Macro (Re)view (15/5) | Re-opening and support now key

The relative success Australia has achieved in containing and limiting the spread of the coronavirus is notable and, should things remain that way, the nation will be given its best chance of reducing the severity and duration of the economic downturn. Unavoidable as it was, significant damage has already been inflicted on the economy as seen in this week's employment report for April, though the positives are that fiscal support is providing an invaluable safety net for many Australians at a time of duress and the initial stages of the recovery are beginning to occur earlier than had been anticipated, with most states now moving through a gradual easing of restrictions. 

That the labour market collapsed as a result of COVID-19 crisis would have surprised no-one, but neither does that mean it was any easier to take. April's Labour Force Survey was devastatingly poor and it should now be clear just how critical it is to make it through this next phase of the crisis as economic activity comes back online sequentially without having to lapse back towards lockdowns. In by far the worst result ever recorded, the ABS reported that 594.3k jobs were lost in April; the rise in the unemployment rate of 1 percentage point to 6.2% would ordinarily be considered an increase of extreme magnitude, but in this context, it vastly underrepresented the reality (reviewed here). This was because 489.8k workers were considered to have exited the labour force in the month (therefore making them ineligible to be classified as unemployed), resulting in the participation rate falling from a near-record high of 66.0% to a 15½-year low of 63.5%. Part of this relates to changes to the JobSeeker payment with the usual requirement of recipients being obliged to look for work appropriately waived because of the pandemic. The severity of the damage to the labour market was better reflected by the surge in underemployment (from 8.8% to 13.7%) and underutilisation (from 14.1% to 19.9%) to record highs. Most accurately though, the full force of the impact from COVID-19 was highlighted by the collapse in hours worked (see chart below), which saw record contractions in the month (-9.2%) and over the year (-8.0%).

Chart of the week  

Highlighting the extraordinary level of support currently being provided to households, in a press conference after the report, Prime Minister Scott Morrison and Treasurer Josh Frydenberg confirmed that some 6 million workers had qualified for the JobKeeper (wage subsidy) scheme and another 1.6 million had qualified for the JobSeeker payments. All up, that equates to around 55% of the size of the labour force in the month directly before the crisis hit. It will be of extreme importance for the government to consider how these schemes will progress in the months ahead, but it must already be clear that with the re-opening occurring sequentially, a cliff edge date for either reducing the level of support (in JobSeeker) or ending it completely (in JobKeeper) towards the end of the September quarter would be far too great a fiscal shock for an economy the RBA forecasts will be in the early stages of recovery after having contracted by around 10% through the first half to handle. Consider also that wages growth was moderating even before this crisis emerged as the Wage Price Index slowed from 2.2% to 2.1% in annual terms in Q1 (see here). 

The good news from the week was that the mood among consumers had improved sharply in early May compared to a month earlier. After posting a record decline of 17.7% in April the Westpac-Melbourne Institute Index of Consumer Sentiment rebounded with a record rise of 16.4% in May, with the overall level improving from 75.6 to 88.1 but still firmly in the pessimistic range of below 100, indicating an understandable degree of caution remains evident. Nonetheless, it is the rate and direction of change that provides optimism, which  Westpac's Chief Economist Bill Evans attributed to the Federal government unveiling its Three-Stage Plan to roll back restrictions. Importantly, consumers' perceptions of the labour market turned notably sensing that the easing of restrictions will allow affected workers to either resume or find employment. However, a more optimistic consumer survey needs to weighed against another dire result from the NAB's Business Survey where confidence remains extremely weak at a reading of -46 (from -65), while the conditions index worsened to -34 to -22 to reflect a further deterioration across the sub-indexes of trading, profitability and employment. Note this survey related to April and was taken between the 23 and 30th of that month, so it would be reasonable to forecast some improvement in May's report.  

