directors on staircases

On a more positive note, payroll job numbers suggest a modest improvement in conditions over the week ending 30 May. Minutes from the June board meeting provided more evidence both of the RBA’s (very) cautious optimism that the COVID-19 hit to Australia’s economy may be less severe than originally feared and its belief that extensive monetary policy support will still be required for some considerable time yet.

Consumer confidence is now well up on March