growth,” Ting Lu and Jing Wang of Nomura said in a report.
On Monday, the Chinese central bank cut its interest rate for medium-term lending to commercial banks to the lowest level since early 2020, at the start of the coronavirus pandemic.
Asian stock markets ended the day mixed following the dual announcements. China’s benchmark Shanghai Composite Index gained 0.6% while the Hang Seng in Hong Kong lost 0.7%. The Nikkei 2225 in Tokyo rose 0.7%.
Lingering Chinese economic weakness has potential global repercussions, depressing demand for steel, consumer goods and other imports.
China rebounded quickly from the pandemic, but activity weakened last year as Beijing tightened controls on borrowing by real estate developers, triggering a slump in construction that supports millions of jobs. That made consumers nervous about spending and investors anxious about possible defaults by developers.
Consumer spending has suffered after authorities responded to virus outbreaks by blocking most access to cities including Tianjin, a port and manufacturing center near Beijing, and imposed travel controls in other areas.
Their “zero-COVID strategy” aims to keep the virus out of China by finding and isolating every infected person. That has helped to keep case numbers low but is depressing consumer activity and causing congestion in some ports.
The ruling party has stepped up enforcement ahead of the Feb. 4 start of the Winter Games, a prestige project. Athletes, reporters and officials at the Games are required to stay in sealed areas and avoid contact with outsiders.
Growth in consumer spending, the biggest driver of economic growth, fell to 1.7% over a year earlier in December from the previous month’s 3.9%.
“The prospect this year for consumer spending to rebound back to pre-pandemic levels has certainly dimmed,” David Chao of Invesco said in a report. “All eyes are on whether policymakers will evolve their zero-COVID pandemic policies.”
Officials have urged the public to stay where they are during the Lunar New Year holiday instead of visiting their hometowns. That will cut spending on travel, gifts and banquets during the country’s most important family holiday.
Forecasters have cut this year’s growth outlook to as low as 5% due to the debt crackdown and coronavirus.
“Downward pressure on growth will persist in 2022,” Tommy Wu of Oxford Economics said in a report.
Compared with the previous quarter, the way other major economies are measured, the Chinese economy grew 1.4% in the final three months of 2021. That was up from the previous quarter’s 0.2%.
Chinese exports, reported Friday, surged 29.9% in 2021 over the previous year despite a global shortage of semiconductors needed to make smartphones and other goods and power rationing imposed in major manufacturing areas.
Exporters benefited from reviving global demand while their foreign competitors were hampered by anti-virus controls. But economists say this year’s trade growth is likely to be weak and export volumes might shrink due to congestion at ports.
“With supply chains already stretched to capacity, last year’s boost from surging exports can’t be repeated,” Julian Evans-Pritchard of Capital Economics said in a report.
Auto sales fell for a seventh month in November, declining 9.1% from a year earlier, reflecting consumer reluctance to commit to big purchases.
Chinese leaders are trying to steer the economy to more sustainable growth based on domestic consumption instead of exports and investment and to reduce financial risk.
In mid-September, factories in some provinces were ordered to shut down to meet official targets for reducing energy use and energy intensity, or the amount used per unit of output.
One of the country’s biggest developers, Evergrande Group, is struggling to avoid defaulting on $310 billion owed to banks and bondholders. Smaller developers have collapsed or defaulted on debts after Beijing reduced the amount of borrowed money they can use.
Chinese officials have tried to reassure investors over the risks of wider problems, saying any impact on lending markets can be contained. Economists say a potential Evergrande default should have little effect on global markets.
National Bureau of Statistics (in Chinese): www.stats.gov.cn
Joe Mcdonald, The Associated Press
Omicron no match for US economy: Moody's – Investment Executive
“The backdrop of elevated inflation and a tight labour market strengthens the case for an earlier and faster normalization of monetary policy,” Moody’s said. “Indeed, notwithstanding the risks to growth posed by the Omicron surge, the Fed is well placed to move to a neutral monetary stance starting in March 2022, and we now expect three U.S. interest rate hikes this year, compared with our November expectation of none until 2023.”
Additionally, a recent shift in signals out of the Fed indicate “broad support” for both a rate hike in March and a normalization of its balance sheet soon after the rate increase cycle begins, Moody’s noted.
While Covid-19 infections have risen quickly in the U.S., creating added uncertainty, “the economy is on a solid expansionary path that the current virus surge is unlikely to derail,” the report noted.
Moody’s continues to expect that GDP will grow by 4.4% this year after rising by 5.4% in 2021.
“The surge in virus cases will no doubt dampen economic activity in pandemic-sensitive services industries in January but, as previous virus surges have shown, activity will rebound once the omicron wave begins to subside,” Moody’s said.
The report noted that latest epidemiological forecasts point to a peak in case counts by the end of the month, with hospitalizations and fatalities peaking in mid-February.
Inflation is expected to moderate this year, but Moody’s said there remains a good deal of uncertainty in inflation forecasts.
“We expect that the Fed will provide more concrete guidance at its next January meeting as to when and at what pace it will begin to raise the federal funds rate and reduce the size of its balance sheet,” it said.
The rating agency noted that it expects the Fed to take a “measured approach” to withdrawing stimulus and normalizing its balance sheet, given the elevated uncertainty in forecasts and a likely reluctance to move too quickly.
Ultimately though, the prospect of rate hikes and balance sheet normalization “will likely push both short-term rates and long-term yields upward,” Moody’s said.
“The effect of rising rates is likely to be transmitted to the real sector by curbing new lending for consumer goods, autos and homes. Small and mid-size firms, which tend to have shorter debt maturity profiles, will also be affected,” it said. “Lastly, higher interest rates will weigh on the valuations of risky assets.”
Firms see increasing labor shortages and wage pressures – Bank of Canada survey
Canadian firms see labor shortages intensifying and wage pressure increasing, with strong demand growth and supply chain constraints putting upward pressure on prices, a regular Bank of Canada survey said on Monday.
The central bank’s Business Outlook Survey Indicator reached its highest level on record in the fourth quarter, which was conducted before the Omicron coronavirus variant began spreading widely.
The data will play into the Bank of Canada’s calculations as it ponders when to raise rates. The bank, which has said it is paying close attention to wage inflation, is scheduled to make its next announcement on Jan 26.
Last October it said it could start raising rates as soon as April 2022, but some investors expect a hike this month. [BOCWATCH]
“The combination of strong demand and bottlenecks in supply is expected to put upward pressure on prices over the next year,” said the survey.
“In response to capacity pressures, most businesses across sectors and regions are set to increase investment and plan to raise wages to compete for workers and retain staff.”
Last month the central bank said slack in Canada’s economy has been substantially diminished.
Inflation expectations for the next two years continued to increase, with two-thirds of firms now expecting inflation to be above the central bank’s 1-3% control range over the next two years.
Most firms, in response to a special question, said they expected the currently elevated inflationary pressures to dissipate over time, with inflation returning to the 2% target over 1-3 years.
Canada’s annual inflation rate was at an 18-year high of 4.7% in November. The December data will be released on Wednesday, with analysts surveyed by Reuters expecting it to hit 4.8%.
The Canadian dollar was trading 0.4% higher at 1.2504 to the greenback, or 79.97 U.S. cents.
(Additional reporting by Fergal Smith in Toronto; Editing by Chizu Nomiyama)
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