Empty tram in Melbourne

Consumer confidence dropped in response to the rising number of COVID-19 cases in Victoria. Payroll data suggest that the labour market has continued to recover gradually from its earlier collapse, but also that the pace of the recovery has been slowing. Home values fell for a second month in June while dwelling approvals slumped in May. Australia recorded another large trade surplus in May as falling imports outpaced falling exports. World trade volumes plunged in April at a rate exceeding that experienced during the peak of the GFC.

This week’s readings include advice on Australia’s recovery strategy and on how to reform state and federal financial relations, a look at our increasingly challenging strategic environment, new updates from three international institutions, contrasting views on the likely shape of US and UK economic recoveries (a ‘reverse radical’ anyone?), China’s gilded age and an economic playbook for exiting from lockdowns.

We're continuing to do our economics podcast, The Dismal Science, weekly at the moment. On the latest episode we cover the Victorian COVID spike, consumer confidence, falling house prices, the 20th anniversary of the GST and what lingering scarring effects this recession might cause.

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Please note that the Weekly update will take a break during the NSW School Holidays.

What I’ve been following in Australia . . .

What happened:

The ANZ-Roy Morgan weekly consumer confidence index dropped 4.5 points to 93 last week.

The main driver of the decline in the overall index was a deterioration in respondents’ views on the economy. Assessments of ‘current economic conditions’ slumped 10.6 per cent and now just seven per cent of respondents (down three percentage points) expect ‘good times’ for the Australian economy over the next 12 months while 45 per cent (up five percentage points), expect ‘bad times’. There was also sharp drop in ‘future economic conditions’, which were down 5.2 per cent, with 19 per cent of consumers (down three percentage points) expecting ‘good times’ for the Australian economy over the next five years compared to 19 per cent (up three percentage points) expecting ‘bad times.’  

Consumer views on current and future financial conditions also both fell over the week, with the former down 2.2 per cent and the latter down 1.9 per cent.

Why it matters:

The recent surge in COVID-19 cases in Victoria now appears to be taking a toll on consumer sentiment, particularly in the form of fears about current economic conditions, and this was the largest fall in the weekly confidence indicator since mid-MarchThat drop took the index back to its lowest level since the 24 May survey result, although that is still well above the lows reached in late March and early April.  

What happened:

ABS weekly payroll data showed total payroll jobs rose by one per cent between mid-May and mid-June.  

Between the week ending 14 March 2020 (the week Australia recorded its 100th confirmed COVID-19 case) and the week ending 13 June 2020, total payroll jobs have fallen by 6.4 per cent while total wages paid have decreased by 6.3 per cent. That compares to the falls of 7.5 per cent and 8.3 per cent that were reported in the previous payroll release, which covered the period up to the week ending 30 May.

 

By industry, the largest job losses over the 14 March to 13 June period have been in accommodation and food services (down almost 29 per cent) and arts and recreation services (down almost 24 per cent), with other high single digit losses in rental, hiring and real estate, the agriculture sector, and other services. Only two industries – finance and insurance and utilities– have added payroll jobs over the past three months.

 

In terms of total wages paid, the biggest falls in the wage bill have been for the accommodation and food services sector (down more than 21 per cent), mining (down more than 15 per cent) and arts and recreation (down almost 15 per cent). Total wages paid have increased in health care and social assistance and in education and training.

 

The demographics of job loss over this period show jobs worked by females have decreased by 6.5 per cent while those worked by males have fallen by 5.8 per cent, while the biggest changes by age include a 15.2 per cent drop in jobs worked by people aged under 20 and a 10.4 per cent decline in jobs worked by people aged 70 and over.

By state and territory, the largest falls in payroll jobs have been in Victoria (down 7.6 per cent) and Tasmania (down 7.3 per cent) while the biggest wage declines were recorded in New South Wales (down 7.6 per cent) and Western Australia (down 7.3 per cent).

Why it matters:

Since mid-April, payroll jobs have now recovered around 30 per cent of the jobs initially lost to the coronavirus crisis (CVC), indicating an ongoing but gradual, recovery in the labour market. The pace of that recovery seems to have slowed, however: after growing by 0.6 per cent in the week ending 30 May, payroll jobs rose just 0.2 per cent in the week ending 6 June and were then flat in the week ending 13 June.