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Events of most focus offshore this week were in the US as tensions with China ratcheted up over the latter's handling of the COVID-19 outbreak, Federal Reserve Chair Jerome Powell gave a notably downbeat update on the economy as the issue of negative rates came on the radar again and there was more historically weak data. In an address hosted by the Peterson Institute for International Economics, the key aspect of Chair Powell's speech was to push the need for longer-term fiscal support at the risk of sustaining irreparable structural damage to the economy. Chair Powell reiterated the Fed's actions in response to this crisis have been aimed at providing relief and stability, including restoring proper functioning in key financial markets that had become impaired as well as measures to support the flow of credit to the real economy for governments, businesses and households. While these actions can address liquidity issues they can do little to ward off insolvency, which Chair Powell outlined can lead to lasting damage to the economy through lowering its productive capacity, discouraging investment and expansion and weighing on jobs growth and incomes. In particular, Chair Powell focused on the disproportionate shock already sustained by low income households with the Fed's latest survey on households' economic well-being released this week. 

On the data front, US retail sales fell by their most on record in a single month with a 16.4% decline in April as all sub-categories sustained significant contractions highlighted by the near evaporation of clothing sales (-89.3%m/m). A very significant miss on expectations was recorded in 'control group' sales (which excludes autos, gas and building materials and is more closely aligned with consumer spending for GDP purposes) -15.3%m/m vs an expected decline of 5.0%. Also recording a record decline in April was industrial production down 11.2%m/m reflecting the significant damage the supply side of the economy has also suffered in this crisis. Not surprisingly given the recent plunge in oil prices, headline inflation fell sharply in April to 0.3%Y/Y from 1.5% and from 2.1% to 1.4%Y/Y on core CPI. Perhaps it was the expectation for low inflation reads to become the norm that the idea of the Fed going to a negative policy rate gained traction in the markets this week, though Chair Powell maintained this was not a course of action it would take.

In Europe, the second estimate of GDP growth for the March quarter showed a 3.8% contraction — its largest quarterly fall in history — with the annual pace revised to -3.2% from -3.3%. Across the bloc, the impact of the COVID-19 outbreak was significantly greater in Italy (-4.7%q/q), Spain (-5.2%q/q) and France (-5.8%q/q), while Germany contracted 2.2% in Q1. Employment in the euro area contracted by 0.2% in the March quarter, which was its first quarterly decline in 7 years ahead of a much greater impact in Q2. In the UK, economic activity contracted by its most in a quarter since the GFC with a 2.0% fall in the March quarter as annual growth fell from 1.1% to -1.6% — its weakest since Q4 2009. Similar to the Fed, Bank of England Governor Andrew Bailey said this week that while it would not completely rule out going to a negative policy rate setting, it was "not something we are currently planning for or contemplating". 

Australian employment -594.3k in April; Unemployment rate 6.2%

Australian employment posted its largest decline on record as almost 600k jobs fell victim to the COVID-19 crisis in April. The nation's unemployment rate lifted to 6.2% (from 5.2%), though a much larger rise was avoided due to a very significant decline in the level of participation in the workforce. The measures better reflecting the impact posted their worst outcomes on record as the underutilisation rate hit 19.9% and hours worked declined by 9.2% in the month.   

Labour Force Survey — April | By the numbers

• Net employment fell by 594.3k (seasonally adjusted) in Apil vs -575.0k expected.

• National unemployment lifted to 6.2% from 5.2% (vs 8.2% expected)
• Underutilisation increased from 14.1% to 19.9% and underemployment lifted from 8.8% to 13.7%, with both at record highs.  

• Participation fell sharply from 66.0% to 63.5% — its lowest since late 2004. 

• Aggregate hours worked collapsed by 9.2% in the month, as annual growth fell from 0.7% to -8.0%.

Labour Force Survey — April | The details

April was a historic month for all the wrong reasons as the severity of the impact on the labour market became more clear. The table, below, highlights the tremendous flow of workers out of the labour force (-489.8k), which reflects the easing in job search requirements relating to the JobSeeker payment, the effective closure of large sections of the economy and adherence to social distancing. Clearly, in the midst of a pandemic, many judged job search activity as either impossible or unsafe. That meant the rise in unemployment was restricted to 1 percentage point, as the number of unemployed increased by 104.5k.  

