Australian employment +210.8k in June; unemployment rate 7.4%

The easing of shutdown restrictions restored around 211k jobs to the Australian economy in June in an upside result on the consensus expectation for a rise of 100k. However, the initial phase of the COVID-19 pandemic saw total job losses of almost 875k between March and May. The national unemployment rate lifted from 7.1% to 7.4% in June and is now at its highest level since late 1998 as more Australians returned to the workforce.    

Labour Force Survey — June | By the numbers

• Employment on net increased by 210.8k in June (seasonally adjusted), a record monthly rise and well ahead of the consensus forecast of 100.0k. In May, employment was revised to show a larger fall of 264.1k from the -227.7k figure reported initially. 

• Headline unemployment increased by more than expected rising from 7.1% to 7.4% (vs 7.3% expected). Underemployment declined from 13.1% to 11.7%, bringing the underutilisation rate down from its record high of 20.2% to 19.1%. 

• The participation rate lifted by 1.3ppt to 64.0% to come in above consensus (63.3%).

• Aggregate hours worked surged by 4.0% in the month to around 1.66bn hours, slowing the pace of contraction in annual terms from -9.2% to -5.7%.

Labour Force Survey — June | The details

The reopening process out of the shutdown resulted in 210.8k coming back to the economy in the month of June. In context, this represents 24% of the jobs that fell victim to the pandemic and the actions taken by the authorities to contain the spread of the virus being restored. All of the gain in employment in June came from the part-time segment (+249.0k) as full-time work continued to fall (-38.1k).

    

Ahead of the pandemic, Australia's rate of workforce participation had been at its highest levels on record north of 66%. The shutdown and easing of the mutual obligation requirement associated with the receipt of the JobSeeker support payment saw this decline precipitously to its lowest level in two decades at 62.7% by May. In June, workforce participation lifted by 1.3ppt to 64.0% as more Australians were able to return to work and some mutual obligation requirements started to be reintroduced. As a result of the uptick in participation, the unemployment rate moved up from 7.1% to 7.4% to its highest level since November 1998. Clearly, with participation still well below its pre-pandemic level more upward pressure will be placed on the unemployment rate. 

Due to the nature of this pandemic where shutdowns were implemented, the dislocation to the labour market has been best reflected by its impact on hours worked. The reopening of the economy saw total hours worked rebound by 4.0% in June to around 1.66bn hours (-5.7%yr). This is down by 6% from its level in February. 

Accordingly, with more hours being worked, the rate of underemployment was brought lower from 13.1% to 11.7%. Combining the unemployed and underemployed, the rate of underutilisation as a share of the labour force eased from 20.2% to 19.1%. Both of these measures continue to provide a more accurate depiction of current dynamics in the labour market than the unemployment rate. 

Labour Force Survey — June | Insights

The upside result on the employment number of 210.8k was a positive, but not unexpected and consistent with the reopening narrative centring entirely on part-time employment that had been hit hardest by the shutdown through April into May. Over the period, employment in the part-time segment fell by 533.7k compared to a 337.8k contraction in full-time work. The easing of restrictions that occurred progressively from early May started to allow workers, particularly those in front-facing industries to return to their jobs, albeit in a restricted capacity, leading to an increase in hours worked across the economy. The very significant challenges that are ahead were best highlighted in Tuesday's NAB Business Survey. Capacity utilisation has fallen to well below average levels across several major industries and with efforts to contain the pandemic likely to be ongoing, repairing the extent of the damage sustained to the labour market will be very difficult indeed. Clearly, the return to shutdown in Melbourne and elevated concerns about the virus more widely will make this even harder.  

Preview: Labour Force Survey June

Australia's latest labour market report for the month of June is due to be released by the ABS later this morning at 11:30am (AEST). The COVID-19 pandemic has taken an enormous toll on the domestic labour market and those worldwide. Since February, total job losses in Australia exceed 830k and this has elevated the unemployment rate to its highest level in nearly 20 years at 7.1%. Furthermore, a significant portion of the labour force has been affected through disruptions to working hours, reflected by the rise in the broader underemployment measure to record highs north of 13% following the onset of the crisis. With the reopening of the Australian economy occurring progressively through May, the consensus call is for some of this damage to be restored with employment forecast to rise by 102k in June. 

