Macro (Re)view (17/7) | Reopening not synonymous with recovery

Australia's update on the labour market for the month of June was the highlight of events domestically this week. In line with the Federal government's three-stage reopening plan, shutdowns across most states started to be gradually wound back from early May leading to a modest rebound in labour demand. In June, 210.8k jobs were added back to the domestic economy in an upside result on the consensus forecast of 100k (full review here). This was comfortably the highest increase on a single month on record, but the key point is that this represents jobs restored, not newly created as is usually the focus. More pertinently, June's rebound needs to be assessed against the quantum of the 871.5k jobs that were lost through April and May as the emergence of the pandemic prompted the authorities to mandate shutdowns to limit the spread of the virus. The part-time segment of the labour force had taken the brunt of this but led the rebound in June as 249.0k jobs came back while full-time employment contracted by a further 38.1k. Overall, the initial stage of the reopening was able to restore 24% of the jobs that were lost through the shutdown (see chart, below). 

Chart of the week

The dislocation is still significant with hours worked some 6.8% below their pre-pandemic level, even after rebounding by 4.0% in June. With workforce force participation lifting by 1.3ppt to 64.0% as more Australians returned to work and some unwinding of the relaxation of the mutual obligation requirement linked to the JobSeeker payment, the unemployment rate increased from 7.1% to 7.4% — its highest since late 1998. However, this understates the true scale given the number of workers that have left the labour force since the pandemic, while the ABS noted there were some 1.15 million Australians that worked either no hours or fewer hours than usual due to 'economic reasons'. The underemployment rate is a more accurate reflection of the situation standing at 11.7%, though it did at least improve slightly from 13.1% in the month prior.

Looking ahead, the labour market faces very significant challenges. As covered last week, the reopening of the domestic economy has run into trouble through the reintroduction of shutdown orders in Melbourne. Clearly, this is of particular concern in Victoria but there were signs this week this was affecting the other states through weakening confidence and high-frequency mobility data suggesting activity was starting to level out. The Westpac-Melbourne Institute Consumer Sentiment Index rolled over by 6.1% in July to 87.9 from 93.7, indicating a notable increase in outright pessimism. Sentiment in Victoria declined by 10.4% on the back of the surge in virus cases leading to the Melbourne shutdown, though the 4.5% fall in confidence across the other states points to a broader degree of nervousness. Renewed virus concerns also appear to have led to a rerating of consumers' economic outlook. After rising by 8.4% last month, the economic conditions next 12mths index plunged by 14% in July, while the next 5yrs outlook more than reversed June's 6.4% advance with a 10.3% decline. Accordingly, unemployment expectations, which had shown notable improvement coming out of the shutdown, deteriorated by 12.1% in July.

On top of renewed virus concerns, the other headwind facing the labour market is from an economy likely to be operating well below capacity for the foreseeable future. This was highlighted in this week's NAB Business Survey for June with capacity utilisation in all measured industries excluding retail falling well below long-run average levels. Certainly, the persistence of the virus and ongoing precautions will continue to weigh on output. The June survey reported a moderation in the weakness of business conditions from -24 to -7 and confidence improved from -20 to +1, though it pre-dated the Melbourne shutdown so some reversal, particularly for confidence measure, appears likely for July. Meanwhile, ongoing weakness in forward orders continues to point to firms being reticent to invest and hire in the months ahead.    

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Switching the focus offshore, China reported a rebound on Q2 GDP growth of 11.5% after the pandemic saw output contract by 9.8% in the March quarter. As a result, growth in annual terms improved from -6.8% to 3.2%. The key theme was not that the rebound occurred but more so its uneven nature. The supply side of the economy has been able to come out of the shutdown with vigour as seen by industrial production rising by 4.8% through the year to June, though there is a divergence with the consumer pointing to ongoing caution due to the virus with retail sales having contracted by 1.8%Y/Y. Over in the US, high frequency indicators have indicated that the reopening of the economy has been losing momentum of late on the back of surging infection rates. Case in point this week was California where the authorities announced the reinstatement of a wide range of containment measures. The latest Beige Book that provides a snapshot of economic conditions across each of the 12 Federal Reserve districts noted that while the reopening had seen activity and labour demand pick up, they remained a long way short of pre-pandemic levels. With more support needed and with the scheduled end to enhanced unemployment benefits nearing, attention now turns to the next fiscal package from Washington, with President Trump appearing to be in favour of payroll tax cuts. Whether there will be more support coming from the Federal Reserve is a live issue, with FOMC member Lael Brainard noting that the pandemic called for "a sustained commitment to accommodation, along with additional fiscal support". On the data front, consumer sentiment according to the University of Michigan index weakened notably from 78.1 to 73.2 in July, consistent with the increased concern over the virus. Retail sales posted a stronger-than-expected rise of 7.5% in June, but that is at risk of slowing from next month as the reversal of reopenings plays through.

Both monetary and fiscal authorities were the focus of developments in Europe this week. There were few surprises from the European Central Bank (ECB) at its latest meeting of the Governing Council as policy settings were left unchanged. Its most recent policy change was the announcement of the expansion of its Pandemic Emergency Purchase Programme from €750bn to €1,350bn. Cumulative purchases through to 10 July stand at around €383bn and the main takeaway from ECB President Christine Lagarde's post-meeting press conference was that its baseline was for the full €600bn expansion in the purchase envelope to be used on the basis that it was required to address the dual purpose for its inception being to reduce the risk of market fragmentation through a widening in sovereign yield spreads and to ease the broader monetary policy stance. Meanwhile, European leaders gathered in Brussels for weekend talks over the details of its recovery fund. The proposal up for discussion is a €750bn fund comprising €500bn in grants and €250bn in loans to support the recovery from the pandemic amid a bleak economic outlook across the bloc. Northern European nations, led by the Netherlands, are pushing for a different composition with a greater share going to loans and more control over how the funding will be disbursed.