The world's largest economy
By Justin Pyvis – Delivered on 01 Dec 2021

Good morning! An emergency national cabinet meeting was held yesterday afternoon and it concluded with tightened restrictions on overseas arrivals, aiming to suppress but not eliminate Omicron case incursions into Australia.

Both NSW and VIC (the only states without mandatory hotel quarantine) will now require all international arrivals to isolate for 72-hours and produce a negative PCR test before leaving isolation. Anyone who has been to a list of eight African countries will be forced into 14 days of hotel quarantine.

Moving on, Victoria's controversial pandemic bill looks set to pass parliament after a crossbencher, Transport Matters MP Rod Barton, said he would vote for it if six amendments were made. The amendments were applauded by the Centre for Public Integrity, the Human Rights Law Centre, the Law Institute of Victoria and Liberty Victoria.

Finally, Queensland's government broadened its vaccine mandate to cover all staff and volunteers at schools and childcare centres, who will now need to be fully vaccinated by 23 January. Prior to the change, QLD had been the only state or territory without a mandate for those workers.

Fully vaccinated population (aged 16+)


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Note: Brent oil, gold bullion and iron ore prices are the second futures contract. Bond yields are 10-year Treasuries. The S&P500 is a snapshot 30 minutes before close.

At the time of writing the US S&P500 was down 1.7% after Moderna's CEO Stéphane Bancel warned that existing vaccines are likely to be less effective against the Omicron variant: "There is no world, I think, where [the effectiveness] is the same level... we had with Delta. I think it's going to be a material drop".

Adding to the market's woes was relatively hawkish testimony from Fed chair Jerome Powell, who said when the central bank meets in December it will discuss ending its bond purchases a few months earlier than had been anticipated. When asked whether he thought inflation was still "transitory", he responded with "I think it's probably a good time to retire that word".

Locally, the ASX200 gained 0.22% despite being up much more that that for most of the day. Travel stocks were the standout performers (e.g. Qantas +3.27%, Flight Centre +4.47%), recovering some of their losses as people began to come around to the view that the Omicron variant may not affect movement as much as initially feared.


The engine lives: China's official manufacturing PMI showed an expansion in activity in October, rising to 50.1 in November which was much better than the 49.6 median forecast. According to an official statistician, the rise was because "shortages of power supply eased in November and the prices of some raw materials dropped significantly". A reading above 50 indicates expansion from the prior month.

Unwinding: Building permits issued in Australia fell 12.9% in October, as they gradually fall back down to earth (approvals are still 34.3% higher than pre-pandemic) following the huge burst caused by "government stimulus and record low interest rates".

All about houses: Credit growth to housing increased by 0.6% in October from the month prior for the second straight month, meaning credit to housing is still growing at an annualised rate of around 7.4%. Debt is the fuel that props up house prices and 7.4% is still a pretty decent clip.

Export machine: Australia's current account surplus hit a record $A23,9 billion in the September quarter, "driven by strong prices for exports of coal and other mineral fuels". Interestingly, import "volumes fell this quarter as global supply chain pressures began to be felt in Australia".

Slight deceleration: According to the S&P CoreLogic Case-Shiller National Home Price Index, US house prices increased 19.5% in September from a year ago (down from 19.8% in August), the first slowdown in annual gains since May 2020.

More records smashed: Consumer price inflation in France hit a 13-year high in November, rising 0.4% in the month or 3.4% from a year ago. In the eurozone as a whole inflation jumped 4.9%, an all-time record high since the single currency was created over two decades ago. Core inflation, which strips out food and energy, also hit an all-time high 2.6%.

A bumpy recovery: Korea's retail sales inched up 0.2% in October ahead of a move to "living with COVID-19" on 1 November, a second straight monthly gain. However, industrial and manufacturing output declined 1.9% (the most in 18 months) and 3.1% (the fourth consecutive decline) respectively, "mainly because a global shortage of auto chips dented vehicle production".

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The world's largest economy

George Magnus, a researcher at Oxford University's China Centre and author of "Red Flags", a book that looks at the "serious challenges" faced by China, released a twitter thread (what else) questioning the "conventional narrative [that] keeps telling us it's only a question of time until China is the worlds largest economy... based on spreadsheet extrapolations without context or deference to what's actually going on".

Stepping back: Even so-called experts such as Nobel Prize winning economist Paul Samuelson have made the mistake of extrapolating from past trends. Two excellent examples are Samuelson's prediction between 1960 and 1980 that the Soviet Union would eventually surpass the US economy and similar calls about Japan up until the mid-1990s. The common error is forecasters downplaying the uncertainty associated with holding rates of growth close to constant for long periods of time.

Why this matters: An economically smaller, less wealthy China is a bad thing for Australia (largest trading partner) and the world (perhaps not Taiwan!). Wealth is the cure for poverty – it's why in just 20 years China has gone from 88% of its population living in poverty to less than 1% today.

Looking forward: Magnus predicts that China is unlikely to surpass the US economy even without an "allowance for property price deflation in China or any sort of Chinese characteristics recession post 20th party Congress, both of which seem quite likely".

How China's government handles its ongoing real estate woes and supposed 'rebalancing' towards empowering households will greatly affect its long-term growth prospects, including whether or not it will one day become the world's largest economy.

The Wrap Up
    💉The US government now recommends everyone aged 18+ to get a booster shot 6 months after their second Pfizer or Moderna dose, or 2 months after their first Johnson & Johnson shot.
    ⚰️Westpac admitted to charging 11,000 dead customers $A10 million worth of advice fees.
    🧐The Kate Jenkins review of parliamentary workplace culture recommended 28 changes including better leadership, a crackdown on boozing, an improved gender balance and establishing codes of conduct.
    👩‍⚖️Three ex-Google employees are suing the tech giant for violating its own "don't be evil" code of conduct, after they were fired for leaking "confidential" information about the company to the press.
    🙄Oroville in California declared itself a constitutional republic in an attempt to bypass the state's mandate requiring schoolchildren to be vaccinated against COVID-19. Oroville will still have no power over schools, which are regulated by the state.
    🏝️Barbados will actually become a constitutional republic, replacing Queen Elizabeth II with her current representative, Governor-General Sandra Mason.
    💩The 'Shitty Theranos', a scientifically questionable poo-testing startup called uBiome that raised $US100 million in venture capital, filed for bankruptcy amid an FBI investigation.
    🐢Can't make this up. A runway at Tokyo's Narita Airport was closed "after a turtle was spotted walking on the tarmac", preventing the take-off of an ANA aircraft in sea-turtle livery.
    🦗WA Premier Mark McGowan said the Ashes will have the "same rules as we put in place for the AFL", meaning broadcast and cricket staff, along with players' partners, would have to quarantine for 14 days. Cricketers will be able to play after five days of quarantine so long as they remain in a bio-secure bubble.
    💶Greece's government will issue a monthly fine of 100 euros to anyone aged over 60 who refuses to be vaccinated against COVID-19, with the proceeds used to finance Greece's hospitals.
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