Australian dwelling approvals down 16.4% in May

Dwelling approvals fell by much more than expected in May following smaller declines in March and April, with the overall level now at its weakest in more than 7 years. The Bureau of Statistics assesses that this captures only a minor COVID-19-related impact due to the lags associated with underlying demand, submission of applications and final approval being granted. 

Building Approvals — May | By the numbers

• Dwelling approvals (including the private and public sectors) fell by 16.4% (vs median forecast of -7.8%) in May (seasonally adjusted) to 12,736 — its lowest monthly total since January 2013. In April, approvals contracted by 2.1% (revised from -1.8%).  
• Approvals are down by 11.6% on a year ago compared to +6.1% as of April.  
• Unit approvals plunged by 34.5% on the month to 4,065 to their lowest level since June 2012, swinging the annual pace to -29.9% from +6.8%. 
• House approvals posted their worst result since last October falling by 4.1% to 8,670, which slowed the annual pace of growth to 0.6% from +5.6%. 

Building Approvals — May | The details 

May's 16.4% decline on dwelling approvals was its sharpest monthly fall since December 2017, while the level at 12,736 was its lowest outturn going back to January 2013. The median forecast was for a smaller fall of 7.8% in May, though it should be noted that approvals had significantly surprised in March (-1.6% vs -15.0% expected) and April (-2.1% vs -10.7% expected). All of this speaks to the complexities of trying to gain a handle on the timing and scale of impact on residential demand from the pandemic. As the ABS noted in today's release; "Due to the lag between changes in demand, and the submission and determination of a building approval, the May data likely reflects applications and levels of demand prior to the introduction of major restrictions". 

The weakness in today's report was concentrated on unit approvals (34.5%mth), with the underlying detail pointing to a very sharp decline in the high-rise segment. However, it was also a notably weak outcome on house approvals (-4.1%) derailing the progress that segment had made so far in 2020. 

In terms of alterations, the value of work approved to be made to existing residential properties flatlined in May at around $634m (-8.4%yr) after falling by 12.0% in the month prior. The value of non-residential work approved extended its weakness from the earlier months of 2020 falling by a further 7.1% to $3.32bn (-19.7%yr) to its lowest level since August 2018. 

 

Broad-based weakness came through from all states in May. Approvals in New South Wales and Victoria have fallen to their levels from around Q3 of last year, with much of these declines being driven by falling unit approvals. Queensland has seen an acceleration in the decline of approvals recently. South Australia is the only state to have seen approvals advance over the past year, though both Western Australia and Tasmania were also up over the year until that was reversed by weak outcomes in May. 

Building Approvals — May | Insights 

The outlook for approvals is highly uncertain due to the impact of border closures on net overseas migration — a key driver of population growth and demand for housing. As the ABS pointed out, today's numbers are likely to have reflected submissions from before the introduction of social distancing restrictions, so approvals appear to be lagging what is occurring in the broader economy at the moment. 

Australian household finances improve

The ABS's latest Household Impacts of COVID-19 survey has provided more key insights into the state of Australian households following the emergence of the pandemic. This was the 6th survey in the series and focused on household finances and spending intentions with the responses coming from a sample of around 1,000 Australians between June 10-15. 

Since perceptions towards household finances were first surveyed in mid-April there has been a broad-based improvement. Around 2 in 3 households now report the state of their finances had "remained the same" in the preceding 4-week period comparaed to only 55% as of mid-April. Finances were assessed to have improved for 16% of households — up slightly from 14% previously, while the proportion of households that felt finances had deteriorated was now running at a much lower 19% from 31% around two months earlier. The timing of this latest survey lines up with restrictions having been eased to either stage 2 or 3 of the national 3-stage plan in all states and territories. The key message appears to be that perceptions towards household finances improved with restrictions being eased allowing more Australian to return to work and earn income, while the government's fiscal support programs swinging into full operation by this stage is also likely to have been influential as well.

Source: ABS

Importantly for overall confidence, financial stress appears to be at a very low level. A total of 88% said they would be able to raise a sum of $2,000 within a week for something important, up from 81% in mid-April. Around 94% of households expected that they would be in a position to pay all upcoming bills over the next 3 months while only 3% assessed they would be unable to pay at least one of their bills on time. By consequence of social distancing and shutdowns, the March quarter national accounts reported that the household saving ratio lifted sharply to 5.5% in Q1. This survey found that some 8% of Australians had drawn on these savings over the preceding 4-week period to meet living expenses, while only 2% had been required to reduce mortgage repayments for this purpose.

