Highlighting the impact of the increase in uncertainty, the RBA's quarterly Statement on Monetary Policy (SoMP) conveyed a more pessimistic outlook for the domestic economy than anticipated back in May, due in part to the reversal of Victoria's reopening that is expected to subtract at least 2ppt from national GDP growth in the September quarter. August's SoMP outlined the impact on the domestic economy from the national shutdown between late-March to early May was less severe than had been anticipated, though a slower recovery was now expected with ongoing uncertainty a larger weight on investment in particular. The RBA still forecasts the contraction in the economy to be 6% through the year to 2020, but it now expects business investment to decline by 17%Y/Y (was -13% in May's SoMP) and residential construction activity to fall by 14% (from -13%), whereas the profile for household consumption was revised to show a smaller expected decline of -7% from -9% previously. The outlook in 2021 is seen to be less robust at 5%Y/Y from its previous forecast 6%, with the key change in that downgrade relating to slower growth in household consumption (at 6%Y/Y from 9%) due to more and prolonged weakness in the labour market. The timing of the increase to the peak in the unemployment rate at 10% has been pushed out by 6 months to the end of the second half of 2020 and is then expected to decline more slowly ending 2021 at 8.5%, which is 1ppt higher than its previous estimate. For 2022, the RBA has penciled in economic growth of 4%, which would mean a return to pre-pandemic levels of output will take around 2 years. For a more optimistic outlook to ensue, the RBA stressed the importance of containment of further virus outbreaks and improved confidence.
On the local data flow this week, retail sales outperformed consensus in rising by 2.7% in the month of June as the annual pace lifted to 8.5% from 5.8% (see here). The pandemic has induced enormous volatility into monthly retail sales, with the shutdown leading to a record fall of 17.7% in April ahead of a record increase of 16.9% in May on the reopening. Taken together, nominal retail sales declined by 2.3% over the June quarter and with price levels reported to have increased by 1.2% over the period, the overall volume of trade in the retail sector contracted by 3.4% in Q2 (see chart of the week, below).
Chart of the week
In the housing market, price declines remained contained at 0.6% in July on a national basis according to CoreLogic's Home Value Index, while the easing of social distancing restrictions enabled housing finance commitments to rebound by 6.2% in June (see here). Meanwhile, the nation's monthly trade surplus widened to $8.2bn in June, though this missed the $8.8bn figure anticipated, as exports lifted by 3.5% to outpace a 1.3% rise on imports (see here). The pandemic had a significant impact on trade flows over the June quarter as earnings from exports declined by around 8%, while spending on imports plummeted by 13.7% with the collapse in offshore tourism due to the travel ban the main contributor.
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Moving to events offshore where in the US negotiations for the next fiscal support package made next to no progress over the past week with both sides of the house still appearing to be wide apart on the size of enhancements to unemployment insurance, which expired at the end of July, and the composition of state aid to assist in the reopening process. The data flow was highlighted by the latest employment report that showed a 1.76m rise on non-farm payrolls in July, outpacing the median estimate for a 1.48m increase. Between May and July, around 9.3m jobs were restored to the US economy, representing around 42% of the jobs that came at bay to the onset of the pandemic. In a widely upbeat report, the unemployment rate continued its descent from April's peak (14.7%) falling from 11.1% to 10.2% (consensus was 10.6%) and the broader underemployment measure declined by 1.5ppts to 16.5%. Markets were also buoyed by upside results on the latest ISM surveys for the month of July. The manufacturing survey showed activity lifted to 54.2 from 52.6 in June (readings > 50 indicate expansion) that was driven by a strong lift in new orders to a two-year high (61.5) and by an expansion in production (62.1). In the services (non-manufacturing) survey, activity in the sector posted a 1.0ppt increase to 58.1 to register a second consecutive month of expansion. It was the services sector that took the brunt of the disruption caused by the pandemic and that was reflected in the patchy underlying detail. The order books of services firms saw a healthy 6.1% rise reflecting the reopening of the domestic economy, though it is a completely different story when looking at export orders that rolled over by 9.6% in the month with the pandemic weakening demand from offshore clients, while the 6.6% fall in imports is likely to reflect the impact of firms scaling back investment plans. Meanwhile, officials from the Federal Reserve were cautious in their remarks this week. Vice Chair of the Fed Richard Clarida noted signs of a slowdown in activity from high-frequency indicators, while the Cleveland Fed President Loretta Mester highlighted that many firms in her district's liason program had reported they were considering laying off staff and delaying or cancelling capital expenditure plans.
Following the outbreak of the virus that led to severe and widespread shutdowns, the euro area economy contracted by around 15% through the first half of the year, but the signs this week remained consistent with growth returning at the start of Q3. Reflecting the initial phase of the reopening of the bloc, economy-wide activity advanced at its fastest pace in more than two years in July according to IHS Markit's composite PMI reading that came in at 54.9 from 48.5 in the month prior (readings > 50 signal expansion). Activity in the services sector improved to 54.7 from 48.3 to be leading the recovery ahead of a more moderate rebound that is coming through from the manufacturing sector at 51.8 from 47.4 in June. Meanwhile, the impact of fiscal support measures and the accumulation of pent-up demand has also seen households come out of the shutdown with initial vigour that has restored retail volumes to pre-pandemic levels after inflation-adjusted turnover increased by a further 5.7% in June following a 20.3% surge in the month prior. However, while these are positive signs, the sustainability of the rebound remains highly uncertain following renewed concerns around the virus, the ongoing presence of social distancing measures, and the impact of a weak global economy weighing on the bloc's key external sector. In the UK, the Bank of England's MPC held policy settings unchanged at this week's meeting, with rates at 0.1% and the target for asset purchases at £745bn. The Bank also published its latest Monetary Policy Report which conveyed a less pessimistic near-term outlook with GDP now expected to contract by 9.5% through 2020 compared to its previous estimate for a decline of 14% after the shutdown in the UK was ended earlier than had been anticipated. However, the recovery in 2021 is seen to be less robust with GDP projected to expand by 9% — a downgrade from 15% in May's forecasts — as increased uncertainty dampens the outlook for investment for longer. For the time being, the BoE are indicating that their preference for policy is around forward guidance and asset purchases, but that it has the prospect of negative rates "under review".
