Australian housing finance commitments decline in February

Ahead of the impact of COVID-19, Australian housing finance commitments fell by 1.7% in February; its first month-to-month decline since May last year. Weakness was evident across both the owner-occupier and investor segments in February and likely presages steeper declines in the months ahead.       

Housing Finance — February | By the numbers

• Housing finance commitments by value (excluding refinancing) declined by 1.7% in February to $19.456bn, whereas the median estimate was for a 2.0% rise, while January's initially reported 4.6% advance was revised to 1.3%. In annual terms, growth in the value of commitments approved slowed from 17.1% to 13.1%.  
• Owner-occupier commitments fell by 1.7% in February to $14.151bn following a 1.8% lift in the month prior (revised from 5.0%), while annual growth weakened from 20.7% to 15.8%.  
• Commitments to the investor segment contracted by 1.9% in the month to $5.304bn after a flat outcome in January (revised from 3.6%), resulting in annual growth easing from 8.4% to 6.3%. 

• Details for loan approvals (by number) to the owner-occupier segment in February were;
• Loans to purchase established dwellings fell by 1.3% to 19,888 (-2.5%yr)
• Loans for the purchase of newly built dwellings contracted by 8.9% to 3,679 (+29.0%yr)
• Loans for dwelling construction increased by 1.9% to 3,283 (-1.7%yr)

Housing Finance — February | The details 

The total value of housing finance commitments approved (excluding refinancing) in February fell by 1.7%, which was its first decline on a month-to-month basis since May 2019 and cut 4.0ppts off the annual growth rate to 13.1%. Recall that May was when the federal election was held, and following the return of the Coalition government, sentiment in the housing market received a boost as uncertainty around touted changes in taxation policy was removed. A month later, the Reserve Bank of Australia recommenced its easing cycle lowering the cash rate to 1.25%; the Board would then go onto deliver an additional 50 basis points of easing through the remainder of 2019. Added to an easing in macroprudential controls, these factors helped to drive an upswing in housing finance demand, though that now appears at an end due to COVID-19 restrictions that will disrupt activity going forward. Early signs of this weakness played through both the owner-occupier and investor segments in February. Owner-occupier commitments fell by 1.7% — their first monthly decline since June last year — with growth over the year pulling back from 20.7% to 15.8%. In the investor segment, commitments fell by 1.9% — their first contraction since September 2019 — slowing annual growth to 6.3% from 8.4%.    

  

Turning to the state details, owner-occupier commitments were mixed in February with declines in New South Wales -8.7%mth (+14.5%yr), Victoria -3.8%mth (+19.9%yr) and South Australia -1.5%mth (+1.8%yr), while gains were recorded in Queensland 4.7%mth (+15.0%yr), Western Australia 5.9%mth (+18.9%yr) and Tasmania 6.6%mth (-0.2%yr). 

Commitments to the investor segment advanced across Victoria 2.5%mth (+15.2%yr), Queensland 2.3%mth (+19.0%yr), Western Australia 3.9%mth (+15.2%yr) and Tasmania 17.0%mth (+23.8%yr) but pulled back in New South Wales -3.7%mth (-2.3%yr) and South Australia -24.2%mth (-15.8%yr).

  

Housing Finance — February | Insights

The upswing in housing finance approvals from mid-2019 to early 2020 looks to have reached its peak with activity to be disrupted by a government-mandated prohibition on open house inspections and public auctions, while the downturn in economic conditions and uncertainty over the outlook will obviously also weigh on volumes and hit demand for housing finance.   

Australian firms' cash flow hit by COVID-19

The ABS's second survey of business impacts due to COVID-19 highlighted a widespread hit to cash flow and a shift in working arrangements. This survey sampled 3,000 firms, with a response rate of 40%, and was in the field between March 30 and April 3. According to the findings, 66% of businesses reported that either cash flow or turnover had been negatively impacted by the onset of the crisis. As per the chart, below, hardest hit have been firms in accommodation and food services with travel restrictions and social distancing measures curtailing demand and impacting trading conditions. 

Source: ABS

In terms of how businesses have reacted to the shock from COVID-19, the most common responses were making changes in the delivery of products and services (38%), such as shifting to online platforms, and renegotiating property lease agreements (38%).

