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March’s labour market results were much better than expected but the Treasury has warned of a ten per cent unemployment rate in the second quarter.  This week’s readings include a look at the lessons from past Australian recessions, more IMF analysis, some ‘Pandenomics,’ an opportunity to read and critique a book in progress on the economics of Covid-19, and the question, will the coronavirus redeem macroeconomics? (yes, really). 

What I’ve been following in Australia . . .

What happened:  

According to the NAB monthly business survey, both business conditions and business confidence suffered their largest declines on record in March.  Business conditions slumped 21 points to minus 21 index points, which is slightly below the readings recorded during the global financial crisis (GFC) but still above the trough experienced during the early 1990s recession.  Business confidence meanwhile plummeted 64 points to minus 66 points, which is the lowest level recorded in the history of the survey.   

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The decline in conditions and confidence was felt across most industries.  The fall in conditions was greatest in recreation and personal services although all industries reported big declines except for wholesale (up 17 points) and construction (which did suffer a fall but only by a relatively modest three points).  Most industries reported falls in business confidence in excess of 60 points with construction declining by almost 80 points. 

Forward orders also dropped to their lowest level on record, falling 25 points to minus 29 index points and there was a sharp decline in the rate of capacity utilisation to just 75 per cent. 

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Why it matters: 

The fall in both business conditions and capacity utilisation in March shows that the impact of Covid-19 was already taking a severe toll on business activity by the end of the first quarter of this year.  The even larger decline in business confidence indicates that most businesses assume things will get considerably worse before they start to get better again. 

What happened:  

The Westpac-Melbourne Institute Index of Consumer Sentiment fell (pdf) 17.7 per cent in April, dropping from 91.9 in March to 75.6 this month.  This was the largest monthly decline recorded in the history of the survey and takes the index below its GFC lows.

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All five sub-indices fell in April, with the biggest drops suffered in expectations regarding the outlook for the economy over the next 12 months (down 31 per cent, the biggest drop on record), and ‘time to buy a major household item’ (down 31.6 per cent – another record fall), while family finances versus a year ago fell to an eight-year low.  The two remaining components (economic conditions over the next five years and family finances over the next 12 months) also fell in April, although the declines were relatively more modest. 

Why it matters: 

While April’s fall in the overall index was the biggest in the 47-year history of the survey, current levels are still above the historic low of 64.6 which was reached in November 1990.  However, as Westpac points out, that previous low was in the context of a deep recession and had been preceded by many months of continuous deterioration in economic conditions, as opposed to the precipitous one-month decline suffered here.

April’s survey also included additional questions on work arrangements, which showed that, of those respondents who had been employed in March seven per cent had lost their job and another 14 per cent had been stood down without pay. Lay-offs and unpaid stand downs running at more than 47 per cent in the accommodation, café and restaurant sector. These results indicate both the scale of the labour market shock and the critical importance of the government’s JobKeeper program.  Somewhat more positively, although the Unemployment Expectations index did jump by more than eight per cent in April to reach a five-year high, the latest readings are still well-below the GFC and early 1990s recession outcomes, suggesting that households are hoping that the shock to the labour market will not be sustained at current levels.  

What happened:  

The ABS reported that employment increased by 5,900 people in March (seasonally adjusted).  There was a fall of 400 people in full-time employment but that was more than offset by an increase of 6,400 people in part-time employment. 

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The seasonally adjusted unemployment rate rose by 0.1 percentage point to 5.2 per cent in March while the underemployment rate rose by the same amount to 8.8 per cent, taking the underutilisation rate up to 14 per cent.

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The participation rate remained unchanged at 66 per cent and the employment to population ratio fell by 0.1 percentage point to 62.5 per cent. 

Why it matters: 

March’s results had been expected to show the start of the impact of Covid-19 on the Australian labour market, with consensus forecasts calling for a 30,000 fall in employment and an increase in the unemployment rate to 5.4 per cent.  But the actual results were much better than anticipated, with the economy still managing to add jobs in net terms, and with the rise in the unemployment rate capped to just 0.1 percentage point (although at 14 per cent the underutilisation rate has crept up to its highest rate since April 2018).