As it stands | Labour Force Survey

Employment contracted by a much worse than expected 227.7k in May (consensus was -78.8k) following on from the shocking outcome in April where employment fell by 607.4k. 
  

  

Taking into account the 3.1k decline in March, total employment in Australia fell to 12.154m in May to be at its lowest level since March 2017. 

The unemployment rate lifted above consensus (6.9%) rising from 6.4% to 7.1% to its highest level since late 2001. However, it is key to highlight that the rate of workforce participation has plunged from record high levels of around 66% pre-pandemic to just 62.9% in May — its lowest since November 2000 — and this has prevented a much larger rise being reported in the official unemployment rate.   

More accurately reflecting the dislocations that have occurred, the underemployment rate (counting those employed but working fewer hours than desired) now stands at 13.1% (down from 13.8% in April) and the underutilisation rate (aggregating the unemployment and underemployment rates) is at a record high of 20.2%.   

Total hours worked in May came in at around 1.61bn hours to be down by 0.7% from the month prior and 9.0% lower through the year. The ABS estimates that between April and May some 1.55 million people (around 12% of the labour force) either had working hours reduced or worked no hours at all due to 'economic reasons', either as a result of being stood down or through there being insufficient work available to fulfill their usual allocation. Overall, the key message is that the rise in the unemployment rate vastly understates the impact the pandemic has had on the nation's labour market (see chart, below).

Market expectations | Labour Force Survey

There is a high degree of uncertainty over the potential outcome of today's report. The consensus call is for a rebound of 102k on the employment number in June following the reopening of the economy that started to occur over May and the ABS's high frequency data that suggests total employment on payrolls has advanced over the period captured by today's report. The band of individual estimates on the employment outcome ranges from -30k to +170k showing there is little conviction. The unemployment rate is expected to tick higher to 7.2% from 7.1%, while workforce participation is expected to pick up to 63.4% from 62.9% as more people were called back to work or were required to start looking for work with the mutual obligation requirements under the JobSeeker support payment returning in some capacity through June. 

What to watch | Labour Force Survey

In terms of the labour market, the initial phase of the pandemic was around assessing the scale and severity of the dislocation that occurred through job losses and disruptions to hours worked. This next phase is now about ascertaining the extent to which the reopening of the economy can restore some of the jobs that were lost through the shutdown, particularly with the government's fiscal supports in their current forms approaching their end dates. All this makes the headline employment number of key interest today. 

Australians' wellbeing improves on eased restrictions

The 7th ABS Household Impacts of COVID-19 Survey reported that the wellbeing of Australians had improved following the easing of social distancing restrictions, though the survey period (24-29 June) largely pre-dates the rise in Victorian virus cases and subsequent shutdown of Melbourne. The other main finding was that Australians were taking fewer health-related precautions in June compared with May, but again this could be at risk of reversing if concerns over the virus in Victoria reverberate more broadly.

The 3rd edition of this survey (for the period between April 29 and May 4) quantified the stress-related impacts of the COVID-19 pandemic on Australians. The good news is that this survey reported an easing in these tensions to what might be considered 'normal levels' as per the 2017-18 National Health Survey, though an elevated sense of nervousness does appear to be a unique consequence of this pandemic. 

Source: ABS

In terms of the types of stress that have been encountered by Australians, we see a clear improvement compared with what was reported in Survey 3. The largest improvements came from a reduction in loneliness to 9% in June from 22% in April, while only 8% now reported difficulty in maintaining a healthy lifestyle compared to 19% in April. Recall that Survey 6 identified signs of improvement in household finances (see here) and this was backed up in this latest edition with concerns around mortgage and 'other financial stress' declining from what were already low levels. The rate of mortgage stress fell from 4.2% to 1.4% in June and 'other financial stress' eased from 9.5% to 7.8% over the month. Rental stress ticked up very slightly from around 3% to around 4% but remains low overall. Somewhat surprisingly given the damage that has occurred in the labour market, anxieties around being unable to get a job was also low at around 4%, virtually unchanged over the month.   

