Australia Q1 CPI 0.3%, 2.2%yr; trimmed mean 0.5%qtr, 1.8%yr

Australia's latest update on inflation surprised slightly to the upside of expectations in the March quarter as the effects of drought and the summer bushfires drove up vegetable and meat prices, while preparations by households ahead of COVID-19 restrictions through stockpiling saw prices for personal care products and non-durable goods advance notably.   

Consumer Price Index — Q1 | By the numbers 

• Headline CPI lifted by 0.34% in Q1 to outpace the median forecast (+0.2%) but was well down on the 0.69% rise in Q4. In annual terms, CPI advanced from 1.84% to a 5½-year high of 2.19% (expected: 1.9%). 

• Details for the underlying measures;
• Trimmed mean lifted by 0.47% in Q1 (expected: 0.3%, prior rev: 0.45%) as the annual pace firmed from 1.6% to 1.79% (expected: 1.6%) to its fastest since Q4 2015.  
• Weighted median advanced by 0.52%q/q (expected: 0.4%, prior 0.39%) to be up by 1.68%Y/Y (highest since Q4 2018) from 1.3%. 
• The average of these measures firmed to 0.5% on the quarter and 1.73% over the year from 0.42%q/q and 1.45%yr. 

Consumer Price Index — Q1 | The details 

Taking an overall view, tradables inflation (influenced by global factors) declined slightly in the quarter by 0.2% as falling petrol prices more than offset rises across other goods, though the annual pace continued to trend higher to reflect the pass-through from a weaker Australian dollar. Inflation remains driven by the non-traded sector (where prices reflect domestic factors) following a 0.7% lift in the March quarter that firmed the annual pace from 2.0% to 2.3%. 

Looking into the March quarter's headline inflation outcome, the food and non-alcoholic beverage group was the driving influence. In percentage terms, prices across the group were up 1.9% in the quarter and the annual pace lifted from 2.6% to 3.2%, contributing more to inflation in Q1 (+0.36ppt) than implied by the overall outcome (0.34%). Within this, vegetable prices lifted strongly (+9.1%qtr) as the effects of drought and disruptions to supply chains due to the bushfires hit, directly adding 0.12ppt to Q1 inflation. These influences also placed upward pressure on meat prices (+2.0%qtr). In addition, the ABS attributed a 0.7% price rise in restaurant meals and takeaway food to the bushfires. 

Prices in the alcohol and tobacco group lifted by 1.6% in the March quarter to be up by 7.9% through the year, with the group contributing 0.15ppt to headline inflation. Tobacco prices rose by 2.0% in Q1 (+0.08ppt) and by 17.1% year on year, while alcohol prices lifted by 1.3% in the quarter (+0.07ppt), firming the annual increase from 1.4% to 1.7%.

The start of the academic year saw education costs up by 2.6% in the March quarter (2.7%yr) on broad-based increases across secondary and preschool and primary providers.

The health group contributed 0.11ppt to Q1 inflation as prices lifted by 1.7% (2.9%yr) with pharmaceuticals (+5.1%qtr) the main influence here as the safety net threshold for the PBS reset on January 1.   

It was another subdued quarter from the housing group (0.3%qtr, 0.6%yr) adding 0.09ppt to Q1 CPI as both rents (+0.1%qtr) and new dwelling purchase costs (+0.4%qtr) remained well contained. 

On the back of this, furniture and furnishings prices weakened further, falling by 3.0% in the quarter and this weighed notably on the furnishings, household equipment and services group as a whole (0.8%qtr, 2.2%yr). However, in line with households stockpiling in preparation for COVID-19 restrictions, the ABS noted strong demand for 'other non-durable household products' (including items such as toilet paper) resulting in prices advancing by 3.4% in Q1, while personal care products lifted by 2.2% as demand for hand sanitiser and soap soared. Child care services costs lifted by 1% in Q1 (6.2%yr) but will completely roll over in Q2 in response to the Federal Government's announcement to make those services to be free for families out to the back end of June.

Weighing most notably on inflation in Q1 was recreation and culture (-0.25ppt) as the cost of both domestic (-3.1%) and international holiday travel and accommodation was hit by the headwinds from Australia's summer bushfires and the COVID-19 outbreak globally.

Transport cut a sizeable 0.23ppt from Q1's CPI outcome as fuel prices dipped by 6.0% (-0.26ppt) in the quarter, though a far larger deflationary hit will come through in the June quarter as global oil markets have since collapsed further.

Clothing and footwear prices fell by 0.7% in the March quarter (2.1%) to subtract 0.03ppt from inflation, while the Communication group continues to see prices coming under pressure falling a further 0.3% in Q1 to be down by 3.4% through the year.