Overall, during the survey week, the ABS found that 90% of firms were still operating, but of the 10% that were not, 70% of those were closed as a direct consequence of COVID-19. The chart, below, shows the percentage of firms in each industry still operating, with the area of the segments representing the share of each industry to the total business population. Once adjusted by relative size, the chart reiterates the notion that firms in the accommodation and food services industry have been most impacted by COVID-19.    

Source: ABS

The other key finding in this survey was that 47% of firms were prompted into making changes to their workforce as a result of COVID-19. The chart, below, provides a breakdown of the alterations businesses have made around staffing grouped by the size of business. Overall, it shows that the most common adjustment has been to reduce hours, followed by placing staff on paid leave ahead of staff either taking unpaid leave or being stood down.

 Source: ABS

Firms ranging in size from 20-199 and 200 or more employees have shown the most sensitivity to the COVID-19 impact. Firms in those brackets have tended to respond in the first instance by reducing work hours and they have been much more prevalent in placing staff on paid or upaid leave or standing employees down than their small business counterparts. The next graphic provides a granular analysis of the workforce changes that have occurred in the nation's 5 largest employing industries, which in total account for almost 50% of the jobs in the Australian economy. Once again, there has a prominent impact on firms in accommodation and food services, with 70% reducing work hours and 43% either standing employees down or placing staff on unpaid leave.

Source: ABS

RBA maintains cash rate and yield targets

The Reserve Bank of Australia Board "reaffirmed" the targets for the cash rate (0.25%) and 3-year Australian Government yield (0.25%) at its monthly policy meeting today. On the fundamentals, the decision statement from Governor Philip Lowe outlined that while "considerable uncertainty" attends the near-term outlook, the impact of the COVID-19 outbreak is expected to lead to "a very large economic contraction" in the June quarter, with the unemployment rate anticipated to "increase to its highest level for many years". Governor Lowe's assessment was that the recent policy responses from the Bank and the nation's fiscal authorities would "help ensure that the economy is well placed to recover once the health crisis has passed and restrictions are removed", albeit acknowledging that the interim would be "a very difficult period" for households and businesses.

With the cash rate having been lowered to its effective lower bound, the focus of this statement from a policy perspective was around the 3-year yield target. The governor noted that since the Bank commenced bond purchases (March 20), $36bn in Commonwealth and semi-government securities had been added to its balance sheet, with the effect of keeping the 3-year Commonwealth bond yield around the 0.25% target and improving market functioning. While noting that the Bank "will do what is necessary to achieve the 3-year yield target", the governor added that if liquidity conditions were to continue to improve, its bond purchases were likely to become "smaller and less frequent". The basis for that assessment so soon after the program has commenced appears to be that its earlier actions support liquidity conditions through daily repo operations had been successful and that with its $90bn Term Funding Facility only just starting to be drawn upon, that situation would be likely to continue, ensuring that funding costs for the banking system would remain low and allow that to be transmitted into the real economy through lending to businesses and households.   

In the concluding paragraph, the governor reiterated the forward guidance around the cash rate target that it would not be raised "until progress is being made towards full employment and it is confident that inflation will be sustainably within the 2–3 per cent target band". The minutes from today's meeting are scheduled to be released on April 21. 

Australia's trade surplus moderates to $4.36bn in February

Australia's monthly trade surplus moderated in February but came in on the high side of estimates. Export earnings were hit by a sharp reduction in services credits in response to government-mandated travel restrictions placed on non-resident arrivals from China following the COVID-19 outbreak, while import spending declined further in line with weak domestic demand conditions and a lower Australian dollar.  

International Trade — February | By the numbers

• Australia's trade surplus declined by $384.0m to $4.361bn in February; above the median estimate of $3.75bn, albeit around a wide range from $2.2bn to 5.2bn indicative of considerable uncertainty in the current climate. January's trade surplus was revised down from $5.21bn to $4.745bn.  
• Export earnings contracted by 4.7% in February (-$1.882bn) to $37.76bn; its steepest month fall (in %age and nominal terms) since April 2017. As a result, the decline in export earnings through the year widened from -1.2% to -6.9% to be contracting at its fastest rate in 4 years. 
• Import spending fell by 4.3% (-$1.498bn) in February to $33.399bn to accelerate the annual decline from -1.5% to -5.6%; its sharpest pace of contraction since September 2016.