Source: ABS

The other main change that the easing of restrictions brought on has been the relaxation in the level of precautions that Australians are taking. This was most evident in the rate of avoidance of social gatherings that fell to 66% in June from 79% in the month prior. More people were now comfortable in accepting home deliveries (27% from 20%) and less likely to avoid public spaces (66% from 79%). Some 92% of Australians still believed they were socially distancing and the practice of disinfecting surfaces has now become commonplace. Overall, the results suggest that while the extent of precautionary behaviour may have reduced, concerns around the virus are still front of mind for many. Clearly, this would be accentuated in Victoria given recent developments, but this could also have spillover impacts in the other states. 

Source: ABS 

Today's survey also shone some light on how the pandemic has changed the way in which Australians are spending their time. This is best conveyed by the increased level of participation in June compared with pre-pandemic times in personal screen time (+44%), time with pets (+35%), cooking and baking (+34%) and online shopping (+33%). These could well be long-term shifts in behaviour with the pandemic not appearing likely to abate any time soon.

Source: ABS

There has also been a shift in terms of people's diets with the survey showing that when compared to pre-pandemic times, consumption of takeaway meals, snack foods and alcohol have all increased markedly, particularly in the 18-64 age bracket. 

 Source: ABS

Macro (Re)view (10/7) | Reopening stumbles

Australia hit its first major stumbling block in the reopening process this week as what started out as localised lockdown orders in northern Melbourne were broadened by the state authorities to a city-wide shut down for the next 6 weeks amid an unnerving rise in its daily infection rate. As of Thursday, Melbourne went back into stage 3 restrictions that were in place during the height of Australia's nationwide shutdown from late March through April, with residents only permitted to leave their homes for essential purposes, while the other states have either closed or kept closed their borders to Victorians. The state of Victoria accounts for 23% of national output and around 26% of the population and with much of this concentred in the capital city of Melbourne, the shutdown will weigh on the Australian economy at a time when the reopening of the other states is accelerating. There is also the potential for the Melbourne shutdown to affect activity outside of Victoria if already weak household and business confidence turns lower on concerns that the virus may have spread into the other states and uncertainty more generally increases. In response, the Victorian government on Friday announced around $530m in support measures focused on providing cash flow assistance to businesses. The situation in Victoria is a reminder of three things; 1) containing the virus might require more than a single-round effort; 2) the rapidity at which the situation and outlook can change, and 3) that the economic recovery will not be synchronised across jurisdictions, whether in Australia or the rest of the world. Meanwhile, at the federal level concerns of an upcoming 'fiscal cliff' as the JobKeeper and enhanced JobSeeker policies near their scheduled end dates were alleviated with the prime minister and treasurer saying this week that more support measures will be forthcoming on July 23 when the government presents its updated economic and fiscal outlook. That there will be more fiscal support coming was largely a given, key will be the specific design of these measures and how targeted they will be.

In other events domestically this week, the Reserve Bank of Australia remained firmly unchanged on its policy settings at the July meeting with Governor Philip Lowe noting in the decision statement that its "accommodative approach will be maintained as long as it is required" (see here). That line reinforces the Bank's forward guidance on rates that they will not be raised from their current targeted level of 0.25% until such time as material progress is achieved in lowering the unemployment rate and returning inflation towards the 2-3% target band. Yields on 3-year Commonwealth Government bonds continue to trade close to the RBA's 0.25% target and with the domestic bond markets now assessed as functioning more effectively, the RBA's bond purchases have not increased since early May, though it was reiterated by the governor that it would "scale-up" these purchases again if required.  Contributing to the enhanced flow of liquidity in the markets has been the $15bn in drawings by banks from the RBA's Term Funding Facility. In combination with its cash rate and yield targets, Governor Lowe noted that these actions were "keeping funding costs low and supporting the supply of credit to households and businesses". The effect of this could be seen in the refinancing numbers within this week's housing finance update for May (see here). The number of external refinancing approvals granted by lenders to the owner-occupier segment surged to 21.7k totaling $10.1bn — both sitting at record highs — with borrowers taking advantage of the more favourable terms on offer in the market. However, this was against a record monthly fall in 'new' demand for housing finance that declined by 11.6% in May to $16.4bn, which reflects the scale of the disruption that the prohibition placed on open house inspections, public auctions and restrictions on mobility had on housing market activity during the shutdown. Lending commitments to owner-occupiers were down 10.2% month-on-month to $12.3bn (7.3%yr), while the investor segment recorded a sharper fall of 15.2% to $4.1bn to its lowest level in 17½ years.