The ABS has pointed out that the early ‘labour market impacts from major disruption to the economy tend to be most evident in the hours people work…[since]…Hours worked can change more quickly than employment…During an economic downturn, reducing hours is often an early response taken by businesses, often with the view to avoiding people losing their jobs.’  But here too there was little sign of any major impact from the CVC in March with monthly hours worked in all jobs increasing by 8.6 million hours (seasonally adjusted). 

The main reason for this relatively benign labour market outcome relates to timing.  The reference period for the report was 1-14 March, and therefore preceded the major actions taken here in Australia to contain the spread of the virus.  Summing up the overall results, the ABS said that the data showed ‘some small early impact from Covid-19 on the Australian labour market in early March, but any impact form the major Covid-19 related cations will be evident in the April data.’ 

What happened:  

According to estimates from Treasury, cited by the Treasurer, the unemployment rate is likely to rise to ten per cent in the June quarter, up from 5.2 per cent at the end of the March quarter.  In the absence of the $130 billion JobKeeper payment, Treasury estimates that the unemployment rate would be five percentage points higher, peaking at around 15 per cent. 

Why it matters: 

Although Treasury’s forecasts of the unemployment rate are subject to same unusually wide confidence intervals that must be applied to all economic forecasts at present, nevertheless they do provide yet another useful indicator of the looming labour market shock and serve as a warning to set against the positive surprise of the March labour market report.  

For an historical perspective on Treasury’s projection, recall that the current monthly ABS series on unemployment runs back to February 1978.  Over that period, the unemployment rate has only hit double figures during two previous downturns: in the early 1980s recession, when it hit a peak of 10.5 per cent in July 1983 and in the early 1990s recession, when it reached a peak of 11.2 per cent in December 1992. 

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To find a time when the unemployment rate was at 15 per cent (or above), in line with Treasury’s forecast for what unemployment would have looked like in the absence of the $130 billion JobKeeper fiscal package, we would have to look even further back, to the 1930s and the Great Depression, which saw the unemployment rate peak at just below 20 per cent.

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. . . and what I’ve been following in the global economy 

What happened:  

The IMF published the latest World Economic Outlook (WEO) which provides updated forecasts for what the Fund is now calling ‘The Great Lockdown.’ IMF Chief Economist Gita Gopinath describes the ‘magnitude and speed of collapse in activity’ as ‘unlike anything experienced in our lifetimes’.   

The IMF cautions that there is ‘extreme uncertainty’ around its global forecast with the likely economic fallout determined by the hard-to-predict intersections of a range of factors including: the pathway of the pandemic; progress in finding a vaccine and therapies; the intensity and efficacy of containment measures; the extent of supply disruptions and productivity losses; the impact of tighter global financial conditions; the impact of shifts in spending patterns, behavioural changes, and confidence effects; and commodity price volatility.  But after setting out all those caveats, the Fund describes out a baseline scenario built upon the assumption that the pandemic fades through the second half of this year, allowing for a gradual easing in containment measures. As a result, economic disruption is assumed to be concentrated in the second quarter of 2020 for most countries (except for China where economic disruption is expected to be largest in the first quarter), followed by a gradual recovery, supported by an easing of financial conditions in the second half of the year. 

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Even based on those relatively conservative assumptions, world real GDP is forecast to shrink by three per cent this year – a downgrade of more than six percentage points relative to the IMF’s January projections of just a few months ago.  Growth in advanced economies overall is forecast at minus 6.1 per cent, including large drops in the United States (-5.9 per cent), Japan (-5.2 per cent), the UK (-6.5 per cent), Germany (-7.0 per cent), Italy (-9.1 per cent) and Spain (-8.0 per cent).  

Emerging and developing economies as a group are projected to contract by one per cent this year (or by 2.2 per cent excluding China), while emerging Asia is the only region across the globe that is expected to achieve positive growth in 2020, with the region growing by one per cent, supported by China (1.2 per cent) and India (1.9 per cent).   