Analysis was also provided on the government's two key income support measures. Around 11% of respondents were receiving the JobKeeper payments, which provides a wage subsidy of $1,500 per fortnight. Of these recipients, 48% said the payments were lower than their usual pay, 33% said it was about the same, while 20% said it was more than usual. The other measure is the JobSeeker payment that could be accessed by Australians that had lost work or had their hours reduced due to the pandemic but who did not qualify for the JobKeeper scheme. The government announced a $550 supplement payable to all JobSeeker recipients on top of existing allowances, effectively doubling the maximum payment available to around $1,100 per fortnight. This survey found that 8% were receiving the $550 supplement payment, with the most common uses being for essentials such as paying bills and groceries. Key for the government is working out the way forward with these schemes, both of which are due to conclude by around the end of September. This must be carefully considered as the risks associated with a hard end date are transitioning to much higher levels of unemployment and household finances and confidence deteriorating.

In terms of spending intentions, the key findings out of the survey focus on respondents who said they had decreased their level of spending as the result of the social distancing restrictions brought in. The majority of these respondents said they planned to increase their spending mainly in the areas of household services including recreation and leisure (74%), eating out (73.9%), private transport (73.4%), personal care (69.9%) and child care (66.2%). However, areas of retail demand appear likely remain flat with spending intentions staying the same for the majority of respondents in household goods (71.5%) and clothing and footwear (52.2%).

The latest gauge of the types of activities Australians are most comfortable in resuming continue to be concentrated around essential purposes. Causing most discomfort are going to gyms and pools, playing sports and attending open house inspections or auctions.  

 Source: ABS

Specifically on travel, Australians would be hesitant to head overseas for a holiday when border restrictions are eased, though there are more constructive signs on the domestic front with 55% of respondents keen to go on a trip. 

Of those willing to take a domestic holiday, 25% said they would travel within 6 months of restrictions being eased, 44% between 6 and 12 months and 31% after 12 months.   

Macro (Re)view (26/6) | Disconnect steers the narrative

The International Monetary Fund (IMF) this week significantly downgraded its outlook for the global economy anticipating that the COVID-19 pandemic will lead to a deeper and longer-lasting recession as countries struggle to recover from scarring effects to confidence and structural change lowers productive capacity. As per their June Outlook Update, the IMF now expects a steeper decline in global GDP in 2020 of 4.9% compared to the 3.0% fall it forecast back in April (see chart, below). With economic conditions expected to progress towards normalising over 2021 global output recovers by 5.4% (revised down from 5.8%) bringing GDP broadly back to its pre-pandemic level. The outlook remains highly uncertain and dependent on the path of the virus, though as the IMF highlighted the recovery has now also become vulnerable to a change in market sentiment if optimism over the continuation of unprecedented policy support and reopenings through the sequential improvement in the data gives way to the still very bleak prospects for the global economy. It is the disconnect between these two opposing views that is steering the narrative of this recovery depending on what markets decide to give more weight to and prioritise from day to day. 

Chart of the week

In the IMF's Global Financial Stability Report released this week, the group was cautious in noting that with valuations appearing stretched markets were vulnerable to "a repricing of risk assets" and this "could add financial stress on top of an already unprecedented economic recession". The range of potential triggers put forward by the group that could adversely impact sentiment included a reassessment of the economic fundamentals, a ramp-up in virus infections leading to the reinstatement of containment measures, misplaced optimism in the ability of central banks to continue to support markets, an intensification of global trade tensions and social unrest. This week provided a snapshot of these tensions as virus cases in the US states of Florida, Texas and California saw sharp increases while the data flow played into the sense of optimism around the reopening. IHS Markit's 'flash' composite Purchasing Managers' Index (PMI) reading for June improved to 46.8 from 37.0, indicating that while the US economy was still contracting it was now doing so at a much slower pace than in April and May during the height of the shutdown. The details of the report suggested that the improvement in conditions was occurring across both the services (46.7 from 37.5) and manufacturing sectors (49.6 from 39.8), while on the consumer front personal spending rebounded by 8.2% in the month of May — albeit disappointing the consensus forecast for a 9.2% lift — but heading in the right direction and a sign that households were beginning to re-engage more broadly in economic activity after the shutdown. Meanwhile, to enhance the resilience of its banking sector in response to the pandemic, the Federal Reserve has mandated that large banks must cap dividends and suspend share buybacks for the September quarter.   