 

International Trade — February | The details

Starting on the export side, the 4.7% hit to earnings in February (-$1.882bn) was largely driven by a 9.7% fall (-$846.0m) from the services sector. The main influence was a 14.8% decline in tourism earnings (-$862m) after travel restrictions by the Federal government were implemented on February 2 for non-resident arrivals from China, which was the epicentre of the COVID-19 outbreak. Earnings from goods exports sustained an aggregate fall of 3.4% in the month (-$1.036bn) on broad-based weakness from rural goods (-7.4%), non-rural goods (-1.6%) — driven by a notable 8% slide in iron ore credits on lower shipment volumes — and non-monetary gold (-23.2%). 

After a 2.8% fall in import spending in January, that weakness extended into February (-4.3%), impacted by the headwinds from weak domestic demand conditions and a lower Australian dollar. Spending on imported goods pulled back by 5.5% in the month, which reflected weakness across consumption (-7.8%), capital (-7.0%) and intermediate goods (-2.4%). Service imports only fell by a modest 0.8%, though this comes ahead of significant weakness in March due to offshore travel being greatly dislocated by COVID-19.

International Trade — February | Insights 

A more severe decline in February's trade surplus was expected, though the 4.7% fall in export earnings was to a large degree offset by a 4.3% reduction in import spending. Clearly, COVID-19 will have a much more significant impact on these data going forward due to economic activity being disrupted by more widespread shutdowns, social distancing measures and travel restrictions. Greater insight around these impacts will be available on April 23 with the ABS to publish a preliminary estimate of March's merchadise trade data. 

Preview: RBA April meeting

The Reserve Bank of Australia Board holds its monthly policy meeting today; the third occasion it has met in the past 5 weeks. At its meeting back on March 3, a deteriorating outlook in response to the COVID-19 outbreak prompted the Board to lower the cash rate by 25 basis points to 0.5%. With global markets under severe strain and after aggressive easing by other central banks, the Board held a special meeting on March 18 and delivered a number of significant announcements the following day. These announcements included a rate cut of 25 basis points taking the cash rate to its effective lower bound of 0.25% and introducing a state-based form of forward guidance, commencing bond purchases to target a yield of 0.25% on a 3-year Commonwealth Government security, establishing a $90bn liquidity facility offering 3-year funding to the banking sector fixed at 0.25% and making an upward adjustment of 10 basis points on exchange settlement balances.

To be clear, these are very significant announcements and change the tools the Bank will use to pursue its objectives. For a Board that never expected to have to turn to unconventional measures, how this new policy framework will play out and how it will communicate its thinking to the markets in that situation are unknowns. What is known is that the minutes from the March 18 meeting confirmed the cash rate was now at its effective lower bound and that the Board had "no appetite" for going negative. With quantitive easing now its primary policy tool, these minutes outlined that the 3-year yield target would likely remain in place "until progress was made towards the Bank's goals of full employment and the inflation target" and that "it would be appropriate to remove the yield target before the cash rate itself was raised". By way of background, as of yesterday (6/4), the RBA had purchased a total of $31.0bn of Commonwealth Government Bonds, with daily purchases starting out on March 20 at $5.0bn, then $4.0bn (23rd and 24th), $3.0bn (26th to April 1) and then $2.0bn thereafter. The chart, below, highlights this program has kept the 3-year yield well anchored around its target.         

In Governor Lowe's decision statement, to be released at 2:30PM (AEST), the key interest will be around how effective the initial stages of its quantitive easing program are assessed to have been and if the possibility of future changes around its structure is left open. With visibility over the outlook extremely limited, the Governor is likely to reiterate the sense of coordination between the Bank and the nation's fiscal authorities in supporting the domestic economy through the shock from COVID-19.

Macro (Re)view (3/4) | A long way to the other side

Policymakers on both the fiscal and monetary sides remained highly active once again this week as the cyclone that is covid-19 continues to unleash tremendous damage across the globe. Confirmed covid-19 cases on a worldwide basis doubled this week moving north of 1 million, with the crisis in the US deepening to a little above 245,000 compared to around 85,000 a week ago. In the markets, though volatility has eased somewhat it remains at elevated levels and with such limited visibility over the outlook and ongoing concerns around credit risk, last week's rally across global equities was not sustained.

