This notion of a faltering in the recovery in the US was the key theme highlighted by the Federal Reserve at this week's policy meeting of the FOMC. As expected, policy settings were left unchanged, with the Committee noting that the outlook for the economy would depend heavily on the path of the virus and that "the ongoing health crisis will weigh heavily on economic activity, employment, and inflation in the near term". In the post-meeting press conference, Chair Jerome Powell outlined that the Committee was closely monitoring a range of high-frequency indicators and the recent signs were that as virus cases started to rise strongly through June economic activity looked to have slowed. While there was uncertainty over how long-lasting the slowdown might be, it was emphasised that the path of the virus is the key factor that will shape the Fed's outlook going forward. The other influential aspect in this regard is the actions of policymakers to support the economy. Chair Powell reiterated that the Committee will be maintaining its accommodative monetary policy stance for "an extended period", until such time as progress is being made towards its macroeconomic objectives of full employment and price stability. The Fed will likely move towards a more explicit form of forward guidance later on this year when its monetary policy review is complete. The importance of the role of fiscal policy in the current crisis continued to be highlighted by Chair Powell, though progress from Congress in coming to terms on the details of the next support package continued to be slow and limited this week, despite the end of month deadline on the $600 per week enhancement to unemployment benefits.
In Europe, June quarter GDP contracted by its most in the bloc's history falling by 12.1% to extend the decline in annual terms to -15.0% from -3.1%. Unsurprisingly, the declines at a country level were more significant where stricter and longer shutdowns were implemented with Spain -18.5%q/q, France -13.8%q/q and Italy -12.4% standing out. Germany — the bloc's largest economy — fared comparatively better but still contracted by 10.1% in Q2. While the onset of the pandemic led to a deeper decline in GDP in Europe than in the US, the continent has seen a much milder rise in unemployment by comparison. Data this week showed the euro area's unemployment rate lifted to its highest level since early 2019 with a 0.1ppt increase in June to 7.8%, while in the US its unemployment rate currently stands at 11.1% in June, down from a peak of 14.7% in April. The spread reflects the difference in policy responses to the crisis with national governments in Europe focusing on measures to maintain links between workers and their employers, such as short-time work schemes and income substitution, whereas in the US workers who were laid off, even temporarily, were classified as unemployed and were then able to access support through enhanced unemployment insurance or were later taken back by their employer once the government's Paycheck Protection Program was activated. In other European data this week, the flash estimate of headline inflation in July was little changed at 0.4%Y/Y from 0.3% in the month prior. The services sector has been hardest hit by the pandemic and as a result inflation in the sector has fallen to a 4-year low (0.9%Y/Y) while weak demand has driven energy prices lower (-8.3%Y/Y).
— — —
Turning to Australia, there were further signs from the high-frequency data this week that the economic recovery was stalling. Google's mobility indexes indicated that activity levels slowed over July as the Victorian capital city of Melbourne was placed back into shutdown and this appeared to weigh on confidence more broadly. This was reflected in the ABS's latest household survey that highlighted a considerable level of uncertainty in states outside of Victoria over the timing as to when conditions would return to normal (see here). In Victoria itself, the recent escalation in virus cases unsurprisingly has residents there expecting a longer and a more uncertain recovery than in the rest of Australia. The increased level of uncertainty has been reflected in ANZ-Roy Morgan's weekly consumer confidence index that posted its 5th consecutive decline with a 1.9% fall to be down by more than 4% over July. In another sign of a stalling in activity levels, the ABS's weekly payrolls data reported that employment growth in the payrolls index had contracted by around 1% since the start of July to be back at its level from late-May to early-June. While difficult to establish the read-through to the traditional employment data, it was clearly not a constructive signal at this stage of the national reopening. Also raising concerns was the ABS's monthly Business Impacts of COVID-19 survey that reported strains on revenue had continued into July with restrictions limiting the ability of firms to operate at previously normal levels of capacity (see here). While some of this was being mitigated by the current support measures put in place by federal and state governments to provide cash flow assistance, some painful adjustments could lie ahead when these measures are due to expire with 16% of firms indicating they would look to cancel or scale back investment plans, 13% saying they would reduce staffing levels and 10% reporting they would cease operating. All of this highlights the fragile nature of the recovery and the need for ongoing support.
In other developments this week, Australia's Consumer Price Index fell by its most in a single quarter on record contracting by 1.9% in Q2 as the annual pace rolled over into deflation from 2.2% to -0.3% making this a 23-year low (full review here). Much of this can be attributed to the impact of policy, namely the Federal Government's decision to make child care services free for families between early April and mid-July. Furthermore, mandated shutdowns significantly reduced demand for automotive fuel leading to much lower petrol prices, while state government initiatives to allow tenants to negotiate rent reductions where they had been impacted either by a loss of work or income when the pandemic emerged and to provide assistance to households through reduced utilities costs all weighed on inflation, as shown in the chart below.
Chart of the week
In other developments this week, Australia's Consumer Price Index fell by its most in a single quarter on record contracting by 1.9% in Q2 as the annual pace rolled over into deflation from 2.2% to -0.3% making this a 23-year low (full review here). Much of this can be attributed to the impact of policy, namely the Federal Government's decision to make child care services free for families between early April and mid-July. Furthermore, mandated shutdowns significantly reduced demand for automotive fuel leading to much lower petrol prices, while state government initiatives to allow tenants to negotiate rent reductions where they had been impacted either by a loss of work or income when the pandemic emerged and to provide assistance to households through reduced utilities costs all weighed on inflation, as shown in the chart below.
Chart of the week
As such, some of these effects will reverse in the September quarter. Most notably out-of-pocket costs have come back for child care and this will also impact pre-school and primary education costs, while petrol prices have lifted off their shutdown lows. However, the RBA's preferred trimmed mean measure of inflation, which posted its weakest outcome on record in the June quarter at -0.15%q/q and 1.22%Y/Y, is unlikely to show much sign of improvement with the domestic economy operating well below potential and spare capacity in the labour market highly elevated. On the RBA, Assistant Governor Christopher Kent this week in a speech outlined that the package of measures implemented by the central bank back in late-March had contributed to improving market sentiment and easing financial conditions, enhancing the availability of credit to the real economy. Also this week, Australian building approvals declined by more than expected in June with a 4.9% fall to come in at an 8-year low at around 12.2k (see here). Approvals contracted by 10% over the June quarter with uncertainty around population growth dynamics and the broader economic outlook likely to be weighing on the residential construction sector.