Chart of the week 

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Turning to events offshore, markets remain focused on the reopening of the US economy with some officials from the Federal Reserve expressing caution over the sustainability of the rebound recently reported in the data flow as daily virus cases averaged north of 50k over the past week. The trend of late has been for the economic data points to come in strongly above consensus expectations, resulting in Citigroup's US Economic Surprise Index soaring to unprecedented highs. President of the Atlanta Fed Raphael Bostic outlined this week that he saw signs of a "levelling off" in some of the high-frequency indicators and that businesses and consumers in his district were reporting nervousness over the virus with the case numbers mounting. On similar lines, Cleveland Fed President Loretta Mester had also seen signs of activity stalling in her district and pushed back against the notion of a quick recovery, anticipating that a return to pre-pandemic levels of employment and activity was a long way off. Both Bostic and Mester said that additional fiscal support will be critical, while on the monetary side the Vice Chair of the Federal Reserve Richard Clarida outlined that there was more it could do in terms of expanding the balance sheet, which has declined by around $0.25tn over the past four weeks, and strengthening forward guidance. In support of the strength of the reopening was an upbeat read on activity from the ISM non-manufacturing survey that came in at 57.1 in June (reads > 50 signal expansion) — well ahead of consensus (50.2) and up sharply from the month prior (45.4). The standout features in the report were a record rise of 25 percentage points in the business activity sub-index to 66.0 and a 19.7 percentage point lift in new orders to 61.6, with both reads suggesting that order books were filling up and production was rising to meet pent-up demand that accumulated during the shutdown. However, it is worth highlighting that this contrasted with the IHS Markit services PMI that suggested conditions were still in decline in June at a reading of 47.9 but had improved from a depressed level in May (37.5).

Over in Europe this week, the finalised IHS Markit PMIs for June confirmed that while economic conditions remained very challenged, there had been a solid improvement over the month as the composite index lifted from 31.9 to 48.5 to add to the 19-point improvement recorded in May. Overall, this suggests that activity in the bloc returned with some vigour as Europe came out of the shutdown, though it was still declining by the end of Q2. Speaking to this theme was the stronger than expected and record rise of 17.8% on euro zone retail sales volumes in May with all sub-categories rebounding from heavy declines in the past couple of months. However, even after May's surge retail volumes are still down by some 7.4% on their pre-pandemic level in February. In the UK, the Chancellor of the Exchequer Rishi Sunak set out the government's latest plans to support the economy in the Summer Statement. Unveiled was a £30bn fiscal support package focused on taking up the running from its furlough (wage subsidy) scheme that is due to expire at the end of October. Under the package, firms will be incentivised to retain furloughed workers through one-off payments of £1,000 per employee provided they remain on the payroll through to the end of January 2021. Other initiatives announced included targeted value added tax relief for restaurants, hotels, and attractions for the next 6 months lowering the rate from 20% to 5%, the 'Kickstart scheme' that will provide incentives for firms to create jobs for workers aged 16-24 as well as offering grants for businesses taking on new apprentices and trainees, cuts to stamp duty through to the end of March 2021 and an innovative scheme that will provide subsidies for restaurants, cafes and pubs to discount the cost of eating out in the month of August.

   

Australian housing finance falls 11.6% in May

Australian housing finance commitments posted a record monthly decline of 11.6% in May highlighting the scale of the disruption on the housing market brought on by the COVID-19 pandemic. Commitments to owner-occupiers slowed to their lowest level since mid-2019, while investor commitments have turned over to be at their weakest level in 17½ years.      