 

What happened: 

 

Housing values declined for a second consecutive month in June, according to the CoreLogic home value index. The combined capitals index fell 0.8 per cent over the month although it was still up almost nine per cent in annual terms.  The national index was down 0.7 per cent in monthly terms and up 7.8 per cent over the year.

 

Melbourne and Perth (both down 1.1 per cent), Sydney (down 0.8 per cent), Brisbane (down 0.4 per cent) and Adelaide (down 0.2 per cent) all saw values fall over the month, while there were modest monthly increases for Hobart, Darwin and Canberra.

 

CoreLogic also reported signs of a recovery in market activity in June, with home sales increasing 29.5 per cent (following a revised 21.5 per cent rise sales activity in May). There has also been an increase in real estate listings (up 42 per cent relative to the recent low in early May) while the combined capital city auction clearance rate has averaged close to 60 per cent since mid-May, well above April’s record low of 30.2 per cent. 

 

Why it matters:

 

On the downside, we’ve now seen two consecutive monthly falls in dwelling values in a sign that the economic downturn is taking a toll on the housing marketThe better news is that the size of decline to date has been relatively modest whileother indicators of market activity have continued to improve.  

 

CoreLogic attributes this relative resilience to date to a combination of government policy stimulus, mortgage repayment holidays, a scarcity of advertised supply (for every additional new listing to the market, they estimate there are 1.3 sales) and more optimism about the economic outlook and the relaxation of social distancing measures. In that context, however, both the prospect of future falls in support from banks and government and the softening of consumer confidence in the face of the rise in COVID-19 cases in Victoria represent obvious adverse risks that could yet add to the downward pull already being exerted by the overall weakness of the economic environment. 

What happened:

According to the ABS, the number of total dwelling units approved fell by 16.4 per cent over the month in May (seasonally adjusted) and were 11.6 per cent lower than in May 2019.

 

The decline in total approvals was driven by a 34.9 per cent plunge in approvals for units, which were also down almost 31 per cent over the year.  Approvals for private sector houses fell by a relatively more modest 4.4 per cent from June and were nearly flat in annual terms.

 

Why it matters:

The ABS reported that the number of dwellings approved in apartment buildings slumped to an 11-year low this month. However, the Bureau also said that it detected only ‘minor effects of COVID-19’ in the headline numbers, with the decline in approvals driven mostly by pre-virus trends (such as the large prior expansion of supply in inner city apartments). Looking ahead, subdued demand prospects due to weaker economic conditions, falling house prices and slower population growth reflecting the decline in net overseas migration all seem set to further constrain future additions to supply.

 

What happened: 

 

The ABS said Australia recorded another sizeable monthly trade surplus in May, with an $8 billion (seasonally adjusted) result, up $195 million from April.

 

Both exports and imports fell again in May, with exports of goods and services down four per cent over the month and imports dropping six per cent. Exports experiencing a sharp fall in value included cereals, wool, and coal, along with a drop in exports of services. May’s fall in imports would have been even steeper except for a 113 per cent jump in imports of non-monetary gold. Otherwise, imports of consumption goods fell 14 per cent (including a particularly sharp drop in car imports), imports of capital goods fell seven per cent and imports of intermediate goods fell eight per cent.

 

The release also included a special article on the impact of COVID-19 on time series for international trade in services.  

 

Why it matters:

 

COVID-19 continues to take a toll on trade, with both export and import valuefalling again in May after having contracted in April. But with imports once again declining faster than exports, the trade surplus edged higher.

 

The cumulative trade surplus for the first five months of this year is now running at almost $35 billion compared to a bit more than $25 billion over the same period in 2019Australia is on track to record a fifth consecutive current account surplus in the June quarter (the last long run of current account surpluses was back in 1972-73 when we managed a run of seven successive quarters in the black).

     

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

 

What happened: 

 

World trade volumes slumped by 12.1 per cent in April, according to the CPB World Trade Monitor.

 

In trend terms, volumes fell by more than seven per cent over the month and over the year. 

 

Why it matters:

 

April’s monthly drop in trade volumes was almost twice as large as the peak monthly drop recorded the global financial crisis in December 2008 and every region in the world suffered a fall in trade volumes in the first month of the June quarter.  

