At Friday's NPC, China jettisoned its usual practice of announcing an annual GDP growth target due to the uncertainty brought on by the pandemic as the authorities outlined their plans to support the economy through this shock. Here, the focus will be on investment in infrastructure, with local governments to issue CNY3.75 billion in special bonds this year, as well as jobs with a target to create 9 million jobs in urban areas severely affected by shutdowns to lower the unemployment rate down to around 6%. The authorities said its fiscal deficit will widen to over 3.6% of GDP from 2.8% a year ago, although that estimate excludes the special bond issue and the initial reaction from the markets indicated that the measures had missed the mark. Staying in Asia, at an unscheduled meeting, the Bank of Japan announced a new funding facility of around 75 trillion yen that will incentivise banks to facilitate emergency loans to small and medium-sized businesses. This came after the Japanese economy contracted by 0.9% in the March quarter following on from a sharp 1.9% fall in Q4, with the nation being in the unfortunate position of having had typhoon Hagibis and a sales tax increase arrive just ahead of the pandemic.
Over in the US, the focus once again was on the Federal Reserve where the issue of negative rates remains on the radar for markets. However, as far as the Fed goes their messaging on the issue was unchanged this week as a host of influential FOMC members reiterated that current policy settings were seen as appropriate and working effectively. The minutes from the FOMC's meeting held in late April were released this week and while they did not specifically address negative rates, insight was provided into the Committee's thinking around potential future policy changes. In particular, it noted that it could turn to a more explicit form of forward guidance, where it would either specify certain objectives (such as progress in lowering the unemployment rate or in meeting the inflation target) or provide a certain timeframe that would need to pass before consideration would be given to raising rates. Another possibility discussed was around stepping up its purchase of treasury securities to keep yields at the long end of the curve low. Most tellingly, however, was the option presented by "a few participants" to move towards a form of yield curve control that would aim to keep yields "at short- to medium-term maturities capped at specified levels for a period of time". On the banking sector, the Committee highlighted the importance of upcoming stress tests that would provide a gauge of the ability of the major financial institutions to withstand the economic downturn ahead, with "a number of participants" noting that regulators "should encourage banks to prepare for possible downside scenarios by further limiting payouts to shareholders".
In Europe, the main development over the past week was the agreement between German Chancellor Angela Merkel and French President Emmanuel Macron to present a plan for debt mutualisation to be voted on by EU leaders that would involve the membership issuing €500bn in common bonds to provide funding via grants to the nations most imperiled by the COVID-19 crisis. Germany had previously been resistant to such a plan, though the change in stance appears to have come in response to the threat of divisions within the EU widening. However, while it is a step in the right direction, those concerns are far from resolved with nations including Austria, Netherlands, Denmark and Sweden remaining insistent that support must be made via loans rather than grants. As far as economic conditions go, IHS Markit's flash PMI reading for the eurozone improved to 30.5 in May rising off a record low of 13.6 in the month prior. While the group still anticipates GDP growth in the bloc to contract by around 10% through the year to the June quarter, the survey provided a sign that the severity of the shutdown was on the path to moderating. The gain in the headline reading was matched by advances in conditions in both the services (from 12.0 to 28.7) and manufacturing sectors (from 18.1 to 35.4).
Turning to Australia, news came through that the Treasury and the ATO had uncovered reporting errors by around 1,000 businesses participating in the government's JobKeeper (wage subsidy) scheme, while its initial forecasts on the take up had also proven to be overly pessimistic. As a result, the Treasury has significantly revised its estimates of the coverage and cost of the policy. Whereas it had initially anticipated 6.5 million workers to be covered by JobKeeper that number has now fallen to 3.5 million workers, while the cost has almost halved from $130bn to $70bn. In last week's review, we highlighted the risks posed to the economy in ending fiscal support of this size on a cliff edge date. In the event, the government now potentially has $60bn in policy flexibility (3% of annual GDP), where for example it could consider either broadening access to the policy or lengthening its duration for the sectors that will still be in need of support after the September 27 finish date. There is a range of possible interpretations as to what the lower-than-forecast take up reflects, though the most plausible explanation would appear to be that fewer businesses either sustained or were expecting to sustain falls in revenue significant enough to meet the threshold for eligibility to the scheme.
This additional policy flexibility is likely to be highly advantageous for the government at a time of extreme uncertainty. With the re-opening of the economy occurring in a sequential manner, it will become clear over time which are the sectors that will either require or be in need of more support. The minutes from the RBA's May Board meeting highlighted that its policy measures were "working broadly as expected", though in a similar tape to the message that has been coming from the major central banks across the globe in recent times, Governor Philip Lowe's noted in his remarks to the FINSIA Forum on Thursday that there is a "limit to what can be achieved with monetary policy". Governor Lowe also touched on one other key but intangible aspect to the recovery being confidence of people — that they can re-engage in normal activity without the fear that the virus will pose an undue health risk and that better economic times will be ahead. When confidence is the issue there are no easy fixes and the ABS's latest household survey on the impacts of COVID-19 highlighted some of the prevailing complexities in this area (see here). In the week's main data point, the preliminary estimate of retail sales in April pointed to the sharpest monthly decline on record of -17.9% as the impact of lockdowns hit the sector and came immediately after a rise of unprecedented strength (+8.5%) in March that was driven by stockpiling of food and other essentials. Such was the severity of the month to month swing, it eclipsed the volatility around the time of the introduction of the GST in 2000 (see chart below).
Chart of the week