Housing Finance — May | By the numbers

• Housing finance commitments by value contracted by 11.6% in May (vs -5.5% expected) to $16.415bn to its lowest level in 12 months following on from the 4.8% decline in April. Commitments remain higher over the year but only just at 1.8% coming well down from an 11.2% pace for the year through to April. 
• Owner-occupier commitments declined by 10.2% in May to a 10-month low of $12.314bn after falling by 5.0% in April. Annual growth has decelerated to 7.3% from 14.8% a month earlier — this after reaching a peak in this cycle of 22.5% in March. 
• Commitments to the investor segment continued to unwind pulling back for a fifth straight month with a 15.6% fall in May (-11.9%yr). At $4.101bn, commitments to the segment have hit a 17½-year low. 

Housing Finance — May | The details 

The disruptions to the housing market caused by the COVID-19 pandemic were on full display in today's release as the value of commitments made to owner-occupiers (-10.2%), investors (-15.6%) and in aggregate (-11.6%) all turned in their sharpest monthly declines on record going back to mid-2002. The impact of social distancing restrictions saw a dramatic drop in housing-related activity from late March through April following the prohibition placed on open house inspections and public auctions and today's report is a consequence of this. The other key point to highlight is the surge seen in refinancing demand. Back on March 19, the Reserve Bank of Australia lowered the cash rate to its effective lower bound (0.25%), introduced yield curve control and launched its Term Funding Facility offering at least $90bn in 3-year liquidity to the banking sector fixed at 0.25%. As a result, borrowers have looked to take advantage of the more favourable terms lenders have been able to offer with owner-occupier refinancing lifting by 45.1% since March to be up by 91.6% on a year ago. 

Loan approvals made to owner-occupiers to purchase established properties have fallen to their lowest level on record at 16,969 after falling by 9.1% in May following on from a 6.3% decline in April. Construction-related approvals have been more resilient falling by only 2.2% since March, which centres on a 3.9% decline in approvals for newly constructed dwellings while loans for construction are broadly flat (-0.4%) over the period. 

Meanwhile, refinancing approvals have ripped to their highest level on record at 21,727 following increases of 11.2% and 29.2% in April and May respectively. 

Turning to the view at a state level, the summary table below provides the breakdown for housing finance commitments for both the owner-occupier and investor segments. The timing of the impact of the disruption has varied from state to state. In May, activity deteriorated at a much more rapid pace in New South Wales after relatively modest declines in April, while it rolled over in Victoria after both segments advanced in April. Queensland and Western Australia had seen very severe falls of around 18-19% for owner-occupiers and 30% for investors in April, though as the table shows these effects moderated in May. The declines recorded in South Australia in May were of similar magnitude to the month prior, and likewise for the owner-occupier segment in Tasmania, though its investor segment saw a much more modest fall compared to April (-24.8%). 

The chart below shows the values of owner-occupier commitments for each state.

Commitments to the investor segment for each state are shown in this next chart.

Housing Finance — May | Insights

After a relatively modest 4.8% decline in April, housing finance commitments weakened by their most in a single month on record in May (-11.6%). As the ABS pointed out in the previous release, April's data largely reflected loan applications submitted in March, so today's data for May provides an indication of the scale of the disruption that occurred as the nation went into lockdown. Higher frequency indicators have suggested that activity rebounded as restrictions were eased, though the situation is very fluid with lockdown returning in Melbourne and this could weigh on confidence more broadly if concerns (whether perceived or real) over the virus rise in the other states. 

RBA on hold in July; staying the course

As expected, the Reserve Bank of Australia Board left its policy settings unchanged at today's meeting, maintaining the 0.25% targets for the cash rate and 3-year Commonwealth Government bond yield. 

The decision statement from Governor Philip Lowe opened with his assessment of global economic conditions. While the worst of the impact on economic output from the pandemic was seen to have passed, the outlook remained uncertain as it was dependent on the success of countries' efforts to contain the virus, with the divergence in outcomes on that front currently being seen noted. On the markets, the governor inserted a new line into the statement to highlight the disconnect between recent price action and the fundamentals by noting that asset prices have "risen substantially despite the high level of uncertainty about the economic outlook".

In the domestic markets, the governor continues to assess that the government bond markets are functioning effectively, and with the markets respecting the yield target on 3-year maturities, the RBA had been able to pause its bond purchases. Nonetheless, the commitment to "scale-up its bond purchases again" should that be warranted remains. Furthermore, liquidity conditions are seen as ample, helped by some $15bn in drawings under the RBA's Term Funding Facility with more expected to follow in the months ahead. 