Global trade volumes are forecast to drop by 11 per cent.  /

Global growth is forecast to rebound to 5.8 per cent in 2021 as activity starts to normalise from very low levels. The good news is that profile looks relatively ‘V’-shaped.  Even so, that recovery would still leave the level of economic activity below the level that was predicted for 2021 pre-Covid-19. Indeed, the Fund thinks that the cumulative loss to global GDP over this year and next due to the CVC could be around US$9 trillion, or greater than the combined annual output of Japan and Germany. Moreover, even that partial recovery ‘depends critically’ on the pandemic fading in the second half of this year, allowing containment efforts to be wound back and business, consumer and investor confidence to recover. And with many countries scrambling to deal with a ‘multi-layered crisis comprising a health shock, domestic economic disruptions, plummeting external demand, capital flow reversals and a collapse in commodity prices’, the Fund think that risks of a worse outcome predominate. It sets out three alternative scenarios which see growth deviations below (its already grim) baseline by between three per cent in 2020 to eight per cent in 2021. 

For Australia, the IMF’s baseline scenario sees real GDP shrinking by 6.7 per cent this year before rebounding by 6.1 per cent in 2021, while the unemployment rate is forecast to rise to 7.6 per cent this year and then to climb again to 8.9 per cent in 2021.  Inflation is expected to remain quiescent, running at 1.4 per cent this year and 1.8 per cent next year.  In the Asia-Pacific regional press conference, the IMF explained the depth of the Australian downturn in terms of our relative dependence on the services sector (including education and tourism), our exposure to weaker commodity prices, and our dependence on Chinese economic growth. 

Why it matters: 

The IMF’s baseline scenario foresees a global recession this year that will be significantly deeper than any of its predecessors in the post-Second World War global economy.  Using the IMF’s own definition, in the period between 1950 and 2019, the world economy suffered just four global recessions: in 1975, 1982, 1991 and in 2009.  And of these, only 2009 saw an absolute decline in real GDP, and in that case the drop (-0.1 per cent when GDP is measured using purchasing power parity (PPP) exchange rates) was a fraction of that predicted for this year. 

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Likewise, the IMF expects that growth in Asia overall (advanced and emerging) will stall at zero percent in 2020, which would be the worst growth performance in almost 60 years, including during the GFC (4.7 percent) and the Asian Financial Crisis (1.3 percent).  

A similar comparison applies to the case of Australia.  A fall in output of close to seven per cent would, if realised, be by far the worst growth outcome we’ve suffered in the post-war period since 1950, and the worst overall since 1930-31. 

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Finally, the Fund’s three alternative scenarios as set out in the April 2020 WEO serve as a sobering warning of some of the significant unknowns still facing even this pretty grim global economic outlook. For example, the IMF’s first alternative scenario assumes that it turns out to be harder than currently anticipated to contain Covid-19 and that as a result, lockdowns last for 50 per cent longer than in the baseline scenario. The second alternative considers the impact of a second, somewhat milder, outbreak of the virus in 2021. And the third combines the previous two alternatives envisioning both a longer lockdown and a second outbreak. In each case, the tightening of financial conditions is greater, the ‘scarring’ suffered by economies (capital destruction, a temporary slowing of productivity growth and a temporary increase in trend unemployment) is more severe, and the impact on emerging economies is larger (although many of the service sectors most harmed by the virus are relatively less important in emerging economies than advanced economies, this is offset by tighter financial conditions and more limited fiscal space in the former). 

What I’ve been reading 

NAB economics looks at some of the lessons from past Australian recessions. 

ABC business compares Covid-19 to the recession of the early 1990s. 

Deloitte Access economics reckons that we don’t need to worry about the current rise in government debt.  (This message is broadly consistent with the analysis in my weekly note of 3 April.) 

As well as the World Economic Outlook discussed above, the IMF has also released two of its other flagship publications this week: the Global Financial Stability Report and the Fiscal Monitor. 

An FT Big Read on the pressures facing the global asset management industry. 

Pandenomics – 15 ways Covid-19 could change the world. 

An assessment of the impact of coronavirus-driven uncertainty. 

Clive Crook notices that private sector scenarios for the economic consequences of the CVC tend to be relatively more optimistic than official ones. 

The Economist has a briefing on how business is being changed by the pandemic. 

Noah Smith asks whether Covid-19 has provided an opportunity for the redemption of macroeconomics. 

McKinsey has some suggestions as to how we might restart national economies. 

Adam Tooze in the London Review of Books has an essay on the global economy and the pandemic. 

Economics in the Age of Covid-19 – a book in progress. 

Vox wonders whether the current pandemic signals the end of the office as we know it.