Consumer Price Index — Q1 | Insights 

Australia's inflationary pulse was a little stronger than expected in the March quarter, though that broadly related to the effects of the summer bushfires and earlier drought conditions placing upward pressure on vegatable and meat prices. A significant deflationary hit lies ahead in the June quarter as fuel prices have collapsed to their lowest levels in nearly two decades and governments and businesses have announced a wide array of cost saving measures to support the household sector through the shock from COVID-19.  

Preview: Q1 Consumer Price Index

Australia's inflation report for the March quarter is due to be published by the ABS at 11:30am (AEST) today. Another subdued print is expected, though it will be of little consequence to markets or for policy given all the attention is on the deflationary impacts that will play through in the June quarter.   

As it stands | CPI 

Australian inflation remained low and steady in the fourth quarter last year, though both the quarterly and annual headline CPI outcomes were stronger than anticipated at 0.7%q/q and 1.8%Y/Y. Consensus had been for the quarterly pace to lift by 0.1ppt to 0.6% and for the annual pace to remain at 1.7%. 

Underlying inflation went nowhere in the December quarter; the RBA's preferred trimmed mean measure was unchanged at 0.4%q/q and 1.6%Y/Y remaining well below the lower bound of its 2-3% target band, while the weighted median was steady at 0.4%q/q and 1.3%Y/Y.

The main drivers of inflation in the December quarter were the alcohol and tobacco (+0.27ppt) and food and non-alcoholic beverage groups (+0.24ppt). Within this, tobacco added 0.31ppt to headline inflation in Q4 reflecting the annual excise tax increase and fruit contributed 0.07ppt in response to drought-related impacts on supply.

Weakness in inflation in Q4 centred on discretionary areas of spend with international travel and accommodation (part of the recreation and culture group) taking 0.12ppt off headline inflation, furnishings, household equipment and services a 0.03ppt drag and clothing and footwear weighing slightly (-0.01ppt). Communications subtracted 0.02ppt on cheaper equipment prices and the health group also declined by 0.02ppt due to the effect of the PBS reducing out-of-pocket costs for pharmaceuticals. 

Market Expectations | CPI 

Headline inflation is expected to lift by 0.2% in the March quarter, while a base effect firms the annual pace from 1.8% to 2.0%. For the underlying measures, the trimmed mean is expected to print at 0.3%q/q and 1.6%Y/Y and the weighted median at 0.3%q/q and 1.4%Y/Y. 

What to watch | CPI

Today's report will be of limited significance to the markets given the deflationary forces that will hit in Q2, most notably plunging petrol prices as global oil markets collapsed in response to weak demand and storage constraints, the Federal Government's decision to make childcare services free through to June 28, while a range of other assistance measures have also been announced by local governments and businesses to support households through the COVID-19 pandemic, such as some private health insurers deciding to waive premium increases. Today's report, therefore, provides a snapshot of the inflationary pulse before these factors come through. Tradables inflation (prices of goods and services that are influenced by global factors) have been lifting over recent quarters in line with weakness in the Australian dollar and this is likely to have continued into 2020 given that over the 6 months to the end of Q1 the domestic currency declined by 7.6% in trade-weighted terms and by 8.5% in US dollar terms. The impact of drought conditions driving up vegetable and meat prices have been another factor here.  The main driver of inflation over recent years has come from the non-tradables sector (prices determined by domestic factors), which reflects price increases in 'administered' areas such as utilities, health services, childcare, property rates and charges and public transport fares etc, and this is likely to have remained the case in Q1. 
  

Macro (Re)view (24/4) | Crisis on two fronts

Recent optimism in risk assets was pared back this week as more light was shed on the scale of the toll COVID-19 has dealt on the global economy, firming the sense that this is now a dual health and economic crisis. On COVID-19 itself, global cases continued to rise to around 2.8 million, with the daily pace tracking around 75k over the past couple of weeks, while in Australia daily cases have slowed to a trickle at fewer than 50 for the past 7 days. Policymakers remain under immense pressure to not only formulate effective policy on the run in an uncertain environment but to also ensure efficient implementation. That pressure is being brought to bear by labour markets that are rolling over in rapid time across the globe in response to the impact of shutdowns and social distancing measures.   