On the domestic economy, in light of the severe dislocation that has occurred in the labour market resulting in the loss of around 800,000 jobs, the governor made the observation that the damage would have been even greater in the absence of the government's fiscal support measures. Positive signs identified were the decline in hours worked slowing sharply in May compared with April as well as the strong rise in retail sales recorded in May. Overall, though, the governor continues to assess the recovery as being "highly uncertain" and together with uncertainty prevailing over the path of the virus, these factors were making "households and business cautious" weighing on both consumption and investment intentions. 

In conclusion, the governor reiterated the Bank's forward guidance that rates will not be increased until progress is made towards full employment and inflation is on track to sustainably return to the target band of 2-3%. This forward guidance is reinforced through the yield curve target, and with the cash rate at 0.25%, the governor notes that these actions "are keeping funding costs low and supporting the supply of credit to households and businesses". Certainly, the RBA will be maintaining its accommodative stance for the foreseeable future, though Governor Lowe also highlighted that ongoing fiscal support "will be required for some time".

Preview: RBA meeting July

The Reserve Bank of Australia's monthly policy meeting takes place today. Governor Philip Lowe will hand down his decision statement at 2:30PM (AEST) that will confirm an unchanged policy stance while also reiterating the Bank's forward guidance that the cash rate will be kept on hold until progress is made on lowering unemployment and returning inflation to target. 

Setting the scene for today's meeting was the speech given by the RBA's Deputy Governor Guy Debelle to the Economic Society of Australia last week on the effectiveness of the Bank's policy settings. The key points were; 1) the cash rate has been trading around 13-14 basis points and is expected to remain there for at least the next 12 months; 2) the 3-year Commonwealth Government bond yield has been anchored around the 0.25% target and the Bank has not had to make any bond purchases to achieve that target since early May; 3) demand for the RBA's daily market operations has tapered off in recent weeks with exchange settlement balances having been sufficient to meet the liquidity needs of most banks; 4) drawings under the RBA's Term Funding Facility remain modest, though their liaison with the banking sector has indicated that demand will increase over the coming months as banks' wholesale funding matures. The net effect of these policy measures since they were announced on March 19 was assessed by Dr. Debelle as being transmitted into the real economy through a reduction in funding costs for businesses and households. 

Key points of interest in today's statement will be around the governor's latest assessment of economic conditions, particularly in light of the recent rise in new virus cases in Victoria that has led to localised lockdowns and the closure of the border with NSW. These developments may have spillover effects on household and business confidence, which the RBA assesses as key to the economic outlook. Since the Board last met, the level of the Australian dollar has firmed slightly, though it does not appear to be of immediate concern based on recent commentaries.  

Macro (Re)view (3/7) | A quarter like no other

The June quarter of 2020 came to a close during the week and the single word that best describes it is unprecedented. Unprecedented not just from a health perspective as government-mandated shutdowns were implemented worldwide in the fight against the COVID-19 pandemic but also from an economic perspective as countries were driven deep into recession prompting monetary and fiscal policymakers to go all-in to stem the damage. The markets were focused on the other side of the crisis taking the view that containment measures would prove successful allowing economies to reopen and come back sharply when they did helped by the unprecedented level of policy support in the system. That is a thesis still to be fully tested, especially amid a resurgence in virus cases in the US, though for the equity markets at least, it seemed to be a case of so far so good as the benchmark S&P500 index surged to its best quarter since 1998 rising by 20%, European markets advanced in the order of 10-20% and Australia's ASX200 was up 16%.