To better understand the impact, underemployment (measuring workers who would like to work more hours) surged from 8.8% to 13.7% and underutilisation (counting the unemployed and underemployed) increased from 14.1% to 19.9%. Keep in mind these measures were already elevated before the pandemic. 

The full breakdown of unemployment, underemployment and underutilisation rates are summarised in the table below. While all segments increased significantly in the month, unemployment lifted the most for those aged 15-24 years (+2.23ppt) followed by a 1.57ppt rise for 25-34 years. For underemployment and underutilisation, the increase was highest for 25-34 years at +6.75ppt and +8.32ppt respectively, indicative of a significant downward adjustment to hours worked.

Aggregate hours worked fell by 9.2% in April as firms responded to weaker demand by adjusting work schedules. It is also reasonable to think that some workers may have voluntarily pulled back to protect their health, particularly in higher risk activities. In annual terms the decline of 8.0% is the worst on record and nearly twice the pace of contraction than in the previous two recessions. 

Labour Force Survey — April | Insights

The deterioration in labour market conditions was not unexpected nor surprising as it reflects adherence to the public health advice to limit the spread of COVID-19. The unfortunate result is the hardship of unemployment and underemployment. The good news is that attempts to manage the virus have (to date) gone better than the public health authorities had expected, leading to restrictions being eased quicker and more widely. Yesterday's surge in consumer sentiment in the Westpac-Melbourne Institute survey in May is a testament to that. Importantly, though, the re-opening of the economy will not be able to occur in a synchronised fashion, which argues for fiscal support to be continued in a targeted manner. It is equally important to avoid having to re-impose restrictions as that would come at an enormous cost to the economy in terms of jobs and incomes.   

Preview: Labour Force Survey April

Australia's Labour Force Survey for April is due to be released by the ABS today 11:30am (AEST) and will provide the clearest indication yet of the severity of the damage the COVID-19 crisis has inflicted on the labour market. The very significant level of fiscal support provided through the JobKeeper and JobSeeker policies will help contain the damage somewhat, though a material increase in spare capacity and a sharp deterioration in hours worked are expected.       

As it stands | Labour Force Survey

March's report reflected conditions in the first half of the month, coming ahead of the World Health Organization declaring the COVID-19 outbreak a global pandemic and the Federal government introducing social distancing measures. As a result, employment was reported to have lifted by 5.9k in March in contrast to market expectations for a 30.0k fall. The unemployment rate lifted by 0.1ppt to 5.2% — below the consensus forecast for a rise to 5.4% — as the level of workforce participation remained unchanged at 66.0%. In a concerning development, the measures providing a broader read on spare capacity in the labour market were on the rise going into the crisis with underemployment lifting to its highest level in more than 3 years at 8.8% and underutilisation hitting a 2-year high at 14.0%. Hours worked were expected to weaken materially to reflect the disruption to working arrangements associated with concerns over the virus, however; in the event aggregate hours worked increased by 0.5% on the month to 1.78bn hours.  

Market expectations | Labour Force Survey

Expectations are for this to be one of the worst labour market reports ever seen in Australia. Consensus according to Bloomberg's survey is for employment to post its sharpest monthly fall on record of -450k (range: -125k to 1,000k), while the unemployment rate is predicted to rise to its highest level in more than two decades at 8.3% (range: 5.6% to 10.0%). 

While it is a given that a very sharp deterioration in conditions will be reported today, the huge variation on the ranges of estimates highlight there is a great deal of uncertainty as to its severity. The ABS's weekly payrolls data indicate that between March 14 and April 18 total jobs contracted by 7.5%, though that is not directly comparable with employment measured in this survey. 

