The GDP story: it’s time to spend for Australia
What does the latest GDP data mean for investors? Pendal portfolio manager Tim Hext (pictured) explains in our weekly Bond, Income and Defensive Strategies wrap.
THE WEEK’s headline act was the Q1 GDP result.
It marked the first full year since Covid-led changes, restrictions and lockdowns altered our economic landscape (and lives).
What a comeback. Most importantly, Australia’s economy has expanded as we emerge from the shadow of 2020.
Australia’s GDP is now 0.8% higher than it was in December 2019. This was driven by the 1.8% GDP growth in 2021 Q1.
Comforting: consumer spending
Sustainable economic growth always stems from a strong and stable consumer spending base. Therefore it was wonderful to see consumer spending as the biggest driver of growth in 2021 Q1.
Even better, this time around in 2021 we are spending on services instead of just goods. This is the opposite of 2020 when we were in the midst of an online spending frenzy.
Goods spending held steady with a decline of only 0.5% — instead of falling off a cliff — despite concerns about post-Covid spending patterns.
This was a case of retail services roaring back to life. Just when we thought the gift would not keep giving.
Not surprisingly, the main retail services sectors benefitting from an uplift in consumer spending were those held back during lockdown. Hotels, cafes, restaurants, recreation, culture, transport have all taken off.
Hello domestic tourism
Elsewhere in the economy the Q1 results showed that building programs already in place worked. Building approvals rose with higher levels of new building, which will feed into inflation.
After lacklustre business investment over the past decade it became easy to write off this section of the economy. But thanks to new measures allowing unprecedented property, plant, and machinery (PPE) tax write-off, private business investment rose by 4% — with 11.6% in new PPE spend alone.
This is a level of growth not experienced in more than 10 years (since Q4 2009).
Troubling: Victorian lockdown
Even as Victoria extends lockdown by another week there is no need to hit the panic button. The economy will not hit the brakes — as long as this lockdown does not extend to the same length as last year.
Experience has taught us this is not lost spending but delayed spending. Once the economy re-opens it will recover lost ground.
Furthermore, Australians now have the habit of saving for a rainy day. Household income continued to rise in Q1. Though the savings rate has eased from pandemic levels, it is still above 11%.
This is more than double the pre-pandemic, five-year average savings range of 5-6%. These savings will serve Victorians well through this lockdown and support them in the re-opening, as will the new federal support measures.
Strong tax receipts from the increase in nominal GDP driven by commodity prices and economic expansion will fund those measures. This ensures we are seeing a mere storm in a teacup.
Given the strength of Australia’s economic growth we expect the Reserve Bank of Australia (RBA) to announce in early July that it will not extend Yield Curve Control (YCC) beyond the April 2024 bond.
This supports our portfolio positioning. Kinks in the yield curve will be ironed out as the three-year futures basket sets to roll off the yield curve-controlled bonds.
Continued economic growth will support the federal budget bottom line through stronger tax receipts.
This will result in favourable demand-supply dynamics of Australian Commonwealth Government Bonds (ACGBs).
Meanwhile the eventual RBA tapering of Quantitative Easing will see Semi-government bonds underperform from current levels.
In the medium term, we favour being overweight ACGBs and underweight Semis.
Tim Hext is a portfolio manager with Pendal’s Bond, Income and Defensive Strategies (BIDS) team.
Led by Vimal Gor, Pendal’s BIDS boutique is one of the most experienced and well-regarded fixed income teams in Australia. In 2020 the team won the Australian Fixed Interest category in the Zenith awards.
The team oversees $22 billion invested across income, composite, pure alpha, global and Australian government strategies with the goal of building Australia’s most defensive line of funds.
Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.
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