Starting domestically, in a speech this week Reserve Bank of Australia (RBA) Governor Philip Lowe outlined tentative details around the Bank's economic outlook for the first half, which was nothing short of sobering. National output growth is expected to contract by 10% through to the end of the June quarter, though most of the damage will be delayed into Q2 coinciding with the impact of government-mandated restrictions and closures. It appears the Bank's central scenario is for restrictions to be gradually eased through the September quarter allowing for a partial recovery over the second half, moderating the contraction through the full year in 2020 to -6%, ahead of a 7% rebound in 2021 as economic activity comes back online. But the process to regain momentum in an economy as complex and integrated as Australia's will not be straightforward and as Governor Lowe highlighted there is an additional layer of uncertainty to consider around business and consumer behaviour that could be fundamentally changed going forward into what will be severe headwinds on both a health and economic front. Adding weight to this view was detail in the ABS's latest COVID-19 survey that highlighted the elevated level of concern households have in relation to the risk that the virus poses to their health, which could persist in the absence of breakthrough on the medical side (see more here). Consider also March's preliminary result for retail sales, with the ABS estimating that turnover advanced by its most on record in a single month at 8.2% (see chart of the week, below) driven by a surge in spending at supermarkets (+22.4%) as households stockpiled essentials and this provides a sense of just how pervasive the COVID-19 crisis can be on mindsets and activity. 

Chart of the week

On the labour market, the RBA anticipates the unemployment rate to hit 10% by June, which would be a doubling over Q2 from its pre-crisis level of 5.2% as covered in last week's review. Data compiled between the ATO and ABS released this week provided an indication of the speed and severity of the deterioration in the labour market with employment falling by 6% between March 14 and April 4, resulting in wages paid over the period rolling over by 6.7%. Heavily impacted by closures and social distancing, employment in accommodation and food services contracted by 25.6%, while arts and recreation sustained an 18.7% fall. The other key insight was that the impact to date appears to have fallen disproportionately on younger Australians, with employment declining by 18.7% across the under 20 and 20-29 years old cohorts and wages paid contracting by a combined 21.8% over the second half of March into early April. 

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Offshore this week the initial (or flash) readings of IHS Markit's Purchasing Managers' Index surveys for April were released providing more clarity on the impact on private sector economic activity from shutdowns in response to COVID-19. In the US, composite activity (including the services and manufacturing sectors) collapsed to an unprecedented level falling from 40.9 to 27.4 (readings < 50 signal contraction), surpassing the depths of the GFC. The services sector PMI plunged from 39.8 to a record low reading of 27.0 with businesses not only hit by shutdowns and social distancing measures domestically but also by similar headwinds offshore that have weighed on external demand. With the future very uncertain it comes as no surprise that confidence in the services sector has collapsed to record lows and staffing levels have been reduced at a rapid pace. For the manufacturing sector, the output PMI plunged from 46.5 to a series low of 29.4 reflecting severe weakness in production and in the order book from clients domestically and offshore. What was first and foremost a human health crisis has now distressingly evolved into an economic crisis highlighted by yet another disastrous initial jobless claims number of 4.4 million coming through this week. In a figure that is near on incomprehensible, 26.4 million Americans (around 16% of the labour force) have lost work over the past 5 weeks leaving the world's largest economy with an unemployment rate that is likely to be pushing towards 20%. At the very least, after two weeks of negotiations, the Senate approved an additional $484bn in aid that will provide a $321bn top up to the Paycheck Protection Program that had been drained of funds as of last week as well as a $60bn carve out for emergency loans to be made available through smaller banks and credit unions often linked with small businesses. In addition, there was a $75bn injection of funding for hospitals and a $25bn allocation to expand testing for COVID-19. In another move designed to keep liquidity pumping, the Federal Reserve (Fed) this week announced it had eased access requirements for banks to its intraday credit lines through to the end of September this year. 

Over in the continent, markets were left disappointed by the outcome of a meeting of EU officials that endorsed a €540bn package in near-term emergency funding to the nations most impacted by the COVID-19 crisis but failed to reach agreement on the more pressing issue of a longer-term recovery fund as discord persists over how much and the type of support it would provide. The more fiscally constrained member states of Italy and Spain had pushed for the aid to take the form of grants, though among those opposing this are Germany, Sweden and the Netherlands who are insisting support must be made via loans. At a time when Italy and Spain have been hardest hit by the COVID-19 outbreak, there are concerns that support via loans will only serve to intensify the debt burden and accentuate the challenges being faced by those economies. On this point, S&P maintained Italy's credit rating at BBB (negative outlook) overnight on Friday but highlighted that it could fall to non-investment grade should government debt fail to move downward over the next few years or if borrowing conditions were to deteriorate, though for the moment the latter is being mitigated by the European Central Bank (ECB) backstopping the situation. The political impasse at the EU level sets a difficult background ahead of next week's ECB policy meeting where there is speculation the Governing Council could follow the Fed by expanding asset purchases to include high-yield credits. Earlier in the week, the ECB announced it was temporarily lowering collateral requirements for banks to its lending operations by freezing the credit rating of each asset as at April 7, which ensures that assets that have since suffered ratings downgrades to non-investment grade will still be eligible, though with the caveat that the asset must not have fallen below a BB rating. In the flash PMI reading for April, composite activity in the euro area declined from 29.5 to just 13.5 to reflect an economy that has all but been shuttered by containment measures to limit the COVID-19 spread. Services sector activity was weaker still stepping down from 26.4 to 11.7 while manufacturing output fell to a record low level of 18.4 from 38.5 in March. Based on these readings, IHS Markit's analysis points to a 7.5% contraction in euro area GDP in Q2. 

