Quarterly economic update: July – September 2021

COVID here to stay

The third quarter of the calendar year brought with it the third and by far the biggest wave in COVID-19 infections. Largely restricted to NSW and Victoria the outbreak was driven by the highly infectious Delta variant. Such was its speed of spread it forced a change in strategy from one of elimination to learning to live with the virus, supported by a massive vaccination campaign. By quarter’s end vaccination rates were closing in on key targets that will allow a slow and selective lifting of the severe lockdown conditions that have prevailed for months. This may lead to a slower economic recovery than occurred after previous waves.

Time to chill

You know Australia has a housing problem when the head of one of the big banks, in this case Matt Comyn at CBA, calls for action “sooner rather than later” to stop the property market overheating. This was on the back of CoreLogic data showing house prices in Melbourne and Sydney rose 15.6% and 26% respectively over the 12 months to August. The International Monetary Fund (IMF) also called on Australian regulators to cool the market. Don’t expect this to happen through the usual instrument of increased interest rates. Rather, look for reduced lending in specific sectors, such as investors, higher deposit requirements, or testing loan serviceability at higher interest rates.

Pop goes iron ore

Iron ore’s price bubble eventually popped as China instructed its steelmakers to cut back on production. The main reason given was to reduce emissions, and perhaps to help clear the skies in the run up to the winter Olympics. Over the quarter the ore price fell 45%, with major miners taking an equivalent hit. BHP, Rio and Fortescue saw their shares tumble 33%, 26% and 44% respectively.

Hot topic

In August the Intergovernmental Panel on Climate Change (IPCC) released its latest report. It warned that “unless there are immediate, rapid and large-scale reductions in greenhouse gas emissions, limiting warming to close to 1.5°C or even 2°C will be beyond reach”. The report paints a grim picture of what that warmer world will look like and returned climate change to the front pages of the world’s newspapers.

The numbers

Equity markets experienced a bit of a rollercoaster ride over the quarter. All the major indices posted record highs, but most ended up within 1% of where they started.

The Aussie dollar also had a volatile quarter, trading between 71 and 75.4 US cents and finishing at 73 cents. It was a similar story against the other major currencies.

In both cases the late-quarter sell-offs were blamed on expectations of higher US interest rates.

On the radar

Many of the world’s leaders will come together in Glasgow at the end of October for the 26th UN Climate Change Conference (COP26). If they heed the warning from the IPCC, and if they agree to take the necessary steps to limit warming to 2°C (and preferably 1.5°C), it will set the scene for a dramatic economic transformation, with huge opportunities for those who can sort the winners from the losers.

Of more immediate concern, Chinese property company China Evergrande appears to be on the brink of collapse. Heavily indebted to the tune of US$300 billion, if it is allowed to fail it is likely to have global ramifications, not the least for Australia. For one thing China’s construction boom has been a huge driver of demand for our iron ore. The degree of intervention by the Chinese government (to protect shareholders, suppliers and/or home buyers) will be of great interest and importance.

The outlook and implications for investors

Share and property markets have had a very strong year, and the recent pull back in share markets is not surprising in light of events in China and ongoing Covid-19 numbers. While concerns over Chinese production, US debt levels and potential interest rate and inflation rises may result in further market volatility, there is still likely to be improved economic recovery thanks to supportive policy and continuing vaccine rollouts. Overall, we feel that patient, well diversified growth investors have been and will continue to be rewarded over the longer term.

Economic indicators – 1 Oct 2021                   1 year % excluding dividends

Australia: ASX 200


Japan: Nikkei 225


China: CSI 300


UK: FTSE 100


US: S&P 500


Australia: Current at 1 Oct 2021

$A : $US


Official interest rates (%)


Australian 10-year bond yield (%)


Published : 08 Oct 2021