Mixed messages on the economy this week. The April labour market report showed the headline unemployment rate ‘only’ rose to 6.2 per cent, a much better result than markets had expected. But the devil is in the detail, and a record high underemployment rate, a slump in hours worked and a sharp fall in the participation rate tell a more sombre story.
Business confidence (in April) and consumer sentiment (in May) have both rebounded, albeit from extremely low levels, in a sign that continued good news on public health and the prospect of an economic re-opening is lifting expectations. Visitor arrival numbers to Australia have collapsed. The Treasurer and the RBA have been thinking about what our economic future might hold. And last week’s US unemployment numbers were jaw-droppingly bad.
This week’s readings include a defence of global supply chains, a criticism of (COVID-19) economic modelling, the worldwide potential for WFH and the death of the office.
And another plug for our weekly podcast. This week we talked about improving economic sentiment, economic forecasts and scenarios for re-opening the economy, and the implications of the recent ruling of the German Constitutional Court for the European Central Bank and the future of the Eurozone.
What I’ve been following in Australia . . .
What happened:
According to the ABS, Australia’s unemployment rate rose from 5.2 per cent in March to 6.2 per cent in April (seasonally adjusted) as the number of unemployed persons increased by more than 100,000. The underemployment rate jumped to 13.7 per cent, a new record, taking the underutilisation rate up to its own new record high of 19.9 per cent.
The unemployment rate rose in all states and territories, with the largest increases in Tasmania (up 1.3 percentage points to 6.2 per cent), Queensland (up 1.2 percentage points to 6.8 per cent), and New South Wales (up 1.1 percentage points to six per cent).
The number of persons in employment fell by more than 594,000 over the month, with full-time employment decreasing by 220,500 people and part-time employment dropping by 373,800 people.
All states and territories suffered falls in employment last month, with the largest decreases in New South Wales (down 221,400 people), Queensland (down 129,600 people), Victoria (down 127,100 people) and Western Australia (down 62,300 people).
The national participation rate fell by 2.4 percentage points to 63.5 per cent while the employment to population ratio dropped by 2.9 percentage points to 59.6 per cent. That took the former down to its lowest level since September 2004 and the latter to its lowest rate since July 2003.
Why it matters:
In a pre-COVID-19 world, an unemployment rate of 6.2 per cent in April – a full percentage point higher than March’s 5.2 per cent rate – would have been a terrible result, taking the economy even further away from the RBA’s estimated equilibrium unemployment rate of around 4.5 per cent. But in the context of the CVC, April’s headline unemployment rate could arguably be classed as a pleasant surprise. After all, the consensus forecast had been for an 8.2 per cent unemployment rate, so this was a much better outcome than had been expected.
But there’s also something of a puzzle here. If the consensus forecast was far too pessimistic about the unemployment rate, it turned out to be a little bit too optimistic about the fall in employment, despite predicting a huge 575,000 drop. The actual outcome was a fall of more than 594,000 – a collapse that dwarfs the previous worst result of a 75,000 decline in employment in the early 1990s.
Moreover, there’s the important complicating factor of some big labour market policy initiatives that have had significant implications for the statistics on unemployment that also needs to be considered. The ABS has a helpful summary here, but two key points to keep in mind are that (1) the ABS expects that people who are paid through the JobKeeper scheme will be classified as employed, regardless of the hours they work (even if they are stood down and work zero hours) and (2) recent changes to the JobSeeker program as result of COVID-19 mean that recipients do not have to meet the usual mutual obligation requirements (such as looking for work). That matters because, to be classified as unemployed in the Labour Force statistics, a person must have actively looked for full-time or part-time work in the last four weeks and be available for work in the reference week.
After digging into the data, it turns out that what the outsized drop in employment is telling us – at least in part – is that looking at the labour market only through the prism of the unemployment rate presents us with a misleadingly positive view of the true state of its health.
The ABS has been talking about this issue for some time and has suggested that, as well as following changes in the rate of joblessness, we should also look at developments in hours worked. In this case, the numbers show a fall of 163.9 million hours worked in April, or a monthly decline of more than nine per cent. That’s a much steeper fall than the still substantial 4.6 per cent decline in the number of employed people, although it is far short of the 20 per cent fall in hours worked baked into the RBA’s baseline forecast for the June quarter (see below). The big decline in hours worked also shows up in the record high underemployment rate noted above.