Australians adhering to social distancing

The ABS debuted its 'Household Impacts of COVID-19 Survey' this morning with the results indicating that Australians are adhering to social distancing directives in response to an elevated level of concern over the risk posed to their personal health by the pandemic. Last week's labour force data indicated that conditions had not been materially impacted by COVID-19 over the first half of March, though today's survey provided a more timely analysis of the situation indicating that by the end of the month unemployment had risen more precipitously and hours worked had declined sharply.

Vindicating the progress the nation has achieved in flattening its infection curve over recent weeks, today's survey highlighted broad-based compliance with social distancing practices by Australian households. The top three measures being taken were; "Keeping distance from people" (98%), "Avoiding public spaces" (88%) and "Cancelling personal gatherings" (87%). Further down the list was "Working from home" with a little over 40% of all respondents indicating they had shifted to this arrangement.   

Source: ABS

If today's survey is anything to go by, concerns that Australians may become complacent over health risks due to its progress in slowing the rate of infection may be ill-founded. This survey highlighted an elevated level of concern around the risks to personal health posed by the COVID-19 outbreak with 2 out of 3 respondents between 18 and 64 years and 71% of people aged 65 and over saying they were either "concerned or very concerned" about the situation. Last week, Westpac and Melbourne Institute reported that consumer sentiment according to their monthly index had collapsed by its most in a single month (-17.7%) in April with an extreme level of pessimism over the economic outlook for the next 12 months evident. The mix of elevated health-related concerns, particularly in the absence of a vaccine, and a downbeat view on the economy indicates that even if social distancing measures are soon eased to some degree, activity in a more re-opened economy will be coming up against dual headwinds of severe intensity. 

  Source: ABS 

On the labour market, 63% of respondents reported they were in a job in the first week of April, down 3 percentage points from the start of March. However, even for those still in work in April, there had been a notable impact on hours worked with the proportion of employees engaged in paid hours falling by 8 percentage points over the month from 64% to 56%. Furthermore,  the proportion of workers still employed but not working paid hours lifted by 5 percentage points to 8% by the first week of April. Overall, the survey indicated that 26% of respondents were now working fewer hours than they were back in March, with nearly all of that group saying it was due to COVID-19 (see chart, below). On the other hand, 12% of respondents said there were now working more hours as a result of the COVID-19 crisis. Meanwhile, 61% of respondents said they had not had their work hours impacted one way or another.   

  Source: ABS  

The Household Impacts of COVID-19 Survey is based on a sample of 3,000 households, with the ABS reporting it received responses from 1,158 households (around 39%).     

Macro (Re)view (17/4) | Against a wall of uncertainty

Progress on the health front in the fight against COVID-19 continued this week, though attempts by authorities to provide an indication on when economies could potentially reopen seemed premature at a time when restrictions were being extended in New York, Germany and the UK, while in Australia existing measures were set to remain in place for at least another 4 weeks. Nevertheless, markets continued to remain optimistic that economies would soon reopen and that activity would snapback sharply when they did, even with a data flow that was full of warning signs. This week, the International Monetary Fund released its latest outlook with its baseline forecast for global GDP growth to contract by 3.0% in 2020 — in its previous update before the COVID-19 crisis emerged the group had expected output in 2020 to rise by 3.3% — ahead of a 2021 rebound of 5.8%. In effect, the IMF anticipates a v-shaped recovery on the basis of the virus being contained by the second half of this year allowing activity to come back online, turbocharged by earlier monetary and fiscal policy support. However, the group acknowledged the risks around that outlook were to the downside with visibility around the nature of activity in a post-COVID-19 global economy highly uncertain. 