The other issue is around how workers will be classified in the survey. The ABS has advised that workers covered by the JobKeeper (wage subsidy) scheme will be regarded as employed regardless of hours worked, while the employment status for those receiving the JobSeeker payment will depend on whether or not they have actively looked for work and were available to start work. The pandemic also potentially meant that a large section of the workforce worked no hours in the reference period through either being stood down or taking some form of leave. For these workers to be classified as unemployed, their period of absence needs to have been for more than one month (without pay), while they also would have needed to have actively looked for work and been available to start a new position immediately. 

What to watch | Labour Force Survey

For the clearest understanding of the severity of the deterioration in the labour market look to the change in aggregate hours worked and the broader measures of spare capacity in underemployment and underutilisation. These measures will capture the effects of the disruptions businesses and employees sustained to working arrangements, regardless of classification issues. 

Australian Q1 WPI 0.5%; 2.1%Y/Y

Australian wages growth matched consensus forecasts rising by 0.5% in the March quarter to be up by 2.1% over the year. Wages growth in the private sector held steady and ticked up a little in the public sector. The report comes ahead of the impact from COVID-19, though the main takeaway, for now, is that wages momentum was slowing ahead of the pandemic.    

Wage Price Index — Q1 | By the numbers

• The headline WPI (total hourly rates of pay ex-bonuses) increased by 0.52% in Q1, in line with consensus and unchanged from the previous quarter.
• Annual growth ticked down to 2.13% from 2.22%, as expected.

Wage Price Index — Q1 | The details 

The WPI measures wage inflation by tracking changes in hourly rates of pay for a fixed group of jobs and is affected by minimum wage settings, variations in awards, enterprise and workplace agreements and individual contracts. 

Growth in the headline WPI advanced by around 0.5% for the fourth straight quarter, which saw the annual pace tick down a touch from 2.22% to 2.13% to be around its level from mid-2018. In the private sector, wages growth remained stuck at 0.53% in the quarter and 2.15% over the year. There was a slight pick up in the public sector with wages advancing from 0.44% to 0.59% in Q1 and this increased the annual pace from 2.17% to 2.39%.

 

The WPI including bonuses measure (not seasonally adjusted) lifted by 0.3% in Q1, though the annual pace moved down from 2.21% to 2.04% on a base effect. Private sector wages inc. bonuses were flat in Q4 and fared little better in the new year ticking up by 0.15% over the March quarter, with the annual pace easing to around 2% from 2.3%. As with the headline measure, public wages inc bonuses firmed a little at 0.59%q/q and 2.39%Y/Y. 

Wages growth across the industries is shown in the table, below. The healthcare sector continues to lead overall (3.0%yr), though the pace was virtually unchanged from Q4. Going through the list, the clear theme is that momentum in wages was slowing ahead of the pandemic. Indeed, annual wages growth moved down in Q1 in mining, utilities, wholesale trade, retail trade, accommodation and food services, transport, information media and telcos, finance and insurance, professional services, administrative services (private and public), education and training and other services. 

The next chart speaks to the overall theme of slowing momentum, with wages growth over the year to Q1 2020 lifting from the same point in 2019 in just 4 industries: healthcare, arts and recreation, real estate services and construction. 

Lastly, the details across the states for both the private and public sectors are shown in the table below. Despite a slowing, Victoria remains out in front (2.5%yr) with wages growth in its public sector the strongest segment across the nation (3.3%yr). Private sector wages continue to remain subdued in New South Wales (2.1%yr), though they are faring a little better in Victoria (2.4%yr). 

Wage Price Index — Q1 | Insights

Today's report comes ahead of the shock from COVID-19 that will see spare capacity in the labour market rising substantially and lock in a period of lower for longer wages growth. However, even before the pandemic hit it is clear wages growth was slowing, consistent with a labour market that was softening over the first quarter of 2020. 

 

Preview: Wage Price Index Q1

The Wage Price Index (WPI) report for the March quarter is due to be published by the ABS at 11:30am (AEST) today. The WPI is a measure of wage inflation in the Australian economy and is influenced by factors such as changes in rates of pay associated with minimum wage and award settings, enterprise and workplace agreements and individual contracts. Today's update comes ahead of the worst of the COVID-19 shock that will add significantly to spare capacity in the labour market and lock in a period of lower for longer wages growth.   