Focusing on developments in Australia, it was a significant week on the fiscal front in efforts to counter covid-19. Following an initial support package of $17.6bn on March 12 that was then upscaled to $63.8bn on March 22 (reviewed here), Federal Treasury more than doubled those measures through the announcement of a $130bn wage subsidy (reviewed here). In total, fiscal support to the Australia economy has risen to $193.8bn (10.2% of GDP) over the period out to 2023/24, though the bulk of this is concentrated through the remainder of 2019/20 and then into 2020/21, with our estimates indicating the impact over this period will equate to a little above 20% of GDP. The wage subsidy bill is a hugely significant policy announcement intent on limiting a precipitous rise in unemployment by keeping workers linked to their employers through the period of the crisis, while at the same time providing workers with an income replacement for lost wages. The reach of the package is vast, with businesses of turnover of less than $1bn able to qualify if revenue has fallen (or is likely to) by 30% over their usual reporting period (1 or 3 months) compared to a year ago, while for firms with turnover exceeding $1bn that requirement is raised to a 50% fall in turnover, while self-employed workers can also participate. The 'JobKeeper' policy is back-dated to March 1, such that for each eligible employee on the books of a qualifying business on that date, the government will subside their wage by $1,500 per fortnight for up to 6 months from April onwards. By design, the policy aims to keep unemployment at bay by maintaining the employer-employee link through the crisis, giving businesses the chance to turn the key and reactivate operations quickly once the disruption clears. Treasury's estimates are that around 6 million employees (equating to around 44% of the labour force) will receive the JobKeeper payment. In a further boost for households, the government announced a $1.6bn assistance package for the childcare sector that will offer families access to free childhood education and care services for the next 6 months.

The fiscal response followed sweeping policy changes made by the Reserve Bank of Australia at its special policy meeting 2 weeks ago where the cash rate was lowered to 0.25%, quantitative easing was started and a $90bn liquidity facility to the banking sector was announced. The Board's minutes from that meeting were released this week which highlighted the close level of coordination occurring between the Bank and governments at a federal and state level to support the economy through the covid-19 shock. Next Tuesday, the Board meets again where it is no longer a question of rates with the cash rate at the Effective Lower Bound. Instead, its focus will be around the effectiveness of its quantitive easing measures, which it will likely view favourably given the 3-year Commonwealth Government yield has been anchored around its 0.25% target since the policy was implemented. The domestic data flow this week related to the period pre-covid-19 but provided insight into conditions going into the crisis. According to CoreLogic, national dwelling prices were gathering strong momentum increasing by 0.7% in March and by 7.5% over the year, though activity in the market will be curtailed going forward given that open house inspections and auctions are prohibited under social distancing restrictions. Similarly, despite snapping back with a 19.9% rise in February, building approvals are at risk of rolling over in the near term and that would weigh on the residential construction sector that is already in a downturn (reviewed here). Meanwhile, retail sales rebounded from a bushfire-impacted January (-0.3%mth) posting a stronger-than-anticipated rise of 0.5% in February in response to strong spending in supermarkets that was likely due to stockpiling ahead of covid-19 but significant weakness lies ahead for the sector due to social distancing and store closures (reviewed here). 

