Q2 GDP growth strong, but weakness ahead

Blog
Friday 3rd September 2021

Q2 GDP growth strong, but weakness ahead

Blog
Friday 3rd September 2021
Written by Chris Lioutas

Markets:

  • Local and global equity markets got a boost from comments from the US central bank chair indicating that the bank was a fair way away from raising rates and would look to reduce their bond buying program towards the end of this year.
  • In local stock news, Wesfarmers lifted full-year net profit to $2.4 billion with the company vowing to keep paying wages to workers restricted by virus measures until at least December 31. The company remains concerned about the lockdown impact on staff after almost 9,000 Bunnings workers had been in isolation at some stage recently.
  • Former Telstra boss Ziggy Switkowski has been named Crown Resorts’ new chair, replacing Helen Coonan, after the punishing Victorian royal commission and NSW gaming inquiry. The company reported a full-year loss of $261 million as virus related restrictions and a jump in restructuring and regulatory costs dragged on profit.
  • OPEC and its allies rubber stamped a previously announced hike of 400,000 barrels per day a month to the crude market weakening the oil price. The move came after the US reported crude inventories declined by 7.17 million barrels last week, which will only likely get worse with cyclones hitting the Louisiana coast.

Economics:

  • The Australian economy rose by 0.7% in the 2nd quarter, coming in above expectations, in a massive improvement on the same quarter last year given the then sharp contraction. Household consumption, business investment, residential construction and public spending all made solid contributions to growth, which goes to show how well the economy was doing prior to the current round of lockdowns.
  • Australian retail trade fell 2.7% in July, after a 1.8% contraction last month, with lockdowns hitting home. NSW drove the decline as expected. A further contraction in retail trade is expected in August.
  • Australian company profits rose by a strong 6% in the 2nd quarter, boosted by a large lift in mining sector profits due to rising commodity prices. Absent the mining sector, profits fell 1.1% in the quarter as JobKeeper payments ended in March. Wages and salaries rose by 2% in the quarter as the labour market tightened further.
  • Australian dwelling prices rose by a solid 1.5% across the 8 capital cities in August, with annual growth now sitting at 17.5%. Price rises were solid across almost all capital cities, with Hobart, Canberra, and Brisbane leading the charge in August.
  • New lending for housing was broadly flat in July with lending to first home-buyers continuing to fall at a rapid pace whilst lending to investors continues to rise reaching its highest value since April 2015.
  • A range of data painted a mixed picture of the Australian economic landscape. The current account surplus was a record $20.5 billion in the 2nd quarter, whilst net exports are expected to have subtracted one percentage point from 2nd quarter economic growth. Total residential building approvals fell by 8.6% in July, coming in below market expectations, whilst approvals for private multi-unit dwellings and houses both fell. Private sector credit rose by 0.7% in July, with a strong lift in business credit and housing credit growth remaining firm.
  • US central bank chair Jerome Powell sent his strongest signal yet that the bank could start dialling back its massive pandemic-era stimulus program this year, at the much anticipated Jackson Hole gathering of central bankers. He felt that they had met their inflation test even though he believed the recent inflation surge would prove temporary, and whilst making good progress on their employment test, had still yet to meet their objectives on this front. All eyes will be on labour market data from here. Rate rises a while off still.
  • US consumer spending grew 0.3% in July showing that the recovery had lost momentum as concerns continued to rise regarding the virus and government policy responses.
  • Economist forecasts have the Eurozone seeing its fastest inflation since 2012 this month with a likely 2.7% reading, as supply bottlenecks and increased demand stoked prices. The strengthening recovery is likely to have pushed unemployment 1% below its virus peak of 8.6% in 2020.
  • The speed of Germany’s recovery is being put at risk as companies in the manufacturing engine of Europe report shortages of materials ranging from memory chips to wooden pallets.
  • China’s factory activity expanded at a slower pace in August, as virus restrictions and high raw material prices put pressure on businesses. Whilst China recovered strongly early in 2020, growth more recently has shown signs of easing.
  • A private manufacturing gauge in China fell to its lowest level in over a year, with investors now expecting the broader slowdown in China will force the central bank’s hand to loosen monetary policy in order to boost growth.

Politics:

  • Moderate and progressive Democrats in the US are in disagreement on how to pay for President Biden’s economic agenda, potentially stalling or even sinking the legislation in the lead up to the mid-term elections next year. Moderates want a smaller package whilst progressives want to re-write the whole tax code. The last decade has shown that extreme changes and/or too many changes in a campaign platform aren’t usually taken too well by voters.
  • China has issued a comprehensive warning to corporates against the excessive work culture that usually results in the common practice of working 9am to 9pm six days a week. The government also announced plans to propose rules to stop companies from going public in the US if they have large amounts of sensitive consumer data.
  • The US officially ended its military presence in Afghanistan concluding two decades of American involvement, which resulted in more than 2,400 American deaths, tens of thousands Afghan deaths, and about US$1 trillion in spending since the conflict began.  


Author 

Chris Lioutas, Director, Insight Investment Consultants

Chris holds the position of asset consultant for Maxim Advisors and is a current sitting member of Maxim's investment committee. 

With permission of the author, this article is presented by Maxim Private Clients Pty Ltd ASFL No. 511972

Maxim Private Clients Pty Ltd ABN 47 611 614 398 AFSL No. 511972

Disclaimer: This material has been prepared without considering any potential investor's or clients objectives, financial situation or needs. This article is of a general nature and does not consider the individual circumstances of its recipients. Any information contained within this publication should not be misinterpreted as advice in any way. Please consult your financial advisor should you have any questions or concern