The ABS has also highlighted the unusually large number of people who left the labour force in April – almost 490,000 – which is the number that sits behind the outsized drop in the participation rate last month.
It notes that if that increase in the number of people leaving the labour force was instead treated as an increase in the number of unemployed, then April’s unemployment rate would have jumped to 9.6 per cent.
Two last points. First, the April labour force results also provide us with an opportunity to cross-check the information content of the new ATO payroll series that we’ve been tracking here in the Weekly note. That 594,000 fall in employment in April looks reasonably consistent with the fall in payroll jobs, with the experimental data showing a fall of around 607,000 paid jobs over the same period.
Finally, the ABS also includes a helpful comparative analysis this month of Australia’s unemployment statistics with those of the United States and Canada. Last week, the US unemployment rate soared to a post-WW2 record of 14.7 per cent (see below), against which Australia’s 6.2 per cent rate looks like a vastly superior outcome. But as the ABS explains, the comparison is not quite as straightforward as that, since the US numbers are calculated in a different way to ours.
In the Australian approach, people are classified as employed even if they have been stood down and are not working for a short period if they maintain an attachment to their job. In contrast, in the United States (and Canada), all those formally stood down ‘on temporary layoff’ are treated as being unemployed. To put the statistics on a more comparable basis, the ABS takes the official Australian unemployment rate and adjusts it using two additional estimates. The first of these includes people reporting that they worked zero hours and were ‘stood down’. The second includes all those reporting that they worked zero hours because of ‘no work, not enough work available or were stood down’. Those adjustments take the headline Australian rate, first, from 6.2 per cent to 9.3 per cent, and then up to 11.7 per cent. Still better than the US outcome, but not by as much as at first glance.
What happened:
The Westpac-Melbourne Institute index of Consumer Sentiment rebounded by 16.4 per cent in May to 88.1.
The ‘economy, next 12 months’ sub-index recorded a dramatic 32.6 per cent bounce to 71.2 from an extremely weak reading of 53.7 in April, while the ‘time to buy a major item’ sub-index jumped 26.7 per cent to reach 96.6 in May from 76.2 in April. Other sub-components of the index showed more modest improvements, but all were up over the month.
Why it matters:
According to Westpac, May’s recovery in sentiment marks the biggest monthly gain in the Index since the survey began nearly 50 years ago. That has unwound a fair amount of the record 17.7 per cent drop in the index suffered in April and while it still leaves the Index level relatively weak by historical standards (this month’s reading was the second lowest since the GFC and the index remains deep in pessimistic territory), the marked improvement in sentiment is nevertheless striking. Westpac notes that the survey spanned 4-8 May, which covered the lead up to, and actual announcement of, the government’s Three Stage Plan to ease restrictions. It also follows a run of good news on Australia’s ability to contain COVID-19. So, although households remain very cautious about current conditions, they are updating their expectations given recent positive developments.
What happened:
The NAB monthly business survey for April showed business conditions falling 12 points to -34 index points. But business confidence jumped by more than 19 points to a reading of -46 index points.
Digging into the reading on conditions by sub-component shows that trading conditions declined by 14 points to -33 index points, profitability declined seven points to -35 index points and the employment index fell 15 points to -35 index points.
Both capacity utilisation (down three percentage points) and forward orders (down eight points) fell again in April.
Why it matters:
While the March business survey showed a record fall for both business conditions and business confidence, the forward-looking confidence measure had dropped much further than the read on current conditions. To some extent, April’s survey reverses that story. On the one hand, the assessment of current conditions continued to deteriorate last month and is now well below the levels reached during the GFC. On the other, April did see a marked spring back in confidence. To keep that in context, however, the reading still has confidence levels roughly twice as low as the case during the GFC, albeit up from three times GFC lows last month.
Other survey indicators tell a more subdued story than the confidence result. Capacity utilisation is now well below the levels seen at the worst of the 1990s recession, the employment index is approaching its lowest level on record and is consistent with large scale job destruction, and the slump in forward orders suggests that despite the (relative) rebound in reported confidence, the near-term outlook for activity remains extremely weak.
