Reserve Bank governor Philip Lowe says one of the qualities he inherited growing up in country NSW was to always keep a positive outlook.
This was on display from an end-of-year speech in his hometown Wagga Wagga – as he gave the clearest indication yet of a pathway to pull out the massive cash stimulus still adding fuel to the economy.
Marking his last formal appearance before the Reserve Bank board meets in February, Lowe stoked expectations that the central bank’s $4bn a week bond buying program could end from the same month. The massive program has been helping to keep longer-term financing costs cheap in Australia.
The end to this program was entirely dependent on the twin goals of inflation and wages growth picking up through the next two months, and on current indications it is going that way.
Lowe's comments came on an extraordinarily bullish day for the Australian economy.
Employment rose by a much higher-than-expected 366,000 for November, marking a new record for monthly jobs growth. The growth was quality with the participation rate returning back to near pre-Covid highs. The unemployment rate fell to 4.6 per cent – the market was tipping 5 per cent – returning key jobless indicator back to the lowest levels in over a decade.
Even as Treasurer Josh Frydenberg on Thursday slightly curbed this year’s growth forecasts to 3.75 per cent from 4.25 per cent previously due to recent Delta lockdowns in NSW and Victoria, there was a sharp upgrade in financial year 2023’s growth outlook.
In forecasts contained in the mid-year budget update on Thursday, Frydenberg now expects next year’s economic growth to come in at 3.5 per cent compared to 2.5 per cent previously.
The dark cloud over all this optimism remains the rapid spread of Covid’s Omicron variant, which could dampen confidence and therefore curb spending again in the near term. A severe spread could trigger closure to state borders or a return to lockdowns. For now, states are holding their nerve.
Even so, the RBA boss was speaking amid a backdrop of a rapidly shifting global economic outlook.
The US Fed is turning decidedly hawkish in the face of inflationary pressures with the Fed’s top officials predicting at least three sets of rate rises over the next year. In September, around half of those same Fed officials thought US inflation or rate increases wouldn’t be needed until 2023.
Australian companies too have felt the pain of inflation building into the economy, mostly as a result of supply side squeeze.
Woolworths chief Brad Banducci, who runs one of the nation’s single biggest employers, earlier this week warned of underlying cost inflation, particularly with wages growth across his business running at 2.5 per cent. In normal times Woolies would try to claw back the wages gains through productivity wins, but Covid disruptions have made this nearly impossible.
ANZ chairman Paul O’Sullivan on Thursday also highlighted staffing shortages among his customers of his bank.
One bright spot for employers is the prospect of a reopening of the hard international borders – including a trickle of international students – which will slowly ease pressure on the labour market.
That underscores both the RBA’s and Treasury’s view that wages spike will be temporary. In the mid-year update Treasury said it won’t be until 2024 until wages growth hits at least 3 per cent.
Lowe didn’t want to take away too much from the economy as he reiterated a strong view that any rises in the current ultra-low interest rate setting won’t come during the next year.
“We’re still not at the point where we can confidently say that inflation is going to be sustained,” Lowe noted.
Market economists have pencilled in rate rises from the back end of next year, although the consensus view is that this won’t take place be until 2023. Bond markets, which have skin in the game, are betting rates are set to start moving from mid-next year.
Qantas’ post-Covid world
Qantas boss Alan Joyce is doing his part in smoothing over Australia’s relations with the European Union after it opted for Toulouse-headquartered Airbus to replace its ageing Boeing 737s, the workhorse of the domestic fleet.
The major fleet upgrade sends a strong signal to customers and investors that despite everything of the past 22 months, Qantas sees a return to normal service in coming years and its board under chairman Richard Goyder is rightly planning for this.
For plane spotters the switch to the Europeans from the US is notable given Qantas has until now has been firmly committed to Boeing for its mainline domestic fleet – although Airbus has been a feature of the Jetstar arm.
Under the multibillion-dollar commitment, Qantas will place direct orders for 40 of the next generation Airbus narrow body aircraft by June and purchase right options of another 94 aircraft over the coming decade as its existing domestic fleet (75 Boeing 737s and 20 717s) is phased out. A final investment decision will be made by mid next year on the back of technical considerations.
For now though it’s about generating as much cashflow as it can from its domestic business, which in a normal year generates more than 40 per cent of its earnings and the fattest profit margins of its operating businesses of domestic, international and Jetstar international. With almost all states open for normal travel, Qantas expects domestic capacity to be at about 75 per cent of pre-Covid levels by the end of December, rising to more than 100 per cent in February 2022.
Smaller arch rival Virgin is finding its feet following last year’s collapse and stop-start operations and will start piling on competitive pressure from the middle of next year. At the same time private equity-backed new entrant Bonza shouldn’t be ignored.
One of the big lessons for CEOs from the pandemic is balance sheet and liquidity. Those going into the pandemic in reasonable shape on both fronts were able to capitalise on the disruption going through it, setting them up for years to come.
Qantas’ Joyce had no choice but to pull all the levers available to it from asset sales, including the $802m Mascot land sale, a $1.9bn capital raising, and pledging aircraft as security on short-term loans. Added to this was the taxpayer-funded $855m JobKeeper program that provided a cushion for its 20,000 stood-down staff and in the process eased the pain on the airline’s wages bill.
Another take out from Covid is that nothing lasts forever and whatever conditions are in place now can change in a flash. Think of oil prices, employment, financing and economic recovery, so businesses need to be prepared for unexpected changes in the operating environment.
There will be hits – such as the current Omicron outbreak sapping confidence on international travel, which is partly behind Thursday’s warning of a $1.1bn first half loss but Qantas has no choice but to put a post-Covid world in its sights.
In selecting Airbus, Qantas has also shed some early insight into how the domestic travel market will look later this decade.
The Airbus order gives Qantas the option of putting on more flights, but these will be on smaller aircraft. It can ramp up capacity quickly on peak times with the larger A320s.
With technology making remote working possible more than ever, Qantas sees the growth in the regions and domestic tourism as a permanent feature of the landscape with the smaller A220 now giving it the flexibility to fly new regional routes profitably.
Fuel costs as always are important with savings for the A320neo of 14 per cent from the current generation and claims of being a quieter aircraft. The A220, which seats up to 150 has more than 20 per cent lower fuel burn than the current generation of Boeing equivalent B717. But with a stated range of more than 6000km that gets it to every part of the country.
A major factor for Qantas in going with Airbus was rolling up its Jetstar and mainline brand in the single order. Now it remains to be seen whether the long-serving Joyce will be on the delivery flight of the first of the brand new A320neo planes when it rolls off the production line sometime between July and December 2023.
johnstone@theaustralian.com.au
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