Across the Atlantic, the outlook for the euro area economy was revised sharply lower by the IMF with GDP in the bloc now anticipated to contract by 10.2% in 2020 from -7.5% in the previous forecast. The sharpest revisions came through from France (-12.5% from -7.2%), Spain (-12.8% from -8.0%) and Italy (-12.8% from -9.1%) to reflect a more significant impact from the virus and the measures to contain it, including precautionary behaviour ahead of government-mandated shutdowns as the risks to public health increased. In 2021, GDP growth in the euro area is expected to rise by 6.0%, which would still be some 4.8% below its 2019 level highlighting the drawn-out nature of the recovery expected. Given this, it is not surprising that the Account of the European Central Bank's Governing Council meeting early this month called on fiscal authorities to increase their support to aid the recovery and complement its measures, which most recently included the expansion of its pandemic emergency purchase programme by €600bn to €1,350bn. Similar to the US, June's flash PMI readings for the euro area showed a slowing in the pace of contraction in economic conditions. The composite PMI lifted to 47.5 from 31.9, led mostly by the services sector (47.3 from 30.5) as the manufacturing sector showed a more modest improvement (46.9 from 39.4). At a country level, France was showing tentative signs of growth with its composite PMI rising to 51.3 from 32.1, though Germany was trailing behind (45.8 from 32.3).

Turning to events at home, Australia was one of the very few countries to have its economic outlook for 2020 upgraded by the IMF. After the contraction on Q1 GDP was less severe than forecast, the group revised the decline for the 2020 year from -6.7% to -4.5%. With the data flow mainly second tier this week, clusters of the virus in Victoria gained most of the attention, though in the other states new cases have generally remained very low. On the data, the ABS's measure of Australian job vacancies contracted at a record pace in the 3-month period to May falling by 43.2% led by a very sharp decline in the private sector (-45%), though public sector vacancies also deteriorated rapidly (-29%). This mainly captures the effect of the nation's shutdown from late March and April with more timely indicators showing that labour demand started to pick up in May as restrictions eased, highlighted by the 31.1% rise in skilled internet vacancies also published this week. In the latest ABS Business Impacts of COVID-19 survey, key insights related to the very significant extent of change the pandemic has enforced on firms' operating conditions that could persist long term and weigh on productive capacity, while 2 in 3 firms had reported a decline in revenue as a result of the emergence of the crisis (see more here). 

Ongoing impacts of COVID-19 on Australian businesses

The ABS's 5th and latest Business Impacts survey focused on the wide-ranging effects the COVID-19 pandemic was having on firms' operating conditions and revenue. These themes had been identified in some of the earlier surveys and were explored in greater detail in this edition. This survey was conducted between June 10-17 from a sample of 2,000 businesses with a response rate of 72%. 

In total, 73% of firms said they were now operating under modified conditions due to the emergence of the pandemic, up slightly from 70% in the month prior. As the size of the firm in question increased the more pronounced was the prevalence of all types of modifications. For large businesses (with 200 or more employees) 90% said they were operating under modified conditions, easing to 85% for medium-sized firms (20-199 employees) and lowering to 72% for small businesses (0-19 employees).

Overall, the 3 most common modifications that had been brought in across firms of all sizes was; the introduction of new hygiene protocols and practices (64%), limitations being placed on the number of people that could be on site (57%), and other workforce changes such as working from home or operating with a reduced workforce (46%). These changes might be perceived as the result of complying with the advice from governments and public health authorities and could be unwound as the pandemic eases. However, other modifications being made by firms appear more structural in nature and could persist long term such as changes to the ways in which products and services were provided to customers (40%), changes in operating hours (31%), redefined roles or duties of staff (25%) and alterations to the range and types of products and services offered (22%). The full breakdown is shown in the table, below. 

Source: ABS 

On a more granular basis, the ABS provided a graphic to highlight the prevalence of various modifications being made by different industries (see below).

Source: ABS

In terms of revenue, 2 out of 3 businesses had reported that their revenue was down on a year earlier, while the effects were broadly even across firms of all sizes with 65% of small businesses experiencing a revenue fall and 69% for both medium and large firms. The revenue impact had been broadest across education and training providers (87%) and accommodation and food service businesses (84%) according to this survey. Some 65% of retailers had experienced revenue declines, though the sector also had the highest proportion of businesses that had seen revenue increase (20%) as a result of the pandemic and this would relate to the very strong rates of increase in spending recently recorded by supermarkets, pharmacies, liquor stores and retailers specialising in household goods and hardware.  

