Westpac’s Evans Sees Higher Australian Dollar on Rising Vaccine Rate

(Bloomberg) -- Westpac Banking Corp. Chief Economist Bill Evans reckons Australia will surpass the U.S. when it comes to vaccination rates heading into 2022 and that’s one of the reasons he’s optimistic about the outlook for the Australian dollar.

Discussing the prospects for the economy as Australia’s east coast prepares to exit lockdown, which is set to begin in Sydney in October, Evans expects there will be an adjustment period. 

This is particularly so, he says, given people will lose their emergency payments two weeks after the states hit 80% vaccination rates, making them “a little cautious.” The rate is now over 60% in New South Wales, the most populous state. 

Following is an interview with Evans that’s been lightly edited: 

The consensus seems to be that this won’t be a quick bounce back like those previously. Yet people seem to be preparing to spend once restrictions lift.

They won’t be spending until they’ve got a job because their income will fall back when payments are cut. I think that’ll be a factor. I think we’ll be expecting to see high case loads and people feeling quite nervous about having to present themselves at hospital.

So maybe there’ll be an initial rush to spend, but then I think things will be more cautious until we get to 90% and we get the very, very confident information around the hospitals that things are settling down.

There’s going to be another big job shortage. It’s a global phenomenon at the moment, and that is going to push up costs, and that’s why we’re expecting inflation to get up to the sort of level the Reserve Bank will be comfortable with by the end of next year. 

We’ve got 1.4% for the December quarter in terms of growth but 5% for the first-half of next year and I’m pretty happy to stay with that. 

So you see about a one-quarter transition in terms of people finding a job?

There’s always going to be a lag between the opening up that generates all the demand and someone fitting into that scheme. I think that gap will worry people. The spender will be fine, he will have accumulated savings, but the one who’s under more pressure and needs the job, will be a lot more cautious. 

I think we’ll find that there will be a really significant demand for jobs because of fewer students, holiday workers and other skilled workers. There’s 250,000 less people than are generally available to add to the workforce. It will take time to come back. That’s why I’ve got the unemployment rate down at 3.8 next year.

The other effect that we’re just not sure about is what’s going to happen to the supply of labor when 10% are still left unvaccinated. Do they leave themselves out of the labor force? Undoubtedly there’s going to be an element of that.

In the U.S. you’ve got, I believe, a ridiculously low vaccination rate now. You know, 40% of the people that aren’t vaccinated, are not going to get vaccinated, 20% are uncertain.

We’re going to murder the U.S. in terms of our vaccination rate. That’s one of the reasons why I’m optimistic about the Aussie dollar, I think that’ll be a big success factor next year.

In terms of the Reserve Bank, it just keeps following overseas central banks on tapering?

It looks like the tapering is very much a global trend. So we tapered in September even though the economy is going to contract by 4%. The others of course aren’t contracting. The RBA delayed the review until February. So in a way, they’re buying less between now and November, and more between November and February because under the old model they could’ve easily gone back to A$3 billion a week in November. So you’re going 4-4 instead of 5-3.

And a rate rise in the first quarter of 2023 -- despite the governor saying he doesn’t see it before 2024?

You shouldn’t be disagreeing with a central bank governor. I made a mistake in disagreeing with him when he said he was going to taper in September.

But I think we’re in very unusual times now with a strong demand shock, intermixed with an unusual supply shock around the labor market and the goods markets. The view a couple of months ago was that these supply-chain shocks would’ve eased by now, well they’re getting worse. And if there’s an imbalance between supply and demand, prices go up. 

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