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".

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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".