Looking at the magnitude of the decline in revenue, the survey appeared to suggest that the more businesses were operating under modified conditions the larger the decrease in revenue tended to be (see below).

 Source: ABS 

On a disaggregated basis, the declines in revenue had been of the largest magnitude in accommodation and food services, arts and recreation and information media and telecommunications. Hardest hit had been the accommodation and food services industry in which 63% of firms had seen revenue fall by more than 50%. The full breakdown is shown in the chart, below.

 Source: ABS 

The survey examined the resilience of firms by asking for how long could their operations be supported by available cash on hand. The most common response given by firms of all sizes was for a period of 6 months or more with a skew running towards larger businesses.  

 Source: ABS 

Lastly, it has been common for firms to take on external advice in how to navigate their way through the pandemic. Overall, 60% of firms had sought out of some form of advice from external sources, with the most common topics being around government support measures (52%), regulation and compliance (45%), health and safety (39%), management of business finances (32%) and workforce management (25%).   

Macro (Re)view (19/6) | Success on one front; challenges on the other

The labor market was front and centre in Australia this week as the devasting toll of the COVID-19 pandemic continued to be laid out. Following the shocking report in April in which 607.4k jobs were lost, this week's labour force survey for May came in much worse than expected with a further 227.7k jobs shed in the month (see here). Reflecting the impact of shutdowns and the relaxation of the mutual obligation requirement to look for work under the JobSeeker support payment, the participation rate has fallen by 3.1ppts over the past two months to 62.9% and is at its lowest level since late 2000. This has materially held the unemployment rate down, but even then it has risen to an 18½-year high of 7.1% compared to its pre-pandemic level of 5.2% (see chart of the week, below). Better capturing the dislocation caused to the labour market is the change in hours worked and while May's 0.7% decline was modest this followed a 9.5% collapse in April and the level has now fallen by 9.0% in through-the-year terms. Undoubtedly, the measures implemented to contain the spread of the virus and slow its infection rate did as they were intended to do and enabled restrictions to be eased earlier than had been expected, but now comes the challenge for the nation's policymakers to re-start the economy and revive a labour market from its most severe shock in many decades.

Chart of the week

The good news comes from the ABS's payrolls data, also released this week, that indicated conditions in the labour market were stabilising with the re-opening of the economy now well underway. This should ensure that labour demand will return in the relatively near term but there are significant challenges ahead with the fiscal supports implemented by the Federal government due to be wound back with the JobKeeper (wage subsidy) package scheduled to run through to late September and the requirements linked to the JobSeeker payment starting to be increased. There are also limits as to what the re-opening alone can achieve because conditions are not returning to the previous normal and precautionary behaviour is likely to make Australians reticent to re-engage in activities seen as posing a higher health risk, such as those involving large public gatherings, according to this week's ABS Household Impacts of COVID-19 survey (see here). For now, though, signs of progress are important and that was forthcoming in May's preliminary estimate of retail sales with turnover soaring by a record 16.3% in the month — rebounding after April's record fall of 17.7% — as annual growth swung to 5.3% from -9.4%.

In the Reserve Bank of Australia's minutes from the June Board meeting, their outlook for the domestic economy could be considered to have improved at the margin and they could envisage a scenario in which the downturn was "shallower than earlier expected". This is on the basis of positive news on the health front, with the infection rate having slowed materially and with restrictions having been eased sooner than anticipated, as well as on the activity front in which the Bank's liaison had been reporting signs of improvement in household spending in May coming out of the shutdown. However, the prevailing view of the Board remained that the outlook was "highly uncertain and the pandemic was likely to have long-lasting effects on the economy". On policy, the Board continued to assess that its package of measures to support the economy was working effectively as it was keeping the 3-year government bond yield anchored around its 0.25% target and market functioning in the Australian bond markets had improved, while it did not appear to be perturbed by the recent appreciation in the Australian dollar. Should signs of fragility emerge, these minutes reiterated that the RBA stands ready to "scale up" its bond purchases and that it was prepared to maintain its accommodative stance in place for "as long as is required".