In Australia this week, there was some negative news on the pandemic with the state government in Victoria reinstating some shutdown orders across 10 postcodes in the northern districts of Melbourne, though in the other states restrictions continued to be eased. The most positive sign on the reopening of the domestic economy came from a record rise of 16.9% on retail sales in May as the nation came out of the shutdown (see chart of the week below). While this needs to be taken in the context of coming after the record 17.7% fall in April when the retail sector was effectively closed, turnover in May increased to $28.97bn to be 4.4% above its pre-pandemic level (see here). Indeed, turnover in most categories advanced above the levels from February, though it is understandably still well down in cafes and restaurants with social distancing restrictions still in place. Overall, the details of the report were consistent with the strong improvements recorded in consumer sentiment data in May and the improved picture on household finances in the ABS's latest survey (see here) bolstered by the support provided to incomes from the government's fiscal measures. Australia's trade surplus widened a little further to a very elevated $8.0bn in May (see here). The pandemic has significantly disrupted trade flows, but so far the impact continues to be more significant on imports than exports. Imports fell 6.1% in the month and were contracting at their fastest annual pace on record (-22.8%) reflecting the impacts from the overseas travel ban and very weak domestic demand conditions. The export side also contracted in May (-4.3%), though it will receive support from resources and inbound tourism from overseas students that still remain in Australia even with the international borders closed.

Chart of the week

The issue of the international borders will become of increasing importance to policymakers as strong net overseas migration has been a key source of population growth and this has in turn helped to underpin Australian economic activity. In the absence of the level of population growth the nation has become accustomed to (around 1.5%), the residential construction sector will continue to face considerable headwinds. To highlight this point, the ABS reported that building approvals fell by 16.4% in May to a 7-year low of around 12,700, though the lags between submission and approval meant that the impact from COVID-19 is yet to be reflected (see here). Meanwhile, national property prices according to CoreLogic followed up May's 0.4% fall with a 0.8% decline in June, though considering the level of disruption to activity in the sector and the severity of the broader economic shock, these declines have been modest. The other main development this week came via a speech by the RBA's Deputy Governor Guy Debelle on the Bank's policy settings. Dr Debelle outlined that the RBA's actions to lower the cash rate to its effective lower bound, introduce yield curve control on 3-year Commmenalth bonds and improve liquidity conditions were seen to be reflected in the reduction in borrowing costs for businesses and households since late March. Greater use of the RBA's Term Funding Facility was expected in the months ahead as banks' wholesale funding matures.  

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Moving offshore, the US economy continues to face hurdles in the recovery with new daily virus cases rising at a record pace north of 50,000 per day towards by the back end of the week driven by a surge in cases from the southern states of Florida, Texas, California and Arizona. As a result, the reopening process has stalled in these states with a range of containment measures being reinstated. These developments took some of the gloss away from a very strong employment report for June in which non-farm payrolls lifted by a record 4.8 million, coming in well ahead of the 3.2 million increase expected. Including May's 2.7 million increase, non-farm payrolls have risen by 7.5 million over the past two months, though that still means there are around 14.7 million fewer Americans in work than before the pandemic hit. Much of the employment gains between May and June reflects workers that had been placed on temporary layoffs being taken back by the employers as the economy started to reopen, but clearly the rise in new virus cases threatens to put this progress at risk. The unemployment rate now stands at 11.1% coming down from 13.3% in May, while the broader unemployment rate remains much more elevated at 18.0% from 21.2% in the month prior. What the payrolls report underscored was that there is still a long way to go in the recovery in the US and the focus is now around how the fiscal response will evolve with the $600 a week enhancement to unemployment benefits due to expire at the end of the month. Over at the Federal Reserve, the minutes from the FOMC's meeting highlighted an important discussion around consideration of potential options for future policy changes. The Committee appeared to be unconvinced by yield curve control, though it did consider the RBA's approach to be a reasonable model it could potentially follow where it is used as a communication tool reinforce forward guidance on the path of interest rates. For the time being, increased asset purchases and the introduction of a form of outcome-based forward guidance shape as the more likely path for the FOMC.

In Europe this week, the IHS Markit PMIs confirmed a notable slowing in the deterioration of conditions in the continent in the month of June as the euro area economy begun to emerge from its shutdown. The composite reading advanced to 48.5 from 31.9 in the month prior (readings < 50 signal contraction), with the services sector showing more improvement (48.3 from 30.5) than manufacturing (47.4 from 39.4). In April, the composite reading had slumped to just 13.6 so the hope is that the sequential improvement can translate into economic growth beginning to expand in the September quarter. In other data releases, June's flash estimate on euro area core CPI slowed by 0.1ppt to 0.8% to its weakest pace in a year, while the unemployment rate ticked up from 7.3% to 7.4% in May concealing a larger rise of 0.3ppt for the segment of workers aged under 25 to 16.0%. Lastly, in the UK the Bank of England's Chief Economist outlined in a speech this week that in his assessment the early indications pointed towards a v-shaped economic recovery and that his decision to vote against the action recently taken by the Monetary Policy Committee to expand its asset purchases by £100bn had been influenced by high-frequency data that had suggested the risks to the outlook had moderated but were still "skewed to the downside". 