What happened:
The Wage Price Index (WPI) for the March quarter rose by 0.5 per cent over the quarter (seasonally adjusted) to be up 2.1 per cent over the year, according to the ABS. Private sector wages rose 2.1 per cent over the year from March 2019 while public sector wages were up 2.4 per cent over the same period.
Why it matters:
The reference period for the March quarter WPI was the pay period on or before 21 February 2020, which was before the coronavirus was declared a global pandemic and before the impact of government restrictions on business activity and the labour market. That means this is another one of those data releases that gives us a snapshot of the pre-COVID-19 economy and tells us little about the economic impact of the virus.
The slowdown in the annual pace of wage inflation to 2.1 per cent in Q1 took the WPI down to a rate of increase last seen in the June quarter of 2018. With unemployment and underemployment both on the rise, softer wage growth lies ahead. In its latest forecasts, for example (see below), the RBA expects the rate of increase in the WPI to ease to two per cent in the June quarter of this year before dropping to 1.5 per cent by the December quarter and to then remain stuck below two per cent through next year.
What happened:
The Treasurer delivered a Ministerial Statement on the Economy to Parliament this week. After reviewing the impact of the CVC on the economy and the measures that the government has taken to support activity, he also outlined Treasury’s estimates on the economic implications of the three-step plan (pdf) for opening the economy set out by the Prime Minister last Friday.
Treasury estimates that lifting restrictions across all three stages would boost GDP by $9.4 billion a month and allow about 850,000 people to return to work, with more than half of those workers coming from accommodation and food services (338,000), arts and recreation (76,000) and transport, postal and warehousing (71,000). The anticipated lift in GDP would come from increased demand for retail ($2.9 billion), the opening of cafes, pubs, clubs, entertainment venues, health and fitness gymnasiums ($2.4 billion), the opening of schools (nearly $2.2 billion), the opening of other industry sectors, like local government, museums, and parks ($1.2 billion) and the relaxation of travel restrictions (about $0.7 billion).
The Treasurer also warned that any reimposition of restrictions would come at an estimated loss of more than $4 billion per week to the economy, broken down between NSW ($1.4 billion), Victoria, (around $1 billion), Queensland ($800 million), Western Australia ($500 million), South Australia ($200 million), Tasmania ($100 million), the ACT ($100 million) and the Northern Territory ($40 million).
Why it matters:
The details from last Friday and the Treasurer’s speech this week provide some insight into Treasury’s estimates as to the potential payoff from unwinding each stage of the current restrictions on the economy. The first stage, for example, is expected to boost national economic activity by about $3.1 billion per month, while stage two would add another $3 billion and stage three a further $3.3 billion. This is a useful companion piece to the scenario analysis set out in the RBA’s latest Statement on Monetary Policy (see below). Of course, as the Treasurer reminded us, all this assumes that Australia’s success in containing COVID-19 allows us to follow the roadmap, and that we manage to avoid having to return to more stringent measures that would see economic costs reimposed on the economy.
What happened:
The ABS said that short-term overseas visitor arrivals to Australia in March plummeted by 51.9 per cent relative to February. Australian resident returns from overseas shrank by 23.3 per cent over the same period.
Visitors arriving in Australia for a short-term trip in March 2020 (original estimates) fell by 60.3 per cent over March 2019, marking the largest fall on record. The highest annual decreases were recorded for China (down 77.5 per cent), Japan (down 75.1 per cent) and Malaysia (down 68.5 per cent), but there were declines in excess of 40 per cent for all top ten source markets.
The ABS also issued the first in a new data series looking at provisional travel estimates based on the number of international border crossings. These new numbers showed a 99 per cent decrease in overseas arrivals to Australia in April 2020 compared to April 2019. Of the nearly 22,000 arrivals last month, more than two thirds (15,000) were Australian citizens returning from overseas with just under 7,000 arrivals comprising non-Australian citizens.
Why it matters:
The record declines in visitor arrivals reflect the progressive tightening of travel restrictions that started in February and then intensified over the course of March, and the consequent severe impact on Australia’s international tourism and education exports was a feature of the March trade data discussed last week. The new ABS data series shows that the trend continued into the following month, as the arrival of non-Australian citizens virtually ground to a halt in April.