As it stands | Wage Price Index

Wages growth maintained its subdued pace in the December quarter lifting by 0.53% as the annual pace held steady at 2.22%, both in line with consensus (full review here). 

In the private sector, wages growth matched the headline increase in the quarter, though the annual pace ticked down to 2.16% from 2.25%. The public sector recorded its slowest quarterly increase in wages growth since Q1 2000 at 0.44% and reduced the annual pace from 2.49% to a 3-year low of 2.25%.

If bonuses are included, the WPI fell sharply in Q4 to 0.07% after a 1.28% jump in Q3, which saw the annual pace decline to 2.21% from 2.83%. A 1.44% spike in the private sector measure in Q3 vanished in the December quarter (0.0%), lowering the annual pace to 2.29% from 3.0%. Public sector wages including bonuses lifted by 0.44% in Q4 after a 0.74% lift in Q3, moderating the annual pace to 2.25% from 2.41%. 

Across the industries, the chart below highlights the lack of underlying momentum in wages growth across the economy. Overall, annual growth in the WPI was a touch slower through the year to Q4 (2.22%) than it was 12 months earlier (2.27%). That theme was reflected in 13 of the 18 surveyed industries. The 5 industries in which wages growth picked up compared to a year ago were; health care (3.06%yr from 2.84%), utilities (2.87%yr from 2.79%), professional, scientific and technical services (2.33%yr from 2.14%), mining (2.22%yr from 1.79%) and information media and telecommunications (1.65%yr from 1.59%).    

Market expectations | Wage Price Index

The consensus expectation for today's report is for the WPI to advance by 0.5% on the quarter — matching the rise from the previous three quarters — between a range of individual estimates from 0.3% to 0.6%. A consensus outcome would result in the annual pace easing a touch from 2.2% to 2.1%.  

What to watch | Wage Price Index

Today's report will be of little significance given the shock that will come through in the June quarter. Overall, expect to see another subdued outcome on the headline numbers, remaining consistent with an elevated level of spare capacity in the labour market that had become well entrenched over the years leading up to the pandemic.

Macro (Re)view (8/5) | An uncertain recovery

In the past week, the Reserve Bank of Australia outlined its full set of economic forecasts, anticipating the recovery from the COVID-19 pandemic to come gradually over the next couple of years once social distancing restrictions are eased, while in the meantime the Board at its May policy meeting gave its commitment to ensuring the real economy has access to an ample supply of credit at a very low cost as this occurs. Ultimately, the outlook will to a large extent depend on how the virus evolves, whether or not restrictions need to be reinstated and the lingering effect on confidence and as a result, visibility for the path to recovery is very limited. 

Given the uncertainties acknowledged, the RBA presented a range of scenarios for the economic outlook in May's Statement on Monetary Policy. In the baseline scenario, the Bank forecasts the domestic economy to contract by 10% over the first half and align with a peak in the unemployment rate at 10% — twice its pre-pandemic level. A phasing out of social distancing restrictions is anticipated to occur over the September quarter, facilitating the start of the recovery. As activity picks up this moderates the fall across 2020 as a whole to 6%. A consumption-led recovery drives output growth to 6% in 2021 as spending patterns normalise, though significant headwinds persist from an unemployment rate that remains high at 7.5% by the end of the year as businesses remain reticent to invest and with the timing of the residential construction cycle reaching its trough delayed. Bolstering activity next year is an expected easing of international travel restrictions, allowing exports of education and tourism services to come back online, though demand for key commodities is anticipated to be weighed by a weaker global economy. Overall, under this scenario, Australian GDP is not forecast to return to its pre-pandemic level until 2022 and it will be left with an unemployment rate still notably higher at 6.5% than before the crisis. The RBA also outlined a more optimistic scenario in which the pace of the recovery is faster as containment measures are phased out sooner than expected and if there is a high level of confidence in the authorities' ability to prevent future outbreaks. On the other hand, if the spread of the virus were to re-intensify and require restrictions to be imposed again, a much slower recovery would be expected. Earlier in the week, the Board left policy settings unchanged, with Governor Lowe reaffirming it "will do whatever is necessary to ensure bond markets remain functional and to achieve the yield target for 3-year AGS". Accordingly, the RBA stands ready to scale up its bond purchases again if needed (see here). The only alteration made by the Board was to announce that it was broadening the range of eligible collateral for repo to include corporate debt at the lower tier of investment grade in another step to ensure liquidity conditions remain favourable.