 

What I’ve been reading

The ABS has released the results of the latest update to its survey of the household impacts of COVID-19. Interesting findings included: while three in five Australians with jobs attended their workplace in person in the previous week, another 18 per cent intend to return in the next four weeks; during restrictions, 87 per cent of respondents spent less on cafes, restaurants, pubs and bars, 73 per cent spent less on public transport, 64 per cent spent less on personal care, 44 per cent trimmed their expenditure on clothing and footwear, and 27 per cent scaled back expenditure on household furnishings and equipment. Of those who had cut their spending during restrictions, a majority expect to boost expenditure on recreation and leisure, eating out, transport and personal care, but to continue to spend less on household furnishings and clothing and footwear. Deputy Governor Guy Debelle gave a speech on the RBA’s policy actions and balance sheet.

 

The Grattan Institute has published a new report setting out its views on what Australiagovernments should do to help the economy recover from COVID-19. Suggestions from Grattan’s ‘Recovery Book’ for the next six months include: extra economic stimulus including spending on social housing and ‘shovel-ready’ maintenance and infrastructure projects; the expansion of JobKeeper to include university staff, casual workers and temporary migrants along with an extension of the program past September; an increase in the permanent rate of JobSeeker and a rise in Commonwealth Rent Assistance; an increase in the Child Care Subsidy for low-income households; congestion charging; an expansion in telehealth; and a ‘tutoring blitz.’ Michael Keating approves of their recommendations.

 

Related: Chris Richardson in the AFR warns against pulling government support for the economy too quickly.

 

The NSW Review of Federal Financial Relations has released its draft report.  Key recommendations include measures to lift the GST rate and/or expand the base ‘to offset base erosion and move away from more harmful taxes’ while using some of the increase in revenue to offset the regressive consequences; the gradual replacement of stamp duty with a broad-based land tax; the abolition of all specific taxes on insurance products; a ‘strategic national approach to payroll tax reform’; and a shift to distance-based charging for road users (starting with electric vehicles) and a trial for a congestion corridor.

 

The PM’s speech launching the 2020 Defence Strategic Updatecautioned that ‘even as we stare down the COVID pandemic at home, we need to also prepare for a post-COVID world that is poorer, that is more dangerous, and that is more disorderly’ and continued on to warn that ‘we have not seen the conflation of global, economic and strategic uncertainty now being experienced here in Australia in our region since the existential threat we faced when the global and regional order collapsed in the 1930s and 1940s.’ The Lowy Institute’s Sam Roggeveen’s take on the PM’s message is that this is ‘the beginnings of a plan for a future in which the US will be less reliable and less resolute in defending our interests against a rising China’ at a time when ‘the balance of military power is tipping decisively towards’ Beijing. And here is ASPI’s Peter Jennings arguing that ‘what is new is the realisation that the risk of conflict is upon us right now’ and that this will come with a budgetary cost, suggesting that ‘we should be clear that what we have here is a defence plan that, in maturity, looks more like 3.5 per cent of GDP’ [relative to the government’s old target of two per cent of GDP].

 

Related: Hugh White on Lowy’s COVIDcast podcast, discussing COVID-19 and Asia’s power balance.

 

Three from international institutions. First up, the IMF has updated its global financial stability report.

 

Next, the BIS Annual Economic Report 2020 is now available, including a detailed look at the ‘sudden stop’ the CVC has inflicted on the global economy and the consequent implications for policy.

 

And third, the ILO has a new analysis of the worldwide labour market impact of COVID-19 which reports a 14 per cent drop in global working hours during Q2:2020, equivalent to the loss of 400 million full-time jobs. In May, the ILO had predicted a 10.7 per cent drop (305 million jobs lost).

 

Adam Tooze on the global challenges posed by the pandemic with a particular focus on the crisis in emerging and developing economies.

An FT Big Read on how the pandemic is deepening the pensions crisis.

 

Greg Ip in the WSJworries that earlier hopes for a V-shaped recovery for the US may now be dashed as the economy has ‘shown signs of sputtering’ in recent weeks. Instead, Ip thinks that the US might be in line for a ‘reverse radical’ recovery (which resembles a reverse squareroot symbol, apparently)

While the Bank of England’s Andy Haldane thinks the UK is on track for a V-shaped recovery (although he does caution that although in his view risks to the outlook are two-sided, they remain skewed to the downside).

 

Harold James on ‘Late Soviet America’ and the future of the US dollar.  Cautionary note: commentators have been predicting the greenback’s demise since at least the launch of the euro, so far with little success.

 

The Economist on Yuen Yuen Ang’s ‘China’s Gilded Age.’

 

Blanchard, Philippon and Pisani-Ferry propose a new policy toolkit for exiting lockdowns.