Macro (Re)view (27/3) | Covid-19 batters global economy
The impact of the covid-19 outbreak hit the data flow this week providing a glimpse into the scale of its impact on economic activity and employment, while stimulus efforts from fiscal and monetary authorities continued to advance in response. In the markets, there was a reversal of sorts from recent themes as risk assets rallied, liquidity concerns eased and US dollar strength was pared back. On the covid-19 front, confirmed cases globally according to the World Health Organization moved north of 500,000 with the US overtaking China as the nation with the highest case count, while Australia's count stood at 2,985; up from 709 at the end of last week, according to data reported by the Department of Health.
In the US, after much delay, Congress and President Trump gave the green light to a $2tn stimulus package that is unprecedented in its size and scope but entirely appropriate given the scale of the crisis, both from a public health and economic perspective, unfolding in the world's largest economy. Emphasising this point was a truly shocking rise of 3.283m in the number of US citizens who filed for unemployment benefits for the first time in the 7-day period ending March 21; a number so high that it eclipsed the previous record high set back in 1982 by more than a factor of four, and in a single week erased all of the cumulative job gains achieved over the past 18 months (see, below).
Chart of the week
The centrepiece of the stimulus package is cheques of $1,200 for individuals, with the benefit phasing out to zero for incomes between $75,000 and $99,000, while an additional $500 per child will also be available. To address the shock to the labour market, unemployment benefits have been scaled up and access to that assistance has been expanded. For businesses, Treasury will set aside $500bn for a lending program, with additional incentives available for small and medium-sized enterprises. There were further policy changes from the Federal Reserve this week, most notably the Committee announced it would move to open-ended asset purchases to ensure the transmission of low rates to the real economy remains and liquidity strains do not re-emerge in the Treasury and mortgage-backed securities markets. In other announcements, the Fed unveiled a range of new facilities to support the flow of credit to households and businesses. For an overall perspective on how the covid-19 outbreak has hit the US economy, IHS Markit's flash PMI for March reported that activity pulled back by its most since the financial crisis as the composite measure rolled over from 49.6 to 40.5 (readings < 50 signal contraction). The services sector took the brunt of the decline as activity fell from 49.4 to a record low of 39.1 in response to strict social distancing measures that have severely dented consumer-related industries such as restaurants and travel. Activity in the manufacturing sector also softened in March on the back of weakness in order volumes and production.
Over in the continent, March's flash PMI conveyed the severe impact that covid-19 has wrought on the euro area economy in just a single month as activity collapsed from a modest pace of expansion of 51.6 in February to its lowest level on record at 31.4 in March. Whereas the euro area's services sector had remained resilient to the global trade tensions that drove its key manufacturing sector into a severe downturn from mid-2018, it buckled under the pressure brought on by the covid-19 outbreak as governments in Germany, France and on the periphery escalated containment measures. Services sector activity almost halved in March to its lowest reading on record at 28.4, while enforced closures of businesses resulted in the most severe month of job losses in the post-financial crisis period. The manufacturing sector did not escape unscathed with activity falling from 48.7 to 39.5, which reflected the steepest fall in new orders in a single month in nearly 11 years. At least stimulus will be on the way, to be led by the largest economy in the bloc in Germany, with its parliament this week agreeing to terms on a €750bn stimulus package, while it also voted to suspend its debt ceiling in a move the will allow a further €156bn to be added later this year if required. The European Central Bank remained in focus this week as further details came to light regarding its recently announced Pandemic Emergency Purchase Programme (PEPP). This programme involves the Bank purchasing at least €750bn of private and public sector securities through to the end of 2020 to limit the financial fallout from covid-19. In a landmark decision, the Bank announced that all previously self-imposed limits would not apply in the PEPP, in effect giving itself unlimited flexibility on the type and quantity of purchases it is able to make. Staying with the ECB theme, an op-ed from its former President Mario Draghi published in the Financial Times generated plenty of attention in which he advocated for the public sector to use its balance sheet to protect the economy from the shock induced by covid-19. In the UK, the Bank of England's policy meeting saw its benchmark interest rate and asset purchases left unchanged, though the Monetary Policy Committee "stands ready to respond further as necessary to guard against an unwarranted tightening in financial conditions, and support the economy".
Turning to Australia, last Sunday the Treasury announced an expanded fiscal stimulus package that resulted in Commonwealth support rising from $17.6bn to $63.8bn (0.9% to 3.3% of annual GDP) over the period out to 2023/24 (analysis here). This expansion includes additional income support measures for households and more cash flow assistance for businesses. In an address to the nation on Friday, Prime Minister Morrison indicated that additional measures to support businesses through enforced closures will be forthcoming. A newly released series from the ABS on Thursday highlighted the distress that covid-19 has unleashed on the business sector with 96% of surveyed firms anticipating to be affected in the months ahead citing both demand and supply-side impacts (see here). Further emphasising the difficulty of the current environment, the Commonwealth Bank's flash PMI rolled over from 49.0 to 40.7 in March. Mirroring the trend from offshore, it has been the services sector hardest hit with activity falling from 49.0 to 39.8 on the back of falling demand and cancellations due to social distancing as well as uncertainty over the outlook.