— — —

Switching to events abroad, while a host of risks came across the markets' radar from rising COVID-19 cases and the potential for second waves in China and the US in particular and flaring geopolitical tensions, sentiment remained upbeat as more central bank support was forthcoming and on positive data in the early stages of the re-opening of economies. In the US, the Federal Reserve this week announced it would start purchasing individual corporate bonds under its $750bn Secondary Market Corporate Credit Facility. This announcement had already been in the pipeline and is aimed at ensuring the credit markets remain wide open for corporate issuers in need of liquidity amid the turbulence from the pandemic and, in particular, for those corporates that have suffered recent ratings downgrades. The Fed's Main Street Lending Program also opened this week to facilitate loans through banks for small and medium-sized enterprises ranging between $0.25m and $300m. At his testimony to the Congress this week, Fed Chair Jerome Powell noted that the central bank was taking "broad and forceful actions" to ensure that businesses, households and municipal governments have access to an ample supply of credit, market functioning is maintained and financial conditions remain accommodative. On the outlook, Chair Powell noted that the Fed was seeing some signs that economic activity was on the path of stabilising and that fiscal support was boosting household incomes and spending. In line with this view, retail sales snapped back to life in May soaring by a record 17.7% after plunging by 14.7% in the April shutdown.

In Europe, a videoconference of EU leaders was unable to make any progress on the path forward regarding the plan recently put forward to the membership by Germany's Chancellor Merkel and France's President Macron for debt mutualisation. This proposal would involve a collective bond issuance of €750bn allowing fiscal transfer to the nations hit hardest by the pandemic. Around two-thirds of this would be via grants and one-third in loans and this remains the major point of contention, particularly with the so-called 'Frugal Four' fiscally conservative countries of the Netherlands, Denmark, Sweden and Austria. EU leaders agreed to meet for further talks in mid-July as European Central Bank (ECB) President Christine Lagarde warned that in the absence of "decisive and effective action" market sentiment for the prospects of recovery was at risk of turning negative. Underpinning this optimism has been the support of the ECB who announced this week the take-up of its TLTRO-III program, which incentivises banks to take on their liquidity and lend it out, came in at a record €1.31tn. In the UK, the Bank of England provided more support by announcing that it would expand its QE purchases of government bonds by £100bn, lifting the target to £745bn by around the end of the year, though it should be noted that this actually implies a slowdown in the current pace of purchases by around 40%. Lastly in Asia, the Bank of Japan left its policy settings unchanged this week, though it announced the ceiling on its special lending program to provide emergency loans to corporate borrowers hit by the pandemic would be raised from 75bn Yen to at least 110bn Yen. Governor Kuroda also said the Bank's support would continue to remain in place well into the future noting that it was "a long way from a situation where interest rates can go up".

Australian employment in May -227.7k; Unemployment rate 7.1%

The necessary actions taken by Australian governments and public health authorities to contain the spread and infection rate of COVID-19 achieved undoubted success on that front but now comes the other side of the response to this crisis in managing the economic recovery. The Australian labour market has completely broken down due to this pandemic with a total of 835k jobs falling its victim over April and May and an unemployment rate that is now at its highest level in nearly two decades. 

Labour Force Survey — May | By the numbers

• Net employment fell by 227.7k (seasonally adjusted) in May vs -78.8k expected. In April, employment was revised to show a larger fall of 607.4k compared to -594.3k reported initially.  

• National unemployment rate hit its highest level in more than 18 years at 7.1%, up from 6.4% in April (revised higher from 6.2%) and above the 6.9% level expected.
• The underutilisation rate lifted 0.1ppt to 20.2%, though underemployment eased to 13.1% from 13.8%.

• Participation rate fell from 63.6% to 62.9% — its lowest level since 2001. 

• Aggregate hours worked weakened by 0.9% in May, steepening the annual decline to -9.0% from 8.5%.

Labour Force Survey — May | The details

The COVID-19 pandemic unleashed further significant damage on the labour market with almost 228k jobs being lost in May. This comes on top of the 607k jobs that were shed in April. We continue to see a tremendous flow of workers coming out of the labour force with the participation rate falling by another 0.7ppt to 62.9% to be down by more than 3 percentage points from its level in March. This reflects both the relaxation of the mutual obligation requirement linked with the JobSeeker support payment and also that firms in many industries simply would not be in a position to consider either hiring or re-hiring at this point. While the unemployment rate surged up to 7.1% from 6.4%, it is being mechanically held down by the rollover in workforce participation. 

Less sensitive to changes in workforce participation are the measures of underemployment and underutilisation. Underemployment moved down its record high of 13.8% to 13.1%, suggesting that some had received more hours in the month, though underutilisation ticked up a little to 20.2% to its most elevated level in the history of the series. 