What happened:
Last Friday, the RBA published the May Statement on Monetary Policy (SOMP). This set out the central bank’s views on the economic outlook, which comprised a baseline forecast and two alternative scenarios.
The starting point for all three scenarios is familiar from previous RBA communications over the past month or so. The Australian economy is projected to record a contraction in GDP of around 10 per cent over the first half of this year, the unemployment rate is expected to rise to around 10 per cent in the June quarter and total hours worked to decline by around 20 per cent over the same period. Presciently, the RBA also noted that it was possible that there would be a larger measured decline in the participation rate and a smaller increase in the unemployment rate than forecast, since a greater share of recently dismissed workers may not be actively searching for work (a formal requirement to be counted as unemployed in the labour force data) given the weak labour market and the temporary suspension of requirements to look for work to receive JobSeeker Payments.
The outlook for the second half of the year is conditional on how long current public health measures remain in place and the associated impact on the economy. The RBA judges that a ‘plausible baseline scenario is that the various restrictions are progressively relaxed in coming months and are mostly removed by the end of September.’ Two exceptions are ‘the limits on very large public events and gatherings, which are assumed to remain in place for longer’ and international border closures, which ‘are assumed to be in place until the end of the year.’
Under this baseline scenario, growth is expected to start recovering in the second half of 2020, led by consumption, and then to accelerate through 2021 as business and dwelling investment both pick up. Year-average growth is expected to be minus five per cent in 2020 followed by plus four per cent in 2021, although the RBA notes that even with this recovery, the level of GDP by mid-2022 would still be below the level expected at the time of the February SOMP. The unemployment rate is forecast to ease from nine per cent in December 2020 to 7.5 per cent in December 2021 but still be at 6.5 per cent by mid-2022. Underlying inflation is forecast to be stuck below two per cent throughout the forecast period.
The RBA’s second scenario is for a stronger recovery than the one projected in its baseline forecast, based on the assumption that progress in containing COVID-19 is faster than anticipated, leading to a more rapid phase out of social distancing measures and a rebound in business and consumer confidence. Under this scenario, the RBA thinks that much of the short-term drop in output could be reversed by the end of 2021, although by mid-2022 the level of GDP would still be below the level expected at the time of the February Statement. The unemployment rate would return to close to its pre-crisis rate at around the same time.
The third scenario explores the ramifications of a delay to the lifting of restrictions or their later reimposition. It assumes that ‘many restrictions remain in place until closer to the end of 2020 and international travel restrictions are in place well into next year.’ As a result, household and business confidence are weaker, as are income and spending. Domestic activity is then stuck at close to its Q2 lows for the rest of this year and unemployment is predicted to remain close to its peak well into next year. Inflation would then remain subdued for even longer.
Why it matters:
The RBA had already released some of the highlights of its forecasts after last week’s monetary policy meeting, but the SOMP fills in some more details and fleshes out the two alternative scenarios to the baseline.
That baseline scenario is broadly in line with the recent economic forecasts of Australia’s big four banks, but somewhat more pessimistic than the median forecast of a sample of 35 (relatively) recent forecasts, which calls for a fall in GDP of 4.4 per cent this year.
That baseline forecast would also see us suffer from a growth outcome that would be significantly worse than any previous post-WW2 contraction experienced by the Australian economy.
All three scenarios also imply a significant output gap through 2021 and on into 2022. That is despite the assumption of a relatively rapid return to growth in both the baseline and upside scenarios. If that optimism turns out to be misplaced, then the output gap will be larger and the economic scarring from the CVC greater, which would also imply a more subdued long-term trajectory for the economy post-crisis.
Finally, even under the most optimistic of the three scenarios presented here, underlying inflation will still be stuck below the bottom of the target band at the end of the forecast period. This reinforces the point made in the Weekly note after last week’s RBA Board meeting, that a cash rate stuck at the effective lower bound looks likely to be with us well into 2022.
