Economic update and interest rate discussion at Brisbane Club next Wednesday

Australian Treasury Secretary Steven Kennedy nicely summarised the economic outlook in his Opening statement to the Parliament’s Economics Legislation Committee yesterday:

Nonetheless, while the disruption caused by Omicron has been significant, its overall economic impact is likely to be less than was foreshadowed in the downside scenario.

This is because we have also learnt that the underlying economy is stronger than we had recognised.

As I told the ABC’s Julius Dennis last weekend (As we begin to emerge from the Omicron wave, Queenslanders are spending more and returning to work), the economy is still being supported by the massive monetary expansion resulting from the RBA’s unconventional monetary policy (a.k.a. Quantitative Easing) and all the new credit associated with the latest housing boom. Consumer prices are yet to catch up, and households feel wealthier with their additional money balances, and are spending more. Queensland Treasurer Cameron Dick was quoted by the ABC as saying “Spending is up 27 per cent in early February, compared to pre-COVID.” That Australians haven’t been able to holiday overseas and have been spending more at home is another relevant factor I should note.

Partly as a result of all the additional money held by households and businesses, CPI inflation is accelerating, as I discussed with 4BC’s Scott Emerson last month (see When home owners can expect an interest rate rise), and that will push up interest rates. The outlook for interest rates is the topic of the Brisbane Club’s Economics in Conversation event at the Brisbane Club, on Post Office Square in the CBD, next Wednesday 23 February at 5pm. I’ll be speaking on the economic outlook and likely interest rate movements alongside my colleagues Brendan Markey-Towler and Nick Johnson. 

None of this is to deny the disruption and hardship caused by omicron in the very short-term. CCIQ’s most recent Pulse Survey, conducted over the heavily disrupted month of January, was reported by the Courier-Mail as finding confidence is As bad as lockdown: Business confidence at drastically low levels. I’m expecting that plunge in business confidence was only for a very short period. The CCIQ result may have been reasonable, but it was only applicable for a very short period of time and doesn’t tell us much about the outlook for the rest of the year. That said, as I mentioned to the ABC, it’s hard to know what will happen in Winter if we have simultaneous COVID and flu waves.   

Other indicators are much more encouraging about the economic outlook than CCIQ’s Pulse indicator. For instance, NAB’s Monthly Business Survey reported that while omicron did reduce business activity in January, business confidence actually rebounded in January after it fell in December following the initial omicron outbreak (see chart below). NAB reported:

The confidence rebound signals that, despite the disruption, firms were optimistic that the outbreak would be short-lived, and consistent with this, forward orders remained steady.

NAB data show business confidence as above the neutral reading of 0 in January in Queensland and Australia (on a national-average basis). Also, I should note the Financial Review today reported CEOs ‘very optimistic’ about 2022.    

It’s difficult to know how to reconcile the NAB and CCIQ survey results. Possibly the discrepancy has to do with different compositions of businesses undertaking the surveys, with SMEs more affected by the omicron outbreak making up a larger share of the CCIQ survey sample. 

Finally, there’s been a big recovery in Queenslanders’ mobility (see the chart below). While many of us, including me, stopped going out as much for retail and recreation in early to mid January, we’ve now got back out there. Queensland is now above the baseline for retail-and-recreation-related movements, although Southern States are still significantly below it. Queensland appears to be leading Australia out of the latest COVID-induced disruption.      

Please feel free to comment below. Alternatively, you can email comments, questions, suggestions, or hot tips to contact@queenslandeconomywatch.com. Also please check out my Economics Explored podcast, which has a new episode each week.

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