Speaking to this caution, Australian business and consumer surveys this week revealed the significant damage the COVID-19 outbreak has inflicted on sentiment and activity. The NAB's Business Survey for March showed confidence amongst firms collapsed in the month from a reading of -2 to -66 to its weakest level on record in response to the impact of social distancing measures on trading and an uncertain outlook. Business conditions fell by their most in the history of the survey from 0 to -21 to be around the level that prevailed during the GFC, while each of the sub-indexes declined precipitously; trading from +4 to -19, profitability from -5 to -27 and employment from +1 to -20. While that provides an insight into the perception of the prevailing situation, the near-term outlook was just as pessimistic highlighted by a plunge in forward orders and capacity utilisation to very low levels. 

The crisis is also taking a severe toll on households as the Westpac Melbourne Institute's Index of Consumer Sentiment slumped by 17.7% in April — its sharpest month-to-month decline in the survey's 47-year history — to a reading of 75.6, which at that level is around what prevailed during the recessions of the early 1980's and early 1990's (see chart of the week, below). As Westpac's Chief Economist Bill Evans highlighted, the difference on this occasion is that the plunge to the current level has occurred in just a single month whereas it took a period of around 2 years to reach its trough in the 1991 recession. Unsurprisingly, consumers' pessimism around the economic outlook over the next 12 months is extreme falling by 31.0% in April's reading to a level comparable with the GFC and the aforementioned recessions. On the back of this, unemployment expectations lifted by 8.2%, the 'time to buy a major household item' index plunged by 31.6% and views on family finances going forward deteriorated by 6.6%. Sentiment towards the housing market has also retraced to GFC levels as consumers severely downgraded their assessment for house price expectations (-50.8% to 69.7) and time to buy a dwelling (-26.6% to 82.1).

Chart of the week 

In other news locally, Australia's labour market report released during the week was expected to show the initial signs of deterioration in response to the disruption caused by COVID-19 but in a curious result, employment was reported to have advanced by 5.9k in March against an anticipated fall of 30.0k, while the unemployment rate lifted from 5.1% to 5.2% but was below the 5.4% level expected (reviewed here). In short, the explanation for the result was that March's survey related to the first two weeks of the month, which was before the implementation of the more stringent social distancing measures that are now in place. With the report relating to initial conditions, the labour market was softening going into the crisis with employment growth having slowed materially over the past six months and with spare capacity rising a little further in March with the underemployment rate lifting to its highest since February 2017 at 8.8% and underutilisation more broadly touching a 2-year high. Clearly, with the COVID-19 impact being held over to April's report, the unemployment rate will surge higher on the back of the widespread job losses that occurred as businesses were forced to close or as they saw demand dry up.

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Moving to events offshore, GDP growth in China contracted by 9.8% in a shutdown-impacted March quarter — markets had forecast a 12.0% fall — following the initial outbreak of COVID-19 as growth in year-on-year terms swung from 6.0% to -6.8% (vs -6.0% expected) to its weakest since official data were collected in 1992. Due to the uncertainty over the outlook in response to the crisis, authorities in Beijing never officially announced a growth target for 2020. Released alongside the report, retail sales collapsed falling by 15.8% through the year to March (vs -10.0% expected) on notable weakness in restaurants and clothing that took the brunt of social distancing measures. Also disappointing estimates was fixed-asset investment which fell by 16.1% year on year to the March quarter (vs -15.1% expected) driven in the main by weakness in private sector investment. Meanwhile, industrial production declined by 1.1% through the year to March, though this was against an expectation for a much larger fall of 6.2%. Ahead of what was expected to be a poor set of data, the People's Bank of China injected 100bn Yuan of liquidity into its financial system and lowered its Medium-term Lending Facility rate by 20 basis points. Looking ahead, the IMF forecast was for GDP growth in 2020 to come in at 1.2% before rebounding to 9.2% in 2021. 

Over to the US, President Trump unveiled guidelines for the reopening of the economy but said the decision would ultimately be one to be taken by state authorities rather than through a federal directive. Washington was also in focus after the $350bn it allocated for small business loans in its economic support package was drained not even two weeks since inception and attempts to top up the program were being delayed. This facility was set up by the Small Business Administration to offer loans to firms through banks to help them keep employees on the payroll through the COVID-19 crisis, which would be forgiven if all employees were retained for at least 8 weeks and the funds were used to cover payroll, rent, utilities or mortgage interest expenses. This comes at a time when significant damage continues to be dealt on the economy highlighted by another 5.2 million people filing for unemployment benefits over the week to April 11. Over the past 4 weeks, an astounding 22 million US citizens have fallen out of work. To put this in context, it took the US 113 consecutive months of employment growth between October 2010 to February 2020 to create that many jobs. With unemployment surging and social distancing measures in place, retail spending plunged by its most on record in a single month falling by 8.7% in March to be down by 6.2% through the year. In the state hit hardest by the COVID-19 outbreak, New York, the Empire State Manufacturing Survey showed activity in the sector collapsed to its lowest level on record in April with both new orders and shipments going into freefall. 