Adding to the poor visibility over the outlook is the fact that the data flow largely reflects conditions in the early stages of the crisis. On that front, a record increase in a single month of 8.5% on retail sales was confirmed in March, with the annual pace surging from 1.8% to 10.1% — its fastest since mid 2001 — as households went on a spending splurge at the supermarkets (+23.0%m/m), specialised food retailers (such as butchers) (+30.5%m/m), liquor stores (+30.2%m/m) and pharmacies (+22.3%m/m) to prepare for lockdowns. The unprecedented demand stretched supply chains to the limit and as a result, food prices lifted sharply by 2.6% over the March quarter, driving sector-wide retail prices to their strongest quarterly rise in 19½ years at 1.9%. Adjusting nominal sales for price increases, retail volumes were weaker than expected in rising by 0.7% in Q1. While food volumes surged by their most on record (+6.4%q/q), heavy declines in demand were recorded in discretionary areas such as clothing and footwear (-12.1%q/q), cafes and restaurants (-8.4%q/q) and department stores (-5.2%) as government-mandated closures and fears over the virus more generally took hold (full review here). Also recording a record result in March was the trade surplus in soaring from $4.4bn to $10.6bn (see here). Exports surged by 15.1% in the month as shipments of key commodities rebounded after the disruption from Tropical Cyclone Damien in February. However, travel restrictions due to COVID-19 saw inbound tourism plunge by 15.4%m/m. Imports fell by a further 3.6% weighed by soft private demand conditions and a weaker Australian dollar, while the pandemic saw overseas tourism collapse by 35.3% as it came to a virtual stop by the end of March. In other releases for March this week, building approvals declined by 4% (see here) and housing finance commitments edged up by 0.2% (see here), with both yet to fully be impacted by COVID-19. The most timely update came from the ABS's weekly payrolls and wages data, which showed that over the period between March 14 and April 18 total employee jobs declined by 7.5%, with estimates indicating that up to one third of jobs in the accommodation and food services industry may have been lost, while total wages paid fell by 8.2%. After sustaining significant damage, the question is now how quickly can the labour market recover. The impending easing of restrictions and the Federal government's assistance measures will help here, but the ABS Impacts of COVID-19 survey provided a warning that businesses will be emerging from the crisis in a tenuous state (see here). 

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In offshore events, in the US after several weeks of astoundingly high filings for initial jobless claims, including another 3.3 million last week, April's employment data shattered records for all the wrong reasons. Non-farm payrolls collapsed by 20.5 million in the month — for context that is more than double the number of jobs that were shed through the entirety of the financial crisis over 2008 and 2009. Such is the scale, percentage changes are more instructive. Over the month, total payrolls contracted by 13.5% with the worst of it coming in the leisure and hospitality industry where around 47% of jobs were lost as restaurants, cafes, bars, theatres were forced to close, while the drying up of travel hit demand for hotels. Employment in all industries declined in April, with the bulk sustaining falls ranging between 5 and 10% (see chart of the week, below). According to the Bureau of Labor Statistics, some 18.1 million (or around 88%) of the 20.5 million that became unemployed in April were reported as being placed on a temporary lay off and anticipate being able to resume working for their employer, though whether or not that occurs and then continues remains to be seen.      