  

Australian retail sales up by a record 16.9% in May

Australian consumers drove up retail sales at a record monthly pace of 16.9% in May coming out of the shutdown over late March through April. This result followed the record decline from April (-17.7%) when the retail sector was effectively shuttered, while in the month prior to that the stockpiling of essentials in preparation for the shutdown had seen turnover surge at a then-record pace of 8.5% in March. 

Retail Sales — May | By the numbers 

• Nominal retail turnover surged up by 16.9% in May to $28.971bn coming in ahead of the preliminary estimate and consensus forecast of 16.3%. Retail spending had fallen at a record pace in April (-17.7%) amid the shutdown. In annual terms, growth swung from -9.2% to +5.8%. 

Retail Sales — May | The details

As expected, retail spending lifted at a record pace in the month of May (16.9%) with this result being stronger than what was reported by the ABS in their preliminary estimate two weeks ago (16.3%). In nominal terms, turnover came in at $28.971bn on the month after falling to $24.791bn in April — its lowest level going back to October 2015 — and in March it printed at its highest level on record at $30.110bn as spending at supermarkets, pharmacies, liquor stores, and household goods retailers soared. In a good sign for the domestic economy, retail turnover has recovered to be 4.4% above its pre-COVID-19 level from February and was undoubtedly helped by the success Australia had in containing the virus giving confidence to people that it was safe to venture out again and by pent-up saving with government's fiscal measures providing support to incomes.    

Across the major categories, there were some extraordinary increases in turnover when measured in percentage terms as shown in the chart, below, highlighted by a 129.2% rise in spending on clothing and footwear. 

However, for a cleaner read on the dynamics, the next chart shows the percentage changes in turnover across the categories in May compared to their pre-pandemic levels in February. On this basis, total spending is up by 4.4%, with turnover soaring in household goods (27.1%) likely driven by working from home arrangements, while it has also risen across basic food (9.9%), department stores (12%) and 'other' (9.3%). Hardest hit by the pandemic has been restaurants, cafes and takeaway food (-34.8%) due to mandated closures, in which spending at restaurants and cafes is down by 54.1% from 3 months ago while takeaway services have seen a 9.4% fall over the period. Meanwhile, spending on clothing, footwear and personal accessories has declined by 17.7% since February notwithstanding the 129.2% rise in May. For a guide on discretionary spending, sales ex-food has overall held up over the pandemic (0.4%).  

       

  

Turning to the states, as the summary table in the 'By the numbers' section highlights spending lifted at a very strong pace in each state in May. However, the key insight is that retail sales have recovered to be above their pre-pandemic levels in every state except for Victoria. Since February, sales have advanced in New South Wales (3.8%), Queensland (7.0%), South Australia (8.5%), Western Australia (9.4%) and Tasmania (5.3%) but they are down by 0.4% in Victoria. 

Retail Sales — May | Insights

It is a positive sign that retail turnover recovered to be above its pre-pandemic level as quickly as it did coming out of the shutdown. This is is consistent with the very strong improvements that were recorded in the consumer sentiment data in May, suggesting that Australians felt safe enough to re-engage in activity at the shops in a broader manner than just for essentials with cafes and restaurants also seeing some positive signs, albeit with social distancing restrictions still limiting trade. Of course, incomes are also a key part of this story and quite clearly the government's support measures through the JobKeeper policy and enhanced JobSeeker payments have been beneficial in boosting saving over the shutdown allowing Australians to be in a position to go out and spend in May, even after the severe dislocation that occurred in the labour market. Key now is keeping the virus under control, which has unfortunately taken a turn for the worse in the past week in some areas in Victoria, and in gaining clarity around how the government intends to progress with its fiscal support measures.