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.