On Europe, the IMF's forecasts pointed to a dire outlook for the bloc with GDP growth anticipated to contract by 7.5% in 2020 with only a modest recovery of 4.7% penciled in for 2021. Taking a more granular view of the situation, due to the scale of the crisis in Italy and Spain the economic damage will be more severe with contractions of 9.1% and 8.0% respectively this year ahead of recoveries in 2021 that are forecast to lag behind the bloc as a whole. Economic growth in Germany and France is expected to fall by around 7% in 2020 and then lift by around 4.5-5% in 2021. However, for now, the euro area is still trying to work its way out of the health crisis before economies can come back online and that path remains clouded as Germany this week pushed out the timing of its shutdown to May 3. Lastly, the European Central Bank announced it was temporarily lowering banks' capital requirements for market risk for the next 6 months to preserve liquidity and market-making activities.   

Australian employment +5.9k in March; unemployment rate 5.2%

Australia's labour market report for March was expected to reveal the early-stage impacts from the COVID-19 outbreak, though this ended up being obscured by timing issues as the narrative pivoted to one which highlighted that conditions were softening ahead of the crisis. 

Labour Force Survey — March | By the numbers

• Net employment lifted by 5.9k (seasonally adjusted) in March going against an expected fall of 30.0k. February's initially reported increase of 26.7k was revised down to 25.6k. 

• The national unemployment rate lifted from 5.1% to 5.2%, though it had been expected to rise to 5.4%.
• Both the underutilisation rate (from 13.8% to 14.0%) and the underemployment rate (from 8.7% to 8.8%) increased in March. 

• Participation in the workforce in March remained unchanged at 66.0%, whereas the median estimate looked for an easing to 65.9%. 

• Aggregate hours worked lifted by 0.5% in March to 1.78bn hours after declining in the two months prior, while annual growth ticked up from 0.6% to 0.7%.

Labour Force Survey — March | The details

As highlighted in our preview, the reference weeks for March's Labour Force Survey occurred over the first half of the month — before the implementation of more stringent government-mandated social distancing measures that resulted in the closure of restaurants and cafes, licensed premises and sporting venues. The ABS produced a useful diagram to help articulate the constraints it had in not being able to capture these and other factors such as the government's wage subsidy policy announcement in March's survey (see below).  

Source: ABS

However, while these impacts were not reflected in March's report, labour market conditions were clearly weakening going into the crisis. A closer look at the details shows that the labour force increased by 26.2k in the month and with employment rising by 5.9k, the total of unemployed lifted by 20.3k. 

As a result, the national unemployment rate (at two decimal places) lifted by 0.14ppt from 5.09% to 5.23%, which mostly unwound its 0.2ppt decline achieved in February. For context, forecasts by Treasury earlier this week revealed that COVID-19 crisis is expected to see the national unemployment rate rise to a peak of around 10.0% in Q2. An elevated level of spare capacity has persisted in the nation's labour market over recent years and this incresed a little further in March with underutilisation lifting by 0.24ppt to 14.01% to a two-year high and underemployment increasing by 0.1ppt to 8.77% to its highest since February 2017. 

         

Not only was spare capacity on the rise ahead of the COVID-19 crisis; employment had also entered a period of materially slower growth. The chart, below, highlights this point with employment lifting by a net 44.3k in the March quarter following a soft Q4 in 2019 of 39.1k; both well down from an average increase of 76.7k over the preceding 4 quarters. 

Looking further into March's 5.9k increase in employment, this was driven entirely by a 6.4k rise in the part-time segment as full-time work declined by -0.4k. As a snapshot of where the situation stood before the COVID-19 crisis, employment growth in annual terms was tracking at a three-year low of 1.8%, amid a bifurcation between the part-time segment at 3.4%yr and a full-time space that had slowed to a 36-month low of 1.0%.

Aggregate hours worked were expected to show signs of deterioration in March but in the event, it actually lifted by 0.5% to 1.78bn hours. Meanwhile, annual growth was little changed at 0.7%. Adjusting for the 5.9k increase in employment, average hours worked per employee advanced by 0.4% to 137.1 hours. 

