Macro (Re)view (15/5) | Re-opening and support now key

The relative success Australia has achieved in containing and limiting the spread of the coronavirus is notable and, should things remain that way, the nation will be given its best chance of reducing the severity and duration of the economic downturn. Unavoidable as it was, significant damage has already been inflicted on the economy as seen in this week's employment report for April, though the positives are that fiscal support is providing an invaluable safety net for many Australians at a time of duress and the initial stages of the recovery are beginning to occur earlier than had been anticipated, with most states now moving through a gradual easing of restrictions. 

That the labour market collapsed as a result of COVID-19 crisis would have surprised no-one, but neither does that mean it was any easier to take. April's Labour Force Survey was devastatingly poor and it should now be clear just how critical it is to make it through this next phase of the crisis as economic activity comes back online sequentially without having to lapse back towards lockdowns. In by far the worst result ever recorded, the ABS reported that 594.3k jobs were lost in April; the rise in the unemployment rate of 1 percentage point to 6.2% would ordinarily be considered an increase of extreme magnitude, but in this context, it vastly underrepresented the reality (reviewed here). This was because 489.8k workers were considered to have exited the labour force in the month (therefore making them ineligible to be classified as unemployed), resulting in the participation rate falling from a near-record high of 66.0% to a 15½-year low of 63.5%. Part of this relates to changes to the JobSeeker payment with the usual requirement of recipients being obliged to look for work appropriately waived because of the pandemic. The severity of the damage to the labour market was better reflected by the surge in underemployment (from 8.8% to 13.7%) and underutilisation (from 14.1% to 19.9%) to record highs. Most accurately though, the full force of the impact from COVID-19 was highlighted by the collapse in hours worked (see chart below), which saw record contractions in the month (-9.2%) and over the year (-8.0%).

Chart of the week  

Highlighting the extraordinary level of support currently being provided to households, in a press conference after the report, Prime Minister Scott Morrison and Treasurer Josh Frydenberg confirmed that some 6 million workers had qualified for the JobKeeper (wage subsidy) scheme and another 1.6 million had qualified for the JobSeeker payments. All up, that equates to around 55% of the size of the labour force in the month directly before the crisis hit. It will be of extreme importance for the government to consider how these schemes will progress in the months ahead, but it must already be clear that with the re-opening occurring sequentially, a cliff edge date for either reducing the level of support (in JobSeeker) or ending it completely (in JobKeeper) towards the end of the September quarter would be far too great a fiscal shock for an economy the RBA forecasts will be in the early stages of recovery after having contracted by around 10% through the first half to handle. Consider also that wages growth was moderating even before this crisis emerged as the Wage Price Index slowed from 2.2% to 2.1% in annual terms in Q1 (see here). 

The good news from the week was that the mood among consumers had improved sharply in early May compared to a month earlier. After posting a record decline of 17.7% in April the Westpac-Melbourne Institute Index of Consumer Sentiment rebounded with a record rise of 16.4% in May, with the overall level improving from 75.6 to 88.1 but still firmly in the pessimistic range of below 100, indicating an understandable degree of caution remains evident. Nonetheless, it is the rate and direction of change that provides optimism, which  Westpac's Chief Economist Bill Evans attributed to the Federal government unveiling its Three-Stage Plan to roll back restrictions. Importantly, consumers' perceptions of the labour market turned notably sensing that the easing of restrictions will allow affected workers to either resume or find employment. However, a more optimistic consumer survey needs to weighed against another dire result from the NAB's Business Survey where confidence remains extremely weak at a reading of -46 (from -65), while the conditions index worsened to -34 to -22 to reflect a further deterioration across the sub-indexes of trading, profitability and employment. Note this survey related to April and was taken between the 23 and 30th of that month, so it would be reasonable to forecast some improvement in May's report.  

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Events of most focus offshore this week were in the US as tensions with China ratcheted up over the latter's handling of the COVID-19 outbreak, Federal Reserve Chair Jerome Powell gave a notably downbeat update on the economy as the issue of negative rates came on the radar again and there was more historically weak data. In an address hosted by the Peterson Institute for International Economics, the key aspect of Chair Powell's speech was to push the need for longer-term fiscal support at the risk of sustaining irreparable structural damage to the economy. Chair Powell reiterated the Fed's actions in response to this crisis have been aimed at providing relief and stability, including restoring proper functioning in key financial markets that had become impaired as well as measures to support the flow of credit to the real economy for governments, businesses and households. While these actions can address liquidity issues they can do little to ward off insolvency, which Chair Powell outlined can lead to lasting damage to the economy through lowering its productive capacity, discouraging investment and expansion and weighing on jobs growth and incomes. In particular, Chair Powell focused on the disproportionate shock already sustained by low income households with the Fed's latest survey on households' economic well-being released this week. 

On the data front, US retail sales fell by their most on record in a single month with a 16.4% decline in April as all sub-categories sustained significant contractions highlighted by the near evaporation of clothing sales (-89.3%m/m). A very significant miss on expectations was recorded in 'control group' sales (which excludes autos, gas and building materials and is more closely aligned with consumer spending for GDP purposes) -15.3%m/m vs an expected decline of 5.0%. Also recording a record decline in April was industrial production down 11.2%m/m reflecting the significant damage the supply side of the economy has also suffered in this crisis. Not surprisingly given the recent plunge in oil prices, headline inflation fell sharply in April to 0.3%Y/Y from 1.5% and from 2.1% to 1.4%Y/Y on core CPI. Perhaps it was the expectation for low inflation reads to become the norm that the idea of the Fed going to a negative policy rate gained traction in the markets this week, though Chair Powell maintained this was not a course of action it would take.

In Europe, the second estimate of GDP growth for the March quarter showed a 3.8% contraction — its largest quarterly fall in history — with the annual pace revised to -3.2% from -3.3%. Across the bloc, the impact of the COVID-19 outbreak was significantly greater in Italy (-4.7%q/q), Spain (-5.2%q/q) and France (-5.8%q/q), while Germany contracted 2.2% in Q1. Employment in the euro area contracted by 0.2% in the March quarter, which was its first quarterly decline in 7 years ahead of a much greater impact in Q2. In the UK, economic activity contracted by its most in a quarter since the GFC with a 2.0% fall in the March quarter as annual growth fell from 1.1% to -1.6% — its weakest since Q4 2009. Similar to the Fed, Bank of England Governor Andrew Bailey said this week that while it would not completely rule out going to a negative policy rate setting, it was "not something we are currently planning for or contemplating".