... and what I’ve been following in the global economy
What happened:
.Last week, the US April jobs report confirmed the devastating impact that COVID-19 has had on the US labour market. According to the US Bureau of Labor Statistics, US non-farm payrolls dropped by an unprecedented 20.5 million as industries shed jobs across the economy.
That saw the unemployment rate triple to 14.7 per cent, a post-WW2 record, as the number of unemployed persons rose by 15.9 million to 23.1 million in April. Indeed, the ‘true’ number was likely even worse, as the US Labor Department said that many workers had mistakenly self-classified themselves as ‘employed but absent from work.’ If those numbers were considered, the reported unemployment rate would have been almost five percentage points higher.
Underemployment also jumped to nearly 23 per cent while the labour market participation rate fell to 60.2 per cent, the lowest since 1973. The employment to population ratio dropped by 8.7 percentage points to 51.3 per cent, which was the largest over-the-month decline in the history of the series.
Job losses were concentrated in sectors such as hospitality and leisure, where employment plummeted by 7.7 million, or 47 percent, with almost three-quarters of that decline occurring in food services and drinking places. Other sectors suffering big job losses included education and health services (down 2.5 million), health care (down 1.4 million), professional and business services (down 2.2 million), retail trade (down 2.1 million) and manufacturing (down 1.3 million) but job losses were spread across most of the economy.
Why it matters:
Several weeks of huge increases in weekly initial unemployment claims had already prepared us for a terrible US labour market report in April, but even having known in advance that it was going to be bad doesn’t take much away from the scale of the job carnage.
The only silver lining to be found in the numbers is the fact that the bulk of these job losses – more than 18 million – are classed as temporary. So, there are grounds for hope that when the COVID-19 shutdowns ease and economic activity resumes, there could be a relatively rapid unwinding of the unemployment rate.
That said, early May has already seen many US businesses announce permanent layoffs as the economic shockwave of the CVC continues to transmit through the economy.
What I’ve been reading
Deloitte Access Economics estimates that Australia will see a $143 billion underlying cash deficit this year, followed by a $132 billion deficit next year. Those estimates are $148 billion and $138 billion, respectively, worse than the official estimates of cash balances in the most recent MYEFO.
Bruce Chapman, John Piggott and Madeline Dunk in the AFR have some suggestions on extending the life of JobKeeper.
This one is from a while back, but I missed including it at the time and it’s worth noting. ACCC Chair Rod Sims gave a speech on Managing the impacts of COVID-19 disruption on consumers and business which provides a roundup of recent activity. It also makes for an interesting companion piece to his earlier talk looking at whether competition would survive the crisis.
The WSJ on a ‘swoosh’-shaped recovery. Interestingly, in an online poll conducted during my recent webinar on the economics of the CVC, we asked participants about their views on the likely shape of the crisis. And ‘Nike Swoosh’ was the most popular choice. Perhaps they were ahead of the curve (pun intended)?
FT Alphaville defends global supply chains.
Noah Smith is sceptical about the value of complex economic models that are supposed to tell us the best time to re-open our economies.
Barry Eichengreen on how to manage the coming global debt crisis: he thinks large-scale debt write downs and debt conversions for many emerging market borrowers are inevitable.
Economists from the ILO estimate the global potential for WFH.
Two pieces from Foreign Affairs. One by Branko Milanovic asking whether COVID-19 is China’s Sputnik moment, comparing China’s ‘regionally decentralised authoritarianism’ and ‘political capitalism’ with the United States’ Federalism and ‘liberal capitalism’. And another on Sweden’s coronavirus policy.
Timothy Taylor recommends a relatively straightforward analytical framework for thinking through some of the trade-offs involved in decisions about when to ease quarantines.
Tyler Cowen recommends this Nature review article on the complex biology of SARS-CoV-2.
The FT’s Martin Wolf delves into the potential implications German Constitutional Court’s ruling against the ECB’s bond buying program – a ‘legal missile into the heart of the EU.’
Two from the New Yorker. John Cassidy reckons that a key lesson from China’s re-opening of its economy is the ‘limited and fitful’ nature of the rebound. And Robin Wright asks whether the Middle East can recover from the twin shocks of COVID-19 and the collapse in oil prices.
The Economist’s 1843 magazine on the death of the office.
John Gray muses on apocalypses now.
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