There was both upside and downside news on Australia's economic recovery this week, which speaks to the RBA's anticipation for it to "uneven and bumpy" and likely to be more protracted than previously expected. On the upside, the rebound in the nation's labour market that started in June as the economy reopened continued into July, albeit ahead of the impact of the reversal of Victoria's reopening in early August. The easing of restrictions in line with the Federal Government's 3-stage reopening plan led to 228.4k jobs coming back to the economy in June (revised up from 210.8k) and in July a further 114.7k jobs were recovered in a result that was well above the median estimate for a 30.0k increase (see here). The underlying detail was better balanced in July with the job gains spread across both part-time (+71.2k) and full-time employment (+43.5k) than in the month prior where the increase came entirely from the part-time segment (+252.0k) as full-time work fell further (-23.6k). Through June and July, the reopening has seen around 39% of the jobs that were lost through the shutdown being returned to the economy. Hours worked also added to the 4.2% rebound that came through in June with a further 1.3% lift in July. In terms of where the situation stands in the recovery, employment is 4.1% below its pre-pandemic level while hours worked are around 5.5% lower (see chart, below)
Chart of the week
Against expectations, the national headline unemployment rate lifted only slightly to 7.5% despite a strong uptick in the participation rate from 64.1% to 64.7%, which is now well off the low in May of 62.7%. However, the extent of spare capacity in the labour market is better reflected by the extremely elevated levels of underemployment (11.2%) and underutilisation (18.7%), though both improved in July. The impact of the sharp rise in spare capacity brought on by the onset of the pandemic was reflected by a downside result in the pace of wages growth to a record low in the June quarter (see here). Annual growth in the headline Wage Price Index slowed from 2.2% to 1.8% (consensus was 1.9%), with an even sharper slowdown hitting the private sector at 1.7%Y/Y from 2.2%Y/Y. The slowdown in wages growth started from the second half of 2019, which was then intensified and broadened to industries across the economy by the effects of the pandemic. Given the severity of the shock to the labour market, the RBA anticipates that wages growth will slow further and remain lower for longer than previously expected.
The rebound in the labour market through June and July showed the capacity for activity to return to the economy if the virus can be contained. However, the opposite is also true, not only in the case of Victoria after being placed back into shutdown but also more broadly across the nation through the confidence channel and this was highlighted by the sharp 9.5% decline in the Westpac-Melbourne Institute of Consumer Sentiment Index to a reading of 79.5 in August. The return of virus concerns has seen the index rollover to be just 5.1% above April's record low after it had lifted to as high as 24% above the trough in June. While confidence in Victoria understandably weakened (-8.1%), the surprise was that confidence in New South Wales is at a weaker level after falling by 15.5% despite not being in shutdown. The broader sense of nervousness was also seen with noticeable declines in Queensland (-8.1%) and South Australia (-5.8%). The other striking aspects of the report were a deterioration in consumers' economic outlook on both a 12-month (-19.2%) and 5-year (-8.7%) horizon, while expectations around unemployment are now more elevated than at any stage of the pandemic with households appearing to be coming to the view that its impacts will be longer-lasting than earlier thought and this underscores the fragility of this recovery. Also fragile is business confidence after falling to a reading of -14 from 0 in NAB's Business Survey for June, and this is likely to worsen materially in July to reflect the Victorian shutdown.
At Friday's appearance by senior officials of the RBA to the House of Representatives Standing Committee on Economics, Governor Philip Lowe outlined that the impact of the Victorian shutdown will be significant to the domestic economy and is expected to take at least 2 percentage points off national GDP in Q3. With Governor Lowe reiterating that the current policy stance is working effectively, the RBA does appear reluctant to do any more at this stage, though its bond-buying did step up by $4bn this week having been restarted recently. While Governor Lowe emphasised the importance of fiscal policy in supporting the economy, the door is still ajar for further monetary easing with the potential options mentioned including a lower cash rate, a separate bond-buying program more directed at lowering yields at the longer end of the curve and changes to the specifications of the Term Funding Facility.
