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
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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.
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.