Chart of the week 

For the moment, the unemployment rate stands at 14.7% (up from 4.4%) — its highest level since records began and nearly 4 percentage points above the previous high from the recession in the early 1980s. Worse still, the broader underemployment measure (U6) surged from 8.7% to 22.8%. The crisis has also driven participation in the workforce down to its lowest level in 47 years falling from 62.7% to 60.2%.    

Over the Atlantic, while the Bank of England (BoE) made no changes to its policy stance at Thursday's meeting, Governor Andrew Bailey was clear that the Monetary Policy Committee (MPC) was prepared to do more to support to a UK economy that has suffered terribly at the hands of the COVID-19 outbreak. Indeed, at this meeting, two of the MPC's members (Haskel and Saunders) voted to elevate the BoE's bond purchases by £100bn above its targeted holding for its Asset Purchase Facility of £645bn, a level the Bank expects to meet by early July based on the current pace of purchases. Similar to the RBA, the BoE presented a range of scenarios for its economic outlook in its Monetary Policy Report. Its "illustrative scenario", which is conditioned on the overarching assumption that social distancing restrictions are removed by the end of Q3, GDP contracts by 14% in 2020 with a peak in the unemployment rate of 8%. In 2021, output growth is forecast to rebound sharply by 15%, though it acknowledged significant uncertainty around the progression of the virus and its effect on confidence, while the unemployment rate is expected to improve by only 1 percentage point to 7%. In Europe, the outlook for the bloc is both challenging and uncertain as it is hit with what is undoubtedly the most severe economic shock in its history. This week's European Commission Spring 2020 forecasts pointed to a 7.7% contraction in 2020, with most of the damage coming through in Q2 as the unemployment rate tops out at 9.6%. On the basis that the pandemic remains contained after restrictions are rolled back and that the monetary support of the European Central Bank (ECB) and fiscal actions on member states gain traction, the recovery occurs in 2021 but it is set to be gradual one as output growth lifts by 6.3%. This comes at a time when scrutiny around the ECB's actions are on the rise, highlighted by the ruling of the German Constitutional Court that declared the Bank had exceeded its powers within its Public Sector Purchase Programme and that had 3 months to demonstrate its actions were "proportional" to its mandate. However, ECB President Christin Lagarde said she was "undeterred" by the ruling, while in a press release the Bank noted a decision from late 2018 by the European Court of Justice that it was acting within its mandate. 

Record high on Australia's trade surplus in March

Australia's monthly trade balance soared to a record-high surplus of $10.6bn in March as commodities exports rebounded from the disruption of Tropical Cyclone Damien in early February, while imports posted a third straight contraction driven by a plunge in outbound travel due to COVID-19. 

International Trade — March | By the numbers

• Australia's trade surplus ripped by $6.737bn to $10.602bn in March against an expected outcome of $6.0bn. February's trade surplus was trimmed from $4.361bn to $3.865bn in today's release.

• Export earnings surged by 15.1% in the month (or $5.558bn) to $42.417bn; the result swinging annual growth from -8.2% to 7.6%. 

• Import spending pulled back by a further 3.6% in March (-$1.178bn) to $31.815bn steepening the pace of contraction through the year from -6.7% to -8.6%.    

International Trade — March | The details

March's trade surplus of $10.602bn was a strong rise on the surpluses of $5.046bn in January and $3.865bn in February. After seasonal adjustments, the ABS reported its preliminary estimate of the trade surplus to be $19.084bn in the March quarter — an increase of 40.9% from the December quarter last year. As a result, the net export component looks likely to contribute a sizeable 0.4ppt or so to GDP growth in the March quarter.

The export performance in March advanced by 15.1% ($5.558bn) to $42.417bn. The bulk of that increase came from a 14.7% ($3.54bn) lift on non-rural goods as commodity exports rebounded sharply after Tropical Cyclone Damien hit production and shipments in February. As a result, iron ore exports advanced 32% on the month, while strength also came through from other mineral fuels (such as LNG) (+10%) and coal (+6%). The volatile non-monetary gold category lived up to that description by posting a 225% lift ($2.474bn) over March. Rural goods increased by 7.0% in the month ($271m) on broad-based gains across cereal grains, wool and other rural products (including sugar and honey). Against these increases, income from services exports was cut by 9.4% in March ($727m) as inbound travel by overseas tourists and students plunged by 15.4% (-$734m) on the back on COVID-19 (travel restrictions were placed on non-resident arrivals from China in early February) and the earlier impact of the summer bushfires. 