— — —

Turning the focus offshore, the scale of the crisis in the US was rammed home by a labour market that is in freefall due to shutdowns and disruptions caused by covid-19. After 113 consecutive months of employment gains dating back to late 2010, employment on non-farm payrolls collapsed by 701k in March; significantly worse than the 100k fall anticipated and the sharpest decline in a single month in 11 years. This resulted in the unemployment rate spiking from 3.5% to 4.4% — its highest since August 2017 — even as participation in the workforce pulled back from 63.4% to 62.7% in response to deteriorating conditions. Extraordinarily, the reference period on which this payrolls report was based pre-dated government-enforced shutdowns as the covid-19 spread widened. In the period since, the number of US citizens filing for unemployment benefits has exploded, with an eye-watering 3.3 million claims coming through in the week ending 21 March, only to be left in the dust of a 6.6 million surge for the 7 days through to March 28. Together, these reports indicate that in just 14 days, unemployment in the US surged by 9.9 million. To put that into perspective, that figure is around 6.5% of the labour force so based on March's payrolls report, the 'live' unemployment rate in the US is in the order of 11%; a level higher than the 10.0% peak it reached after the financial crisis. Predictably, with the US economy shuttered, last week's dire preliminary reads on activity levels in IHS Markit's PMI survey were confirmed on Friday. The composite index (combining services and manufacturing) slumped to 40.9 in March from 49.6 in month prior (readings < 50 signal contraction), indicating that the US economy contracted by an annualised pace of around 5% in Q1, according to IHS Markit. Activity in the services sector has collapsed (from 49.4 to 39.8) as businesses closed and demand conditions weakened. Against this deteriorating backdrop, the Federal Reserve continues to ramp up its support through the rapid expansion of its balance sheet that has risen by $1.1tn in the past 2 weeks alone to sit at $5.8tn (see chart of the week, below). The Fed also made a policy announcement this week establishing a temporary repurchase agreement facility that follows its recent success with its swap lines and will allow other central banks to temporarily exchange Treasury holdings for US dollars to ensure ongoing liquidity conditions remain favourable. 

Chart of the week

Across the Atlantic, the stop in activity in the euro area economy was even more severe than last week's data implied. IHS Markit's composite PMI pointed to an economy expanding at a modest pace of 51.6 in February but there had been a complete reversal by the end of March to 29.7 in response to containment measures brought on by governments to contain the covid-19 spread. Analysis by IHS Markit indicated that GDP growth in the bloc is currently contracting by an annualised pace of 10.0%, with steeper falls expected to come through as activity in the services sector is effectively shuttered. Unsurprisingly, the detail at the country level is dire with activity in Germany (35.0), France (28.9), Spain (26.7) and Italy (20.2) all at record lows. The hard data through the week was all from the period pre-covid-19 shutdowns, with the unemployment rate in the bloc entering the crisis at 7.3% in February, down by 0.1ppt on the prior month, and retail sales volumes advancing by 0.9% month-on-month in February to be up by 3.0% through the year.

Lastly in Asia, activity surveys in China that had plunged to record lows in February as the early outbreak of covid-19 ground the economy to a halt snapped back in March; the official manufacturing PMI bouncing from 35.7 to 52.0 and the services gauge from 29.6 to 52.3. Though these reads might suggest activity has recovered quickly, they mainly reflect a rise in sentiment in March compared to February when factories and businesses were locked down rather than an expansion of output. Significant headwinds will continue to impact the world's second-largest economy because with shutdowns now in force across the globe this will hit demand for its exports.     

Australian retail spending rises 0.5% in February

After a bushfire-impacted start to 2020 for the nation's retail sector, turnover advanced above expectations rising by 0.5% in February driven by a strong uptick in spending in supermarkets and grocery stores ahead of the onset of the covid-19 crisis. 

Retail Sales — February | By the numbers

• Turnover on a national basis increased by 0.5% in the month (seasonally adjusted) to $A27.755bn; coming in above the consensus estimate of 0.4%. Sales in January declined by 0.3% as the summer bushfires curtailed activity. 

• In annual terms, turnover growth slowed from 2.0% to 1.8% to a 28-month low. 

Retail Sales — February | The details 

In last month's review, we covered how the summer bushfires weighed on retail spending in January (-0.3mth) as trading hours were disrupted and the related smoke haze kept people indoors. Just as that crisis was dissipating another one in the form of the covid-19 outbreak was on the horizon. The effect of the latter was to some extent evident in February's report as turnover rebounded by 0.5%, which was led by the food category (0.8%mth) as consumers began to stockpile. 

Consistent with this, monthly turnover growth in supermarkets and grocery stores advanced from 0.4% to 1.1% in February; its strongest monthly rise since April 2018, representing a sizeable pick-up considering the segment accounts for around 34-35% of total retail spending in Australia. Other patterns that appeared consistent with covid-19 were; pharmaceuticals, cosmetic and toiletry goods (2.2%mth) posting their strongest month rise since June 2015; and cafes and restaurants remaining weak post bushfires (-0.4%mth) as demand for takeaway services continued to strengthen (+1.0%mth).      