  

The disruption to labour market activity from actions taken to contain the pandemic is best reflected by the hours worked measure. After collapsing by 9.5% in April, aggregate hours worked fell by a further 0.7% in May. Compared to a year earlier, hours worked in the Australian economy are down by 9.0%. The RBA is forecasting a decline in hours worked of around 10% over the first half of 2020 and that is broadly in line with what has been reported in these data over the past two months. 

Labour Force Survey — May | Insights

May's report was significantly weaker than expectations for both the employment (-227.7k vs -78.8k) and unemployment outcomes (7.1% vs 6.9%). With the JobKeeper and enhanced and relaxed JobSeeker supports in place and with the hours worked measure having declined further, underlying conditions in the labour market deteriorated further in May and the nation is now undoubtedly facing its most severe economic crisis certainly since the early 1990s recession and possibly since the 1930s. The situation will demand nothing short of ongoing fiscal and monetary support as well as a policy reform agenda to revive productivity and drive economic growth forward. Based on the sequential improvement shown in the ABS's payrolls data, the worst is now potentially behind us but it will be a long road ahead. 

Preview: Labour Force Survey May

Australia's labour force report for May is due to be released by the ABS at 11:30am (AEST) today. The COVID-19 crisis has a devasting impact on economies and labour markets across the globe and those reverberations are now being felt in Australia. The shocking loss of 594.3k jobs in April derailed the nation's labour market and further weakness is anticipated in today's report with around 77k jobs expected to have been lost in May, while the unemployment rate is forecast to rise to its highest level in nearly two decades.     

As it stands | Labour Force Survey

April's report was historic for all the wrong reasons as the full scale of the disruption from the COVID-19 pandemic hit the labour market. Employment fell by a sobering 594.3k in April — by far the sharpest decline on a single month in the history of the series that dates back to 1978. 

Headline unemployment surged up to 6.2% from 5.2% to be at its highest level since July 2015. A much greater rise in the unemployment rate was prevented by a plunge of an unprecedented scale in workforce participation from 66.0% to 63.5% and was clearly influenced by the relaxation of the mutual obligation requirement linked with the JobSeeker support payment, meaning that many recipients would not have been considered by the ABS as being in the labour force.

The impact of the pandemic on the labour market was best reflected by the 9.2% collapse in hours worked in April, while the annual pace completely rolled over falling from 0.7% to -8.0%. The RBA's analysis found that more than 750,000 Australians did not work any hours in April, with many of those likely to be participating in the government's JobKeeper (wage subsidy) scheme. 

As a result of the sharp fall in hours worked, the underemployment (8.8% to 13.7%) and underutilisation rates (14.1% to 19.9%) soared to record highs. Australia managed to quickly contain the COVID-19 spread and slow its infection rate sharply leading to an earlier-than-expected re-opening of the economy, but the legacy of this pandemic will be a labour market left to carry forward an extreme level of spare capacity that will take a considerable period of time to wear down and all policy efforts must now be made to address this. 

Market expectations | Labour Force Survey

Further deterioration in the labour market is expected to come through in today's report with the consensus call from Bloomberg's survey being for employment to fall by 76.9k in May, however the degree of uncertainty around that is highlighted by the range of estimates between -275k and +125k. The unemployment rate is expected to jump from 6.2% to 7.0% to its highest level in more than 18 years, with individual estimates ranging between 6.5% and 8.5%.  

While difficult to establish the read-through, it is worth noting the sequential improvement in the ABS's payrolls data. Between March 7 to April 4 payrolls contracted by 6.0%, which slowed to a 1% fall between April 4 to May 2 and then in this week's release payrolls went on to rise by 1% between May 2 to May 30 with gains being spread across the majority of industries. Following the flow, an upside result on the employment number is entirely possible today.   

What to watch | Labour Force Survey

Continue to focus on the change in hours worked as it will give the clearest read on activity in the labour market, particularly given the relaxation of mutual obligations linked to the JobSeeker payment and with the JobKeeper policy still in effect. Adding weight to this is that the RBA has repeatedly said that this is where its focus is in terms of assessing conditions.  

Australian property prices rise 1.6% in Q1

The ABS's Residential Property Price Indexes data published this morning showed price gains on a weighted-average capital city basis advanced by a further 1.6% in the March quarter as the pace of growth over the year accelerated from 2.5% to a 2½-year high of 7.4%. Since reaching their most recent trough mid-way through 2019, national prices have risen by 8.2% as the combination of increased certainty post the Federal election, the recommencement of the RBA's rate easing cycle and a softening in macroprudential controls appear to have helped stimulate demand. The 1.6% rise in Q1 was slower than the gains from the final two quarters of 2019 (+2.4% in Q3 and +3.9% in Q4) and the outlook is now considerably uncertain following the onset of the COVID-19 pandemic that has resulted in the disruption of real estate transaction activity over Q2.    

