How Macquarie’s Ric Deverell sees key macro trends playing out
Ric Deverell is the highly respected Chief Economist and Global Head of Macro Strategy at Macquarie Group. So when he talks, it pays to listen. Last week, he presented his observations on macro issues like global economics and inflation, the pandemic, the Australian economy, China and the bond market. Here are the key take-outs from his presentation.
Global Economics and Inflation
- Interesting point of eco cycle. Remarkable recovery after the crash. Global GDP now about 2.5 points above pre-COVID-19 levels already. Snap back is over and growth will be more difficult from here but have really good momentum for the second half of the year so very confident there is still still good growth for next year but it will be bumpy along the way.
- Stimulus in US peaked in March. Income has back to trend, so consumption has weakened in last few months. Digesting the artificial surge. Consumer is in good health so expect better Q4 but will print soft GDP for Q3. Labour market is strong.
- Easy gains have been made. Services sector accounts for 70 per cent of US employment and still bit weak.
- Global Input Prices have bounced very strongly – back at pre-COVID-19 and furthest above trends for many years. Supply has responded but demand still stronger. Expect pricing peak has arrived already, so global inflation has peaked and will come back down.
- Goods demand is still very strong. After lockdowns governments stimulated and services were constrained – goods still strong but clear the peak has happened, off about 4.5 per cent from the peak and services recovering gradually.
- US Employment stalled in August. Still a very strong recovery happening but as it gets closer to the underlying trends it will get volatile as easy gains have been made.
- Mobility trends are still good in the US.
- US – peak growth is behind us but capex going nuts. Businesses are very confident, which will be the next driver of growth over next year.
- Inflation – lots of people are still worried but overnight CPI print should put to bed.
- US is now like a recession never happened, back on trend, until growth rolls over equities go higher.
- Europe now dramatically overtaken the US in a vaccine race so better control of the delta variant. Risk of winter COVID-19 surge but much less than the US. Very strong growth and will remain over the next 6 months. Growth has peaked so it will slow but it will be good contributor.
- The pandemic is now an endemic and is not going away. Peak of fatalities much lower than previously because vaccines are working. OECD continues about two thirds vaccinated (equivalent to 80 per cent of 16s and over). More supply will become available for developing countries.
- The UK opened when they still had high rates of infection and have gotten away with it as the fatality rate declined.
- Israel thought they were ok, 63 per cent fully vaccinated but not enough. Pfizer is supposedly more effective but fades quicker meaning it will need boosters. Boosters are working well there. 63 per cent not enough and we all need boosters.
- Europe heavily vaccinated so not too worried about winter but US less than 60 per cent nationwide so some risk there.
- US is a pandemic of the unvaccinated. Five lowest vaccinated sates saw hospitalisations high as previous peaks but lower deaths.
- Australia was looking very good until June, it had the strongest recovery in the industrial world with employment and GDP back to trend, unemployment below 5 per cent for first time in 10 years. It then had the outbreak and then shutdowns which caused a big hit in Q3. At least 2 per cent impact to GDP.
- Consumer discretionary spend on goods would have picked up a bit during lockdown but expect to see the same trend as the US where goods spend slows and service spend picks up as people go out and about again.
- A Positive is that cases in NSW have peaked, although Victoria is still increasing. The worst is likely behind us in Australia and a reopening plan has been announced.
- Worst of eco downturn in Australia is behind us. House price growth has slowed but not fallen and job ads barely moved this time around.
- Outlook for household goods in Australia – expect to stay strong but rate of growth has peaked and the level may come down a bit, it will be supported by housing strength but expect a shift to services and travel will resume. Travel will take some time to recovery.
- The labour market is tight in Australia, we need skilled immigration which will take some time. Immigration will come back but it will be 18-month process rather than step back.
- Lots of talk of wage pressures, price pressures etc. but when look at the data, it doesn’t show it. Wage growth still slowing if anything. This is a very different trend to the US where wage growth is showing up. The RBA hopes downward drift will come to end but no evidence economy wide – businesses often talk about it, pressures can be there, but clearly not passing on.
- NAB Survey remains ok – August didn’t go down which is remarkable, NSW still above average even though in lockdown.
- China – GDP recovered back to trend, it had a few outbreaks but looks under control. Vaccinating very fast – 2.2 billion doses administered but their vaccines are weaker. Difficult decision to open borders and the economy has been impacted by their zero COVID-19 policies. We expect a sharp rebound over rest of the year, shutting down the steel sector. The housing sector is soft – all driven by environmental concerns.
- Huge surge in goods demand. China’s exports are more than a third above their pre-COVID-19 levels. So the world is even more reliant on China.
- Chinese production met the demand surge which is extraordinary. Vietnam has had to shutdown so China has been a reliable partner. The idea that China is going away as a trading partner is overstated.
- Delta outbreak looks under control.
- China has been tightening its policy since November last year so further along. China should get a bit of a bounce as restrictions eased and thinks they will set in and stimulate to make sure growth holds.
The Bond Market
- Bond market – consumption has been soft for 6 months and yields have been soft to down over same period. Tapering debate will intensify but don’t expect taper tantrum.
- US yields – expect steepening. Fed funds rate anchored at zero. Don’t expect any move until next year. 10-year still low because Fed is still buying. It will start winding back a bit later this year but not dramatic steepening.