Switching to imports, total expenditure on that side of the account fell for the third straight month with a 3.6% contraction (-$1.178bn) coming through in March to $31.815bn. The aggregate has rolled back to its lowest level since late 2017 weighed by the combination of weak private demand conditions and a declining Australian dollar, which fell by 12.0% in US dollar terms and by -9.4% on a broader trade-weighted basis over the year to March according to the ABS's data. That overall fall in import spending was the result of an 18.6% drop (-$1.492bn) in the services sector, with overseas travel collapsing by 35.3% in March (-$1.527bn) to its lowest level in a decade at $2.8bn due to the COVID-19 pandemic. Capital goods recorded a modest slide of 3.3% in the month (-$194m) but has been hit hard over the past year (-12.4%) as businesses have been reticent to invest. Elsewhere, there were small advances in the month from consumption goods (0.1%) and intermediate goods (0.3%). 

International Trade — March | Insights 

The positive is that net exports will boost Q1 GDP growth nicely, though that still may not be enough to keep a contraction at bay in the March quarter. As the economy rolls over in the June quarter, resources exports may provide some offset given that China — the nation's major trading partner — appears to be managing a successful reopening of its economy after its period of lockdown from the back end of January into February and March.  

Australian housing finance subdued in March

Australian housing finance commitments slowed over Q1 after a broadly flat result in the month of March. Details across the segments were mixed as owner-occupier commitments advanced by 1.2%, but that was largely offset by a 2.5% pullback from investors. However, the underlying detail pointed to a weaker picture than conveyed by the national result.    

Housing Finance — March | By the numbers

• By value, housing finance commitments (excluding refinancing) edged up by 0.2% in March to $19.445bn after falling by 1.8% in February. The annual pace lifted from 13.0% to 17.5% driven by a base effect.
• Owner-occupier commitments increased by 1.2%m/m to $14.344bn following a 1.5% fall in the month prior. On a year earlier, the pace strengthened from 15.8% to 22.5%.
• Commitments to the investor segment recorded their third straight monthly decline with a 2.5% contraction in March to $5.1bn, which slowed annual growth from 6.2% to 5.3%.  

Housing Finance — March | The details 

Growth in housing finance commitments was on an upswing over the second half of 2019 post the Federal election, the RBA recommencing its easing cycle and the banking regulator APRA loosening some macroprudential controls. However, as per the chart below that momentum slowed over the March quarter. 

Growth in total commitments slowed to 2.6% in Q1 after gains of 7.0% in Q3 and 7.6% in Q4 last year. In the owner-occupier segment commitments were up 3.9% over the first three months of 2020 coming off a rise of 7.1% in the September quarter that strengthened to 8.9% in the December quarter. Meanwhile, the investor segment contracted by 1.3% in Q1 after posting advances of 7.0% and then 4.4% in the previous two quarters.

The state details are summarised in the table below, with strength in the owner-occupier segment in New South Wales holding up the national result (+1.2%). The details for the investor segment were soft across the board in March. 

The next chart tracks owner-occupier commitments by value across the states with New South Wales moving higher as its counterparts slow. 

Over in the investor segment, commitments look to be (or on the edge of) moving lower across the nation ahead of coronavirus-induced impacts. 

Housing Finance — March | Insights

The headline result on commitments suggested that housing finance was hanging in there against some strengthening headwinds associated with the coronavirus. However, that was driven by a strong outcome in New South Wales' owner-occupier segment that obscured a much softer tape in the other states. The detail on approvals was also fairly soft and further weakness is expected over Q2 as activity pulls back in a difficult and uncertain economic climate.