The two largest markets being Sydney (1.9%qtr, 10.0%yr) and Melbourne (2.1%qtr, 10.4%yr) have driven the upswing in the national index. In the Sydney market, house prices have clearly outperformed price rises in units, while in Melbourne the price gains have been more even across both segments. 

The price movements on a city by city basis are presented in the summary table, below.

The Brisbane market firmed over the past year driven by the established house segment, though price gains were still fairly modest overall at 2.5%yr. Prices had been little changed in Adelaide and while annual growth in Perth prices continued to remain negative after several years of decline, prices lifted in the city for a second consecutive quarter for the first time in 6 years. In Hobart, annual growth had slowed to 2.1% in Q3 last year but had since picked up again (7.0%yr). The Darwin market continued to see weakness in both house and unit prices, while in Canberra annual price growth lifted from 1.9% to 3.0% with houses leading that market higher.

Australians to remain cautious as restrictions ease

As the nation progressively works through the re-opening process after its period of COVID-19 lockdown, the latest ABS household impacts survey found that Australians generally feel comfortable in resuming essential types of activity but will be reluctant to re-engage in activities that involve large gatherings and travelling. Today's report was the 5th in the ABS's line of surveys that have been monitoring the responses of households to the pandemic and they continue to provide important insights into the behavioral and confidence effects the pandemic has caused. The topic of this survey related mainly to health precautions and the comfort in returning to normal activities as restrictions ease. It was conducted in late May (26-29th) and sampled around 1,000 Australians.

With restrictions having started easing across the nation from mid-May, the focus turns to the speed and the extent to which people are prepared to re-engage in what was previously normal economic activity. The types of activity Australians were most comfortable in resuming could all be classified as being for essential purposes including; seeing a doctor or health professional in person, attending their workplace and sending children to school or child care. At the other end of the scale, the activities that Australians were most uncomfortable resuming were; using public transport (59%), travelling by air (63%), attending indoor gatherings with more than 100 guests (66%), and attending large public events (76%). The full breakdown is shown in the chart below (click to expand).

Source: ABS

Questions were then posed as to what would alleviate the concerns people had in resuming normal activities. The two standout responses were the development of a vaccine (64%) and lower daily infection rates (61%). A proven effective treatment was also seen as a high priority (49%). Interestingly, developments such as higher testing rates, less pressure on the healthcare system and more widespread use of the COVIDSafe app ranked well down the list (click chart to expand).   

Source: ABS

In terms of the activities Australians would most like to be able to return to as or when restrictions ease the top 3 responses were; having larger gatherings of family and friends, dining in at restaurants or cafes and travelling domestically. Some of the activities listed in the chart below are already permitted in some form, but what is interesting is the tension that exists between the nature of some of these activities and the level of caution identified earlier. For example, 63% of respondents had said they would be uncomfortable in resuming air travel, yet 58% said they were most looking forward to domestic travel opening up again. Meanwhile, activities such as shopping in retail stores, going to venues including cinemas or licensed premises and attending sporting events would all appear incompatible with the concerns raised in this survey around large gatherings.            

Source: ABS

While restrictions are gradually being eased back, this survey highlights that precautionary behaviour is still likely to govern the behaviour of households in terms of the type of activity they choose to engage in. Short of a vaccine being developed, it would appear Australians want to see lower daily infection rates or an effective treatment being established before their level of risk aversion will ease.    

Macro (Re)view (12/6) | A dose of reality

The sense of optimism that has driven market sentiment over the past few months received a dose of reality this week as global equities pulled back and a bid went into bonds on fears of a second wave of virus infections in the US and a realisation of the limits to the economic recovery that can be generated by the reopening process. In the OECD's June Economic Outlook for 2020, the group highlighted that as social distancing restrictions are gradually eased the path of the recovery for economies across the globe will be highly uncertain with growth prospects hinging on confidence effects, policy responses and the ongoing actions of public health authorities to contain and limit the spread of the virus. Global growth in OECD economies is projected to decline by 7.5% in 2020 and by 9.3% under a 'double-hit scenario' in which a second wave of the virus sweeps through. However, even if a second wave does not eventuate, the group highlighted the significant damage that has already been done in terms of disrupting business activity, undermining confidence and widening inequality and the legacy of these impacts would leave the global economy with severe and long-lasting scarring demanding of a policy reform agenda to boost productivity and employment growth

