Focusing on developments in Australia, it was a significant week on the fiscal front in efforts to counter covid-19. Following an initial support package of $17.6bn on March 12 that was then upscaled to $63.8bn on March 22 (reviewed here), Federal Treasury more than doubled those measures through the announcement of a $130bn wage subsidy (reviewed here). In total, fiscal support to the Australia economy has risen to $193.8bn (10.2% of GDP) over the period out to 2023/24, though the bulk of this is concentrated through the remainder of 2019/20 and then into 2020/21, with our estimates indicating the impact over this period will equate to a little above 20% of GDP. The wage subsidy bill is a hugely significant policy announcement intent on limiting a precipitous rise in unemployment by keeping workers linked to their employers through the period of the crisis, while at the same time providing workers with an income replacement for lost wages. The reach of the package is vast, with businesses of turnover of less than $1bn able to qualify if revenue has fallen (or is likely to) by 30% over their usual reporting period (1 or 3 months) compared to a year ago, while for firms with turnover exceeding $1bn that requirement is raised to a 50% fall in turnover, while self-employed workers can also participate. The 'JobKeeper' policy is back-dated to March 1, such that for each eligible employee on the books of a qualifying business on that date, the government will subside their wage by $1,500 per fortnight for up to 6 months from April onwards. By design, the policy aims to keep unemployment at bay by maintaining the employer-employee link through the crisis, giving businesses the chance to turn the key and reactivate operations quickly once the disruption clears. Treasury's estimates are that around 6 million employees (equating to around 44% of the labour force) will receive the JobKeeper payment. In a further boost for households, the government announced a $1.6bn assistance package for the childcare sector that will offer families access to free childhood education and care services for the next 6 months.
The fiscal response followed sweeping policy changes made by the Reserve Bank of Australia at its special policy meeting 2 weeks ago where the cash rate was lowered to 0.25%, quantitative easing was started and a $90bn liquidity facility to the banking sector was announced. The Board's minutes from that meeting were released this week which highlighted the close level of coordination occurring between the Bank and governments at a federal and state level to support the economy through the covid-19 shock. Next Tuesday, the Board meets again where it is no longer a question of rates with the cash rate at the Effective Lower Bound. Instead, its focus will be around the effectiveness of its quantitive easing measures, which it will likely view favourably given the 3-year Commonwealth Government yield has been anchored around its 0.25% target since the policy was implemented. The domestic data flow this week related to the period pre-covid-19 but provided insight into conditions going into the crisis. According to CoreLogic, national dwelling prices were gathering strong momentum increasing by 0.7% in March and by 7.5% over the year, though activity in the market will be curtailed going forward given that open house inspections and auctions are prohibited under social distancing restrictions. Similarly, despite snapping back with a 19.9% rise in February, building approvals are at risk of rolling over in the near term and that would weigh on the residential construction sector that is already in a downturn (reviewed here). Meanwhile, retail sales rebounded from a bushfire-impacted January (-0.3%mth) posting a stronger-than-anticipated rise of 0.5% in February in response to strong spending in supermarkets that was likely due to stockpiling ahead of covid-19 but significant weakness lies ahead for the sector due to social distancing and store closures (reviewed here).
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Turning the focus offshore, the scale of the crisis in the US was rammed home by a labour market that is in freefall due to shutdowns and disruptions caused by covid-19. After 113 consecutive months of employment gains dating back to late 2010, employment on non-farm payrolls collapsed by 701k in March; significantly worse than the 100k fall anticipated and the sharpest decline in a single month in 11 years. This resulted in the unemployment rate spiking from 3.5% to 4.4% — its highest since August 2017 — even as participation in the workforce pulled back from 63.4% to 62.7% in response to deteriorating conditions. Extraordinarily, the reference period on which this payrolls report was based pre-dated government-enforced shutdowns as the covid-19 spread widened. In the period since, the number of US citizens filing for unemployment benefits has exploded, with an eye-watering 3.3 million claims coming through in the week ending 21 March, only to be left in the dust of a 6.6 million surge for the 7 days through to March 28. Together, these reports indicate that in just 14 days, unemployment in the US surged by 9.9 million. To put that into perspective, that figure is around 6.5% of the labour force so based on March's payrolls report, the 'live' unemployment rate in the US is in the order of 11%; a level higher than the 10.0% peak it reached after the financial crisis. Predictably, with the US economy shuttered, last week's dire preliminary reads on activity levels in IHS Markit's PMI survey were confirmed on Friday. The composite index (combining services and manufacturing) slumped to 40.9 in March from 49.6 in month prior (readings < 50 signal contraction), indicating that the US economy contracted by an annualised pace of around 5% in Q1, according to IHS Markit. Activity in the services sector has collapsed (from 49.4 to 39.8) as businesses closed and demand conditions weakened. Against this deteriorating backdrop, the Federal Reserve continues to ramp up its support through the rapid expansion of its balance sheet that has risen by $1.1tn in the past 2 weeks alone to sit at $5.8tn (see chart of the week, below). The Fed also made a policy announcement this week establishing a temporary repurchase agreement facility that follows its recent success with its swap lines and will allow other central banks to temporarily exchange Treasury holdings for US dollars to ensure ongoing liquidity conditions remain favourable.
Chart of the week
Across the Atlantic, the stop in activity in the euro area economy was even more severe than last week's data implied. IHS Markit's composite PMI pointed to an economy expanding at a modest pace of 51.6 in February but there had been a complete reversal by the end of March to 29.7 in response to containment measures brought on by governments to contain the covid-19 spread. Analysis by IHS Markit indicated that GDP growth in the bloc is currently contracting by an annualised pace of 10.0%, with steeper falls expected to come through as activity in the services sector is effectively shuttered. Unsurprisingly, the detail at the country level is dire with activity in Germany (35.0), France (28.9), Spain (26.7) and Italy (20.2) all at record lows. The hard data through the week was all from the period pre-covid-19 shutdowns, with the unemployment rate in the bloc entering the crisis at 7.3% in February, down by 0.1ppt on the prior month, and retail sales volumes advancing by 0.9% month-on-month in February to be up by 3.0% through the year.
Lastly in Asia, activity surveys in China that had plunged to record lows in February as the early outbreak of covid-19 ground the economy to a halt snapped back in March; the official manufacturing PMI bouncing from 35.7 to 52.0 and the services gauge from 29.6 to 52.3. Though these reads might suggest activity has recovered quickly, they mainly reflect a rise in sentiment in March compared to February when factories and businesses were locked down rather than an expansion of output. Significant headwinds will continue to impact the world's second-largest economy because with shutdowns now in force across the globe this will hit demand for its exports.