       

Turning to the states, employment outcomes were mixed in March with advances in Victoria (+13.3k), South Australia (+3.5k) and New South Wales (+1.5k) as Western Australia (-6.2k), Queensland (-5.6k) and Tasmania (-2.7k) declined. In a modest Q1, employment was led by Western Australia (+12.0k) and Queensland (+11.8k) with smaller gains coming from South Australia (+7.9k), Victoria (+7.1k) and New South Wales and Tasmania each recording a 2.1k rise. Victoria led employment growth over the year to March contributing 73.8k jobs to the national total of 227.7k.   

   

Victoria was the only state to record a decline in its unemployment rate in March falling from 5.3% to 5.2%. Tasmania's held steady at 5.0% but all other states recorded increases, with New South Wales +0.2ppt to 4.8%, Queensland +0.1ppt to 5.7%, South Australia +0.4ppt to 6.2% and Western Australia +0.2ppt to 5.4%. 

Labour Force Survey — March | Insights

As March's survey was taken too early to reflect the early stages of the COVID-19 impact, the main takeaway from today's data is that intial conditions in the Australian labour market were softening ahead of the crisis with spare capacity becoming more elevated and employment growth slowing. It also means we need to steel ourselves for what will be an even more severe deterioration in April's data that could show the unemployment rate surging up by several percentage points. Also expect hours worked to decline sharply to reflect lower employment and disruptions to working arrangements.    

Preview: Labour Force Survey — March

The first indication of the impact of the COVID-19 outbreak on the Australian labour market will be at hand later this morning when the ABS publishes its Labour Force Survey for March at 11:30AM (AEST). Based on the median estimate, employment is expected to record its worst result in a single month since December 2013 with a contraction of 30.0k, while the unemployment rate is expected to rise to a 21-month high of 5.4%. 

As it stands | Labour Force Survey

Ahead of the COVID-19 crisis, the Australian labour market was in reasonable shape. Employment outperformed the consensus estimate for the fourth straight month with a 26.7k advance in February and employment growth was robust at around a 2.0% annual pace. The unemployment rate reversed its rise from the month prior declining from 5.3% to 5.1%, though it was still well above the RBA's estimate of full employment (around 4.5%) and spare capacity in the labour market was historically elevated with the underutilisation rate at 13.7% and the underemployment rate at 8.6%. This, in part, continued to reflect a near-record high level of participation in the workforce at 66.0%. Hours worked softened for the second straight month, with the aggregate level declining by 0.2% in February, which slowed annual growth from 0.9% to 0.5%. For a complete review of February's report see here. 

Market expectations | Labour Force Survey

By way of background, the ABS's Labour Force Survey in effect reflects conditions over the first two weeks of each month, which in this case was before the more stringent tightening of social distancing measures occurred, most notably the closure of cafes and restaurants, licensed premises and sporting venues that then had spillover impacts across the retail sector. This was also ahead of the government's $130bn wage subsidy policy announcement. It is likely that firms in these industries had already started to cut employees' hours and or stand down staff ahead of the government-mandated announcement. Given the lack of visibility over the situation, economists' expectations for today's report vary widely. The median call is for employment to fall by 30.0k, though individual estimates are as pessimistic as a -125.0k collapse on the low side to a -15.0k decline on the high side. The consensus view is for the unemployment rate to rise to 5.4% from 5.1%, between a range of estimates from 5.0% to 5.9%. Where that lands will depend greatly on what occurred to the participation rate; while notoriously difficult to predict, the median estimate looks for a 0.1ppt decline to 65.9%.

What to watch | Labour Force Survey

Away from the headline employment outcome, there are two areas to acknowledge. Firstly, it is important to understand that the unemployment rate will likely be artificially low in this report given the timing issue discussed above and also how a respondent's absence from work will be classified. A worker will still be classified as employed even if they have been on a period of unpaid leave of up to 4 weeks so long as they believe they will have a job to return to. If that is not the case, the worker will need to have commenced searching for and be available to work to be included as being within the labour force. Secondly, because of these issues, the ABS has indicated that the clearest sign of disruption to the labour force from the COVID-19 crisis is likely to come from the hours worked data. Recently the ABS commenced profiling the reasons for employees working fewer hours than usual (see here). Those insights for March are due to be published by the Bureau on the 23 April. 

Macro (Re)view (9/4) | Markets ahead of the curve?

While the global economic outlook remains highly uncertain and precarious, markets were given every reason to turn to the positives this week on signs of flattening in the COVID-19 infection curves in Europe and the US and extraordinary actions by central banks to address liquidity concerns. However, visibility around exit plans from shutdowns remains very limited and in the meantime, economic activity and labour markets continue to take a beating.    