According to the OECD's forecasts, it will take at least two years for output in the global economy to return to its pre-pandemic level with the recovery to be slow and vulnerable to becoming derailed if remaining containment measures and tracing measures ultimately prove to be ineffective. The group foresees a host of macroeconomic impacts as a result of the pandemic with hits to incomes, employment and investment. Further, there are risks around the productive capacity of economies going forward from the threat of company insolvencies, vulnerabilities in emerging markets and a focus on resilience that could see supply chains become more domestically focused. Looking at the detailed forecasts, the outlook is sobering with growth seen contracting most heavily in the UK (-11.5%) and across the euro area (-9.1%), while in the US a 7.3% fall is forecast this year with more moderate declines anticipated in Japan (-6%) and Australia (-5%).   

The other major highlight from offshore this week was the US Federal Reserve's latest policy meeting. There were no surprises from the FOMC in leaving policy settings unchanged at this meeting. For the first time in 2020, the Committee published an updated set of projections in which the 'dot plot' containing individual members' estimates of the path of interest rates pointed to no change from the current 0-0.25% setting for at least the next couple of years. The median call on GDP was for a contraction of 6.5% in 2020 with the recovery to be drawn-out through to 2022. At the post-meeting videoconference, Committee Chair Jerome Powell reiterated that the actions taken by the Fed since the onset of the crisis had been aimed at supporting the flow of credit to businesses and households and mitigating risks of illiquidity that had so beset the markets back in March, while also noting that the current pace of asset purchases would be maintained at $80bn/mth on Treasuries and $40bn/mth in agency mortgage-backed securities. On the prospect of introducing a form of yield curve control, Chair Powell said that the Committee had not reached any conclusion, and indeed it was an "open question" as to whether such an approach would complement its existing tools. 

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In Australia this week, the focus was on the latest business and consumer surveys, with both providing support to the thesis that the low point for sentiment and economic activity occurred between March and April when social distancing restrictions to slow the spread of COVID-19 were at their most stringent. As those restrictions started to be gradually eased from May conditions appear to have improved and that trend could be reasonably expected to continue given that there is still some way to go in the reopening of the economy, which in itself is occurring earlier than had widely been anticipated just a couple of months ago. For now, this provides a sense of optimism that the recovery is gaining some traction. But, caution should be exercised in trying to extrapolate this out too far because the bigger picture is the nation is now in the midst of its first major economic downturn since the early 1990s and just how businesses, households and policymakers will look to navigate through that unfamiliar environment is highly uncertain.

In terms of businesses, the NAB's Business Survey for May showed an improvement in confidence (from -45 to -20) and conditions (from -34 to -24), though both are still at very weak levels with the former at its lowest since the 1990s recession and the latter around GFC lows (see chart of the week, below). Since the onset of the pandemic, the deterioration in conditions has been broad-based across industries with the services sectors hit the hardest. In May's report, though remaining heavily negative, the conditions sub-components improved; trading (-31 to -18), profitability (-35 to -19) and employment (-34 to -31). In terms of the outlook, the lead indicators remain unequivocally weak across forward orders and capacity utilisation and this will clearly constrain sentiment, investment plans and hiring intentions moving through 2020. 

Chart of the week

Since crashing to its low point in April (75.6), consumer sentiment according to the Westpac-Melbourne Institute's monthly index rebounded with an increase of a record magnitude in May (+16.4%), before adding another 6.4% in June's survey release this week. Overall, consumer sentiment now stands at a reading of 93.7 and is around its pre-pandemic level, though this is still clearly in pessimistic territory. Undoubtedly, the speed at which the authorities were able to bring the COVID-19 infection rate down and the earlier-than-anticipated easing of restrictions has contributed to an improvement in the confidence of households and that was reflected in the June report. In context though, expectations for economic conditions on a 12-month outlook are still very weak and household finances are also seen as coming under significant pressure over that horizon. Given this, it is somewhat surprising that the unemployment expectations index improved by a further 7% this month to a level that indicates households expect the unemployment rate to be stable around its present level over the next 12 months. On the housing market, house price expectations lifted by a robust 10.5% this month, though to a level that is some 43% below where they were pre-pandemic according to Westpac's analysis. April's housing finance data out this week showed the sharpest monthly decline (-4.8%) in almost 5 years with more material falls yet to come through (see here).