 

Outside of these effects, spending on household goods (0.7%) and in department stores (3.1%) advanced, but clothing and footwear declined for a third straight month (-2.9%) to be down by 2.3% over the year and contracting at its sharpest annual pace since September 2011. This segment saw a strong rise in November (3.6%) due to Black Friday sales but it has unfortunately been a period of weakness since for those retailers.

Switching to the state details, outperformance relative to the national result (0.5%mth) came through from Western Australia 1.2% (2.4%yr) and Queensland 0.8% (4.8%yr), with Victoria in line at 0.5% (2.5%yr) ahead of South Australia at 0.4% (0.9%yr) followed by a notably soft outturn in New South Wales of 0.0% as annual growth in the state fell to its weakest in 8 years (-0.8%). 

Turnover was also flat in Tasmania in the month, though it remained in first place for the fastest annual pace of retail sales growth in the nation (6.1%yr). 

    

Retail Sales — February | Insights

A slightly better-than-expected result in February relative to the ABS's preliminary estimate and market consensus (both 0.4%), though that means very little at this extremely difficult juncture for the retail sector, both at home and offshore, that is being battered by covid-19 as governments have brought in necessary but perversely destructive measures to limit the spread of the outbreak, manage the demand placed on health systems and keep citizens safe. The depressing reports of widespread job losses from some of the nation's major retailers and forced closures of restaurants and cafes (outside of takeaway) are a testament to that. Clearly, demand has risen very strongly in certain areas of the sector such as supermarkets, pharmaceuticals, liquor stores (and possibly also hardware) but the headwinds are immense. More optimistically, recent measures by the Federal government to provide financial support to businesses and households could help drive growth in retailers' online platforms in the months ahead.

Australian dwelling approvals rise 19.9% in February

Australian dwelling approvals lifted by 19.9% in the month of February, though this came after a sharp decline of 15.1% in January, with seasonal factors likely amplifying the volatility. The result was also ahead of the escalation in the covid-19 outbreak.  

Building Approvals — February | By the numbers

• Dwelling approvals (private and public sectors) in seasonally adjusted terms lifted by 19.9% in February to 15,698; well ahead of the median forecast for a 4.0% rise. In January, approvals fell by 15.1% (revised from -15.3%). 
• In year on year terms, approvals fell by 5.8% from -11.1% in the previous month (revised from -11.3%). 
• House approvals softened by 1.7% in the month to 8,623 (prior rev: 0.7%mth) for a decline of 5.1% over the year (prior rev: -7.4%yr). 

• Unit approvals surged by 63.7% to 7,075 — after gapping down by 35.6% in January — reducing the annual decline from -17.8% to -6.7%.

Building Approvals — February | The details 

Dwelling approvals continued their volatile start to 2020 with February's 19.9% rise (+2,602) more than offseting January's 15.1% fall (-2,330). The ABS reported no significant impact from either the summer bushfires or covid-19 so these results probably reflect seasonality more than anything. The surge in unit approvals of 63.7% (+2,752) after the pullback in January of -35.6% (-2,387) appears consistent with that assessment. The more stable house segment saw approvals easing modestly by 1.7% (-150) following January's 0.7% increase (+57).  

The state outcomes are summarised in the table, below. Aside from Queensland (-5.2%mth), the other states saw approvals increase in February, which was largely a reverse of what occurred in January. Approvals snapped back in Victoria (-33.9% to +55.7%), South Australia (-9.6% to 11.1%) and Western Australia (-6.0% to 6.2%). New South Wales strengthened (4.1% to 12.7%) as did Tasmania (1.3% to 12.8%). Against the run of play, Queensland rolled over in February after rising strongly (8.9%) in the month prior.   

The value of alteration work approved to existing residential properties pulled back by 7.7% in February to $687.9m to mostly offset January's 9.9% rise. Approvals in the non-residential segment also declined in the month (-6.1%) to $4.359 after lifting by 4.5% in January. 

Building Approvals — February | Insights 

The headline increase in dwelling approvals (19.9%) was flattered by the surge in unit approvals (63.7%) that was likely associated with seasonal factors. In March, concerns around the covid-19 outbreak escalated in Australia resulting in widespread social distancing measures coming on before the end of the month. With those restrictions seeming set to remain in place for at least the next few months, dwelling approvals are likely to weaken and intensify the headwinds impacting the residential construction sector that as of Q4 2019 was mired in its steepest downturn since 2012.