Chart of the week
The rebound in the labour market through June and July showed the capacity for activity to return to the economy if the virus can be contained. However, the opposite is also true, not only in the case of Victoria after being placed back into shutdown but also more broadly across the nation through the confidence channel and this was highlighted by the sharp 9.5% decline in the Westpac-Melbourne Institute of Consumer Sentiment Index to a reading of 79.5 in August. The return of virus concerns has seen the index rollover to be just 5.1% above April's record low after it had lifted to as high as 24% above the trough in June. While confidence in Victoria understandably weakened (-8.1%), the surprise was that confidence in New South Wales is at a weaker level after falling by 15.5% despite not being in shutdown. The broader sense of nervousness was also seen with noticeable declines in Queensland (-8.1%) and South Australia (-5.8%). The other striking aspects of the report were a deterioration in consumers' economic outlook on both a 12-month (-19.2%) and 5-year (-8.7%) horizon, while expectations around unemployment are now more elevated than at any stage of the pandemic with households appearing to be coming to the view that its impacts will be longer-lasting than earlier thought and this underscores the fragility of this recovery. Also fragile is business confidence after falling to a reading of -14 from 0 in NAB's Business Survey for June, and this is likely to worsen materially in July to reflect the Victorian shutdown.
At Friday's appearance by senior officials of the RBA to the House of Representatives Standing Committee on Economics, Governor Philip Lowe outlined that the impact of the Victorian shutdown will be significant to the domestic economy and is expected to take at least 2 percentage points off national GDP in Q3. With Governor Lowe reiterating that the current policy stance is working effectively, the RBA does appear reluctant to do any more at this stage, though its bond-buying did step up by $4bn this week having been restarted recently. While Governor Lowe emphasised the importance of fiscal policy in supporting the economy, the door is still ajar for further monetary easing with the potential options mentioned including a lower cash rate, a separate bond-buying program more directed at lowering yields at the longer end of the curve and changes to the specifications of the Term Funding Facility.
— — —
In events offshore, negotiations in the US over the next fiscal plan remained frustrated by ongoing disagreement between both sides of the aisle, with the Republicans proposing $1tn in support as the Democrats continue to push for a $3tn package. Also in focus is bilateral relations between the US and China, with meetings to take place over the weekend to review progress on the implementation of the Phase One trade deal. Notable this week was the move higher in US Treasury yields as record issuance of 10-year and 30-year bonds came onto the market. Perhaps the move reflected unease given that the size of the Federal Reserve's balance sheet has remained broadly stable over recent weeks, or maybe there was some fundamental basis behind the lift after inflation data for the month of July came in stronger than expected. Annual growth in headline CPI strengthened well above consensus (of 0.7%) in rising from 0.6% to 1.0% driven in the main by higher gasoline prices. Core CPI, which excludes the impact of energy and food prices, also surprised to the upside rising to 1.6% through the year from 1.2%, whereas it was forecast to soften to 1.1%, with medical costs the main contributor. Following on from the outperformance in last week's non-farm payrolls report for July, the latest data on the labour market provided further positive signs. Initial jobless claims in the week through to August 8 came in at their lowest level since the onset of the pandemic at 963k beating the median estimate of 1,110k, while continuing jobless claims also came down by more than expected to 15,486k from 16,090k. Meanwhile, the level of US retail sales has rebounded to be above where they were pre-pandemic after turnover lifted by a slower-than-expected 1.2% in July. Whether that can be sustained with the enhancements to unemployment insurance now expired and with the delays in Washington on the terms of the next fiscal support package remains to be seen.
Over in Europe, the second estimate of GDP in Q2 was unchanged showing a 12.1% contraction, driving the decline in through the year terms from -3.1% to -15.0%. The emergence of the pandemic leading to stringent shutdowns hit Spain the hardest as its economy contracted by 18.5% in Q2, while a surge in virus cases back in March led to a 12.4% decline in GDP in Italy. Germany, the bloc's largest economy, fared slightly better but still contracted by 10.1% in the quarter. The labour market sustained significant damage through the June quarter as employment declined by a record 2.8% to be down by 2.9% over the year. As severe as Q2's decline in GDP in Europe was, a more protracted shutdown in the UK led to that economy posting an even steeper contraction of 20.4% quarter on quarter. With spending constrained by the shutdown, household consumption plunged by 23.1% in the quarter, while the stress placed on firms' cash flow amid an extremely uncertain climate saw business investment collapse by 31.4%q/q. The monthly estimates showed the economic contraction was at its most severe in April (-20.0%m/m), but the gradual easing of restrictions led to the initial phase of the rebound coming through by the end of the quarter with the June estimate for GDP up by 8.7%m/m. Paradoxically, despite the UK experiencing a historic economic contraction, its measured unemployment rate for the 3 months through to June was unchanged at 3.9%. Explaining that situation is the effect of the UK Government's furlough scheme that has been keeping workers attached to their employers, though with that due to be wound up by the end of October the extent of the dislocation to the labour market will not be known for some time. Lastly, amid an unnerving return of virus cases in New Zealand, the RBNZ added more policy support this week by expanding and lengthening its asset purchase program and also keeping the option of moving to negative rates on the table.
