- An increasing amount of data indicates March was a gloomy one for the local economy;
- An important exception was the jobs numbers;
- April is likely to be the economic growth nadir;
- The speed of the upturn remains unknown.
When it comes to the economic impact of COVID-19 financial markets are focussing on three issues: the extent of the downturn, how long will it last and the shape of the recovery. There has been good news in the reduction of new COVID cases. And financial markets are speculating that this will (in time) lead to a relaxation of social distancing rules. This has already happened in Asia. Some countries in Europe have also taken their first steps down this path.
The economic data will lag the health data. In Australia we are just starting to see how the economy was looking prior to entering the strict quarantining (and therefore the weakest point of the economy).
For much of the past couple of years the (pleasant) economic surprise has been the strength of the jobs market. And that pleasant surprise continued into March where the number of jobs rose (the expectation was for a big fall) and the unemployment rate remained broadly unchanged (the expectation was for a 0.3% rise).
Globally, the labour market numbers for March were shockingly poor. The main reason why the international labour market figures have been worse is that other developed countries implemented strict quarantining a little before us. The March numbers were based on a survey that was conducted in the first half of the month, before our strict domestic policies were introduced.
So that makes this data the calm before the storm. All other indicators point to a significant rise of unemployment on the way. The number of job ads has declined, employer job intentions have tanked. Consumer worries about unemployment have sparked higher.
How high the unemployment rate goes, and how long it stays there, is an important question. The vast bulk of economists expect the unemployment rate to peak in the June quarter at around 8.5-9%. Treasury expects 10% (a few other economists are a little higher). By year-end the economy is expected to be better with an unemployment rate falling to somewhere between 7-9%. As always the path of the unemployment rate is the most important signal as to how the wider economy is performing.
One of the reasons to expect a big rise in the unemployment rate is that consumer confidence has taken a big hit. Consumers’ view on current conditions are as bad as they were during the GFC or the 1990s recession. They are worried about the current state of the economy, and concerned about unemployment (the consumer confidence survey was conducted after the announcement of the wage subsidy scheme). Unsurprisingly, few households are looking to buy a new house or generally make a big purchase. Households report that family budgets are hurting, although not as bad as was reported in the 1990s recession.
Two bits of good news. The weekly numbers suggest there has been a bounce in consumer confidence over the past couple of weeks in line with the ‘flattening of the curve’. And while views about the medium-term outlook for the economy have deteriorated they remain well above the levels seen during the 1980s and 1990s recessions. Whether that relative optimism from consumers remains will depend upon the path of the unemployment rate.
While consumer confidence has taken a hit, business confidence has been smashed. Views about business conditions have not fallen by as much but they are below the levels reported during the GFC. There has been a significant decline in forward orders that has led to firms having a dire view on the profitability outlook. In line with the job ads data firms are indicating that hiring plans are very much on the backburner.
Capex spending will be very soft in coming months as businesses look to preserve cash flow. This will help firms survive but will hamper future productivity growth. In line with the weaker economic outlook, firms report that it is more difficult to borrow (although government guarantees and bank lending programs will help).
Social distancing policies are not the only thing holding back the domestic economy. Tourism was a big driver of local activity. But no more. Entering 2020 the number of tourists had declined a little from its peak in the middle of last year reflecting some slowing of the Chinese economy. But a dramatic decline of Chinese visitors took place in February reflecting the lockdown of their economy (and Australian Government policy). The ABS also noted that the number of Chinese students was 35% (62,000) lower in February 2020 compared with the previous year.
There were also big falls in the number of tourists from Hong Kong and Singapore. Indeed, tourism declined from most countries although the number of Indian tourists rose. Bigger falls are to come given that Australia’s borders were closed to international residents in late March. And with the likelihood of extended shutdown of international borders, overseas tourism will be subdued for an extended period.
The above data suggests that the Australian economy is in for a rough ride. And forecasters agree. The IMF is forecasting the Australian economy will decline by nearly 7% this year, a little higher than what local financial market economists believe. The IMF thinks that the world economy will fall by around 3% (despite expectations that both the Chinese and Indian economies will modestly grow), and 5 to 10% declines are seen in the US and European economies. The Federal Treasury expects the unemployment rate to average around 10% in the June quarter (and believes it could have been 15% without the introduction of the wage subsidy scheme).
The good news is that the IMF expects the domestic (6.1%) and global economies (5.8%) to come roaring back next year. The sort of growth that the IMF is predicting would see the unemployment rate drop sharply and profits again rise. The locals are not quite as hopeful about the size of the bounce-back (mainly because they were not as pessimistic about the extent of the drop). Hopefully the locals are right this year and the IMF in 2021.
We live in interesting times!
Peter Munckton - Chief Economist