To Australia, the public health authorities appear to be achieving meaningful progress in slowing the COVID-19 spread as social distancing measures were tightened a little further ahead of the Easter long weekend. Meanwhile, the Federal government's $130bn wage subsidy — its key fiscal response to counter the crisis — was voted into law, providing affected workers of impacted businesses with payments of $1,500 per fortnight for the next 6 months. Entering the strongest economic headwinds the nation has encountered since the downturn of the early 1990s, fiscal support has been ramped up at full-throttle to $193.8bn (around 10% of GDP). The increase in public debt amid a significant deterioration in economic conditions prompted ratings agency S&P to revise its outlook on Australia from 'stable' to 'negative' this week, though the AAA credit rating remains intact given that the impact on the fiscal position was assessed as likely to be temporary. As Reserve Bank of Australia Governor Philip Lowe highlighted in his post-meeting decision statement this week, the scale of that deterioration in economic conditions will be severe with a large contraction in output expected in the June quarter, while the unemployment rate was anticipated to rise to "it's highest level for many years". The decision of the meeting itself went as expected with the Board maintaining its targets for the cash rate and 3-year yield, both at 0.25% (reviewed here). More notably, Governor Lowe's comments around the Bank's bond-buying program pointed to the success it had achieved in keeping the 3-year Commonwealth yield anchored around its target and in restoring liquidity to that market; so much so that the pace of purchases was likely to "smaller and less frequent" should conditions continue to improve. Our chart of the week (below) shows that since inception, daily purchases of Commonwealth government bonds has progressively stepped lower from $5.0bn on March 20 to $1.5bn by April 9. 

Chart of the week

The RBA also published its semi-annual Financial Stability Review this week, in which it outlined that while COVID-19 posed risks to the financial resilience of households and businesses, the financial system was overall "well placed" to withstand this shock through a strong banking system and government measures to guard against balance sheets becoming impaired. On households, high debt levels and elevated housing prices were noted as "longstanding risks" to financial stability, though there were signs in February's housing finance data that the upswing from mid last year was starting to roll over before the onset of the COVID-19 crisis (see here). The RBA noted the ability of firms to weather the downturn would be assisted by their low levels of gearing and holdings of liquid assets, but as highlighted in this week's ABS COVID-19 business survey this would not be before significant impacts to cash flow and workforce arrangements (see here). Lastly, the nation's trade surplus moderated to $4.36bn in February, largely reflecting a 14.8% side in earnings from tourism in response to government restrictions on non-residential arrivals from China (see here).

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To developments offshore where in the US filings for unemployment support recorded another shock rise of 6.6 million through the week to April 4, taking the total of job losses over the past 3 weeks to a sobering 16.8 million — the equivalent of around 11% of total employment erased in response to the shuttering of the economy to limit the COVID-19 spread. Extraordinary times call for extraordinary measures and that describes precisely the actions of the Federal Reserve this week through the announcement of $2.3tn in lending facilities. In a speech following the announcement, Chair Jerome Powell said these actions were taken to "safeguard financial markets in order to provide stability to the financial system and support the flow of credit in the economy". Accordingly, these latest measures include; an $850bn expansion in corporate credit purchases, most notably making eligible debt that was investment-grade rated as of March 22 but was then downgraded to BB- as well as exchange traded funds tracking investment-grade debt with some exposure to high yield credit; providing small and medium-sized businesses with up to $600bn in loans through the banking system; it will directly purchase up to $500bn in short-term notes issued by states (population of at least 2 million) and cities (population of at least 1 million); and it will supply liquidity to those financial institutions that are facilitating loans to small businesses under the government's Paycheck Protection Program that aims to keep workers on the payroll through the crisis. This extraordinary level of support came as the Senate was unable to reach an agreement over a second relief package to provide further aid to small businesses as well as emergency funding for hospitals and states. 

Over in Europe, after a week of protracted negotiations, EU finance ministers agreed to a €540bn assistance package for an economy that has been battered by COVID-19. The package aims to help the hardest-hit nations with €240bn in assistance from the European Stability Mechanism (a bailout fund established during the eurozone debt crisis) for health-related and prevention purposes, a €200bn facility from the European Investment Bank for loans to businesses, and €100bn for employment assistance. There had been hopes by nations in fiscally weaker positions for ministers to agree to the eurozone issuing a common bond to spread out the impact, though that proposal failed to gain broad-based support. For its part, European Central Bank President Christine Lagarde outlined in a blog post that with the economy going into an enforced pause, its large-scale lending facility and asset purchase programs were intended to ward off business insolvencies and prevent an even more precipitous rise in unemployment that would have a lasting impact on the bloc well after the crisis passes. In the UK, the Bank of England has turned to an emergency measure effectively opening the door for it to provide the government with monetary financing during the COVID-19 crisis.