Australian Treasury's $130bn wage subsidy to counter covid-19

The Australian Federal Treasury has announced a $130bn wage subsidy to support the domestic economy through the covid-19 outbreak. This is Treasury's third and most significant response to the pandemic and follows an initial support package of $17.6bn announced on March 12, which was subsequently scaled up to $63.8bn on March 22 (see analysis on those measures here). Adding in the $130bn wage subsidy, total Commonwealth support has been boosted to $193.8bn out to 2023/24 (10.2% of annual GDP), though most of this is to impact the economy before June 30 and then into the 2020/21 financial year. Over this period, total Commonwealth support is around 20% of GDP, we estimate. 

Under the 'supporting businesses to retain jobs' measure, the intent of the wage subsidy is to allow employers that have been significantly impacted by covid-19 to reactivate trade quickly after the period of disruption eases by helping them to retain staff in the interim. Eligibility for businesses to participate is as follows; 

• Where turnover is below $1bn; turnover needs (or be expected) to fall by more than 30% over their usual activity statement reporting period (one or three months) relative to the same period a year ago 

• Where turnover is above $1bn; turnover needs (or be expected) to fall by more than 50% over their usual activity statement reporting period (one or three months) relative to the same period a year ago

Note that non-for-profit organisations can participate but the nation's 5 largest banks—that are subject to the 'Major Bank Levy'—have been excluded. Self-employed individuals can also participate in the case where they expect to sustain a 30% reduction in turnover (for at least a one-month period) relative to the same period a year ago.  

The scheme is to be administered by the ATO and will see qualifying businesses receiving wage support from the government in the form of a $1,500 'jobkeeper payment' per fortnight per each eligible employee that was on their books on March 1, including any that have since been stood down provided their former employer re-engages them, for a maximum period of 6 months. The scheme started on March 30 and payments will be made by the ATO to employers monthly in arrears from the first week of May. 

An 'eligible employee' is one who was either a full-time, part-time or long-term casual (tenure of at least 12 months) with their employer as at March 1. They must also be an Australian citizen or permanent visa holder or meet other eligibility criteria set out here.  

Where those qualifications are met, receipt of the wage subsidy requires an employer to ensure that each eligible employee receives remuneration of a minimum of $1,500 per fortnight for a maximum of 6 months. Thus, effectively;

• an employee ordinarily receiving less than $1,500 per fortnight (before tax) will have their wage topped up by the employer to meet this threshold
• an employee ordinarily receiving $1,500 per fortnight (before tax) maintains the same level of income
• an employee ordinarily receiving more than $1,500 per fortnight (before tax) has the first $1,500 of their wage subsidised, with the employer then able to top up the payment so that it remains in line with their existing arrangement

In the case where an eligible employee was on the books as at March 1 but then subsequently stood down, their previous employer can re-engage them and receive a $1,500 payment per fortnight, which they then must then ensure goes in full to the employee, before any top-up occurs. The design of the scheme provides employers with the discretion to pay superannuation on the additional component over and above their ordinary wage level. 

Supporting businesses to retain jobs fact sheet here 

Employer fact sheet here

Employee fact sheet here 

Macro (Re)view (27/3) | Covid-19 batters global economy

The impact of the covid-19 outbreak hit the data flow this week providing a glimpse into the scale of its impact on economic activity and employment, while stimulus efforts from fiscal and monetary authorities continued to advance in response. In the markets, there was a reversal of sorts from recent themes as risk assets rallied, liquidity concerns eased and US dollar strength was pared back. On the covid-19 front, confirmed cases globally according to the World Health Organization moved north of 500,000 with the US overtaking China as the nation with the highest case count, while Australia's count stood at 2,985; up from 709 at the end of last week, according to data reported by the Department of Health.   

In the US, after much delay, Congress and President Trump gave the green light to a $2tn stimulus package that is unprecedented in its size and scope but entirely appropriate given the scale of the crisis, both from a public health and economic perspective, unfolding in the world's largest economy. Emphasising this point was a truly shocking rise of 3.283m in the number of US citizens who filed for unemployment benefits for the first time in the 7-day period ending March 21; a number so high that it eclipsed the previous record high set back in 1982 by more than a factor of four, and in a single week erased all of the cumulative job gains achieved over the past 18 months (see, below). 

