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.