Given the uncertainties acknowledged, the RBA presented a range of scenarios for the economic outlook in May's Statement on Monetary Policy. In the baseline scenario, the Bank forecasts the domestic economy to contract by 10% over the first half and align with a peak in the unemployment rate at 10% — twice its pre-pandemic level. A phasing out of social distancing restrictions is anticipated to occur over the September quarter, facilitating the start of the recovery. As activity picks up this moderates the fall across 2020 as a whole to 6%. A consumption-led recovery drives output growth to 6% in 2021 as spending patterns normalise, though significant headwinds persist from an unemployment rate that remains high at 7.5% by the end of the year as businesses remain reticent to invest and with the timing of the residential construction cycle reaching its trough delayed. Bolstering activity next year is an expected easing of international travel restrictions, allowing exports of education and tourism services to come back online, though demand for key commodities is anticipated to be weighed by a weaker global economy. Overall, under this scenario, Australian GDP is not forecast to return to its pre-pandemic level until 2022 and it will be left with an unemployment rate still notably higher at 6.5% than before the crisis. The RBA also outlined a more optimistic scenario in which the pace of the recovery is faster as containment measures are phased out sooner than expected and if there is a high level of confidence in the authorities' ability to prevent future outbreaks. On the other hand, if the spread of the virus were to re-intensify and require restrictions to be imposed again, a much slower recovery would be expected. Earlier in the week, the Board left policy settings unchanged, with Governor Lowe reaffirming it "will do whatever is necessary to ensure bond markets remain functional and to achieve the yield target for 3-year AGS". Accordingly, the RBA stands ready to scale up its bond purchases again if needed (see here). The only alteration made by the Board was to announce that it was broadening the range of eligible collateral for repo to include corporate debt at the lower tier of investment grade in another step to ensure liquidity conditions remain favourable.
Adding to the poor visibility over the outlook is the fact that the data flow largely reflects conditions in the early stages of the crisis. On that front, a record increase in a single month of 8.5% on retail sales was confirmed in March, with the annual pace surging from 1.8% to 10.1% — its fastest since mid 2001 — as households went on a spending splurge at the supermarkets (+23.0%m/m), specialised food retailers (such as butchers) (+30.5%m/m), liquor stores (+30.2%m/m) and pharmacies (+22.3%m/m) to prepare for lockdowns. The unprecedented demand stretched supply chains to the limit and as a result, food prices lifted sharply by 2.6% over the March quarter, driving sector-wide retail prices to their strongest quarterly rise in 19½ years at 1.9%. Adjusting nominal sales for price increases, retail volumes were weaker than expected in rising by 0.7% in Q1. While food volumes surged by their most on record (+6.4%q/q), heavy declines in demand were recorded in discretionary areas such as clothing and footwear (-12.1%q/q), cafes and restaurants (-8.4%q/q) and department stores (-5.2%) as government-mandated closures and fears over the virus more generally took hold (full review here). Also recording a record result in March was the trade surplus in soaring from $4.4bn to $10.6bn (see here). Exports surged by 15.1% in the month as shipments of key commodities rebounded after the disruption from Tropical Cyclone Damien in February. However, travel restrictions due to COVID-19 saw inbound tourism plunge by 15.4%m/m. Imports fell by a further 3.6% weighed by soft private demand conditions and a weaker Australian dollar, while the pandemic saw overseas tourism collapse by 35.3% as it came to a virtual stop by the end of March. In other releases for March this week, building approvals declined by 4% (see here) and housing finance commitments edged up by 0.2% (see here), with both yet to fully be impacted by COVID-19. The most timely update came from the ABS's weekly payrolls and wages data, which showed that over the period between March 14 and April 18 total employee jobs declined by 7.5%, with estimates indicating that up to one third of jobs in the accommodation and food services industry may have been lost, while total wages paid fell by 8.2%. After sustaining significant damage, the question is now how quickly can the labour market recover. The impending easing of restrictions and the Federal government's assistance measures will help here, but the ABS Impacts of COVID-19 survey provided a warning that businesses will be emerging from the crisis in a tenuous state (see here).
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In offshore events, in the US after several weeks of astoundingly high filings for initial jobless claims, including another 3.3 million last week, April's employment data shattered records for all the wrong reasons. Non-farm payrolls collapsed by 20.5 million in the month — for context that is more than double the number of jobs that were shed through the entirety of the financial crisis over 2008 and 2009. Such is the scale, percentage changes are more instructive. Over the month, total payrolls contracted by 13.5% with the worst of it coming in the leisure and hospitality industry where around 47% of jobs were lost as restaurants, cafes, bars, theatres were forced to close, while the drying up of travel hit demand for hotels. Employment in all industries declined in April, with the bulk sustaining falls ranging between 5 and 10% (see chart of the week, below). According to the Bureau of Labor Statistics, some 18.1 million (or around 88%) of the 20.5 million that became unemployed in April were reported as being placed on a temporary lay off and anticipate being able to resume working for their employer, though whether or not that occurs and then continues remains to be seen.
Chart of the week
For the moment, the unemployment rate stands at 14.7% (up from 4.4%) — its highest level since records began and nearly 4 percentage points above the previous high from the recession in the early 1980s. Worse still, the broader underemployment measure (U6) surged from 8.7% to 22.8%. The crisis has also driven participation in the workforce down to its lowest level in 47 years falling from 62.7% to 60.2%.
Chart of the week
For the moment, the unemployment rate stands at 14.7% (up from 4.4%) — its highest level since records began and nearly 4 percentage points above the previous high from the recession in the early 1980s. Worse still, the broader underemployment measure (U6) surged from 8.7% to 22.8%. The crisis has also driven participation in the workforce down to its lowest level in 47 years falling from 62.7% to 60.2%.
Over the Atlantic, while the Bank of England (BoE) made no changes to its policy stance at Thursday's meeting, Governor Andrew Bailey was clear that the Monetary Policy Committee (MPC) was prepared to do more to support to a UK economy that has suffered terribly at the hands of the COVID-19 outbreak. Indeed, at this meeting, two of the MPC's members (Haskel and Saunders) voted to elevate the BoE's bond purchases by £100bn above its targeted holding for its Asset Purchase Facility of £645bn, a level the Bank expects to meet by early July based on the current pace of purchases. Similar to the RBA, the BoE presented a range of scenarios for its economic outlook in its Monetary Policy Report. Its "illustrative scenario", which is conditioned on the overarching assumption that social distancing restrictions are removed by the end of Q3, GDP contracts by 14% in 2020 with a peak in the unemployment rate of 8%. In 2021, output growth is forecast to rebound sharply by 15%, though it acknowledged significant uncertainty around the progression of the virus and its effect on confidence, while the unemployment rate is expected to improve by only 1 percentage point to 7%. In Europe, the outlook for the bloc is both challenging and uncertain as it is hit with what is undoubtedly the most severe economic shock in its history. This week's European Commission Spring 2020 forecasts pointed to a 7.7% contraction in 2020, with most of the damage coming through in Q2 as the unemployment rate tops out at 9.6%. On the basis that the pandemic remains contained after restrictions are rolled back and that the monetary support of the European Central Bank (ECB) and fiscal actions on member states gain traction, the recovery occurs in 2021 but it is set to be gradual one as output growth lifts by 6.3%. This comes at a time when scrutiny around the ECB's actions are on the rise, highlighted by the ruling of the German Constitutional Court that declared the Bank had exceeded its powers within its Public Sector Purchase Programme and that had 3 months to demonstrate its actions were "proportional" to its mandate. However, ECB President Christin Lagarde said she was "undeterred" by the ruling, while in a press release the Bank noted a decision from late 2018 by the European Court of Justice that it was acting within its mandate.