Chart of the week

The centrepiece of the stimulus package is cheques of $1,200 for individuals, with the benefit phasing out to zero for incomes between $75,000 and $99,000, while an additional $500 per child will also be available. To address the shock to the labour market, unemployment benefits have been scaled up and access to that assistance has been expanded. For businesses, Treasury will set aside $500bn for a lending program, with additional incentives available for small and medium-sized enterprises. There were further policy changes from the Federal Reserve this week, most notably the Committee announced it would move to open-ended asset purchases to ensure the transmission of low rates to the real economy remains and liquidity strains do not re-emerge in the Treasury and mortgage-backed securities markets. In other announcements, the Fed unveiled a range of new facilities to support the flow of credit to households and businesses. For an overall perspective on how the covid-19 outbreak has hit the US economy, IHS Markit's flash PMI for March reported that activity pulled back by its most since the financial crisis as the composite measure rolled over from 49.6 to 40.5 (readings < 50 signal contraction). The services sector took the brunt of the decline as activity fell from 49.4 to a record low of 39.1 in response to strict social distancing measures that have severely dented consumer-related industries such as restaurants and travel. Activity in the manufacturing sector also softened in March on the back of weakness in order volumes and production.

Over in the continent, March's flash PMI conveyed the severe impact that covid-19 has wrought on the euro area economy in just a single month as activity collapsed from a modest pace of expansion of 51.6 in February to its lowest level on record at 31.4 in March. Whereas the euro area's services sector had remained resilient to the global trade tensions that drove its key manufacturing sector into a severe downturn from mid-2018, it buckled under the pressure brought on by the covid-19 outbreak as governments in Germany, France and on the periphery escalated containment measures. Services sector activity almost halved in March to its lowest reading on record at 28.4, while enforced closures of businesses resulted in the most severe month of job losses in the post-financial crisis period. The manufacturing sector did not escape unscathed with activity falling from 48.7 to 39.5, which reflected the steepest fall in new orders in a single month in nearly 11 years. At least stimulus will be on the way, to be led by the largest economy in the bloc in Germany, with its parliament this week agreeing to terms on a €750bn stimulus package, while it also voted to suspend its debt ceiling in a move the will allow a further €156bn to be added later this year if required. The European Central Bank remained in focus this week as further details came to light regarding its recently announced Pandemic Emergency Purchase Programme (PEPP). This programme involves the Bank purchasing at least €750bn of private and public sector securities through to the end of 2020 to limit the financial fallout from covid-19. In a landmark decision, the Bank announced that all previously self-imposed limits would not apply in the PEPP, in effect giving itself unlimited flexibility on the type and quantity of purchases it is able to make. Staying with the ECB theme, an op-ed from its former President Mario Draghi published in the Financial Times generated plenty of attention in which he advocated for the public sector to use its balance sheet to protect the economy from the shock induced by covid-19. In the UK, the Bank of England's policy meeting saw its benchmark interest rate and asset purchases left unchanged, though the Monetary Policy Committee "stands ready to respond further as necessary to guard against an unwarranted tightening in financial conditions, and support the economy".

Turning to Australia, last Sunday the Treasury announced an expanded fiscal stimulus package that resulted in Commonwealth support rising from $17.6bn to $63.8bn (0.9% to 3.3% of annual GDP) over the period out to 2023/24 (analysis here). This expansion includes additional income support measures for households and more cash flow assistance for businesses. In an address to the nation on Friday, Prime Minister Morrison indicated that additional measures to support businesses through enforced closures will be forthcoming. A newly released series from the ABS on Thursday highlighted the distress that covid-19 has unleashed on the business sector with 96% of surveyed firms anticipating to be affected in the months ahead citing both demand and supply-side impacts (see here). Further emphasising the difficulty of the current environment, the Commonwealth Bank's flash PMI rolled over from 49.0 to 40.7 in March. Mirroring the trend from offshore, it has been the services sector hardest hit with activity falling from 49.0 to 39.8 on the back of falling demand and cancellations due to social distancing as well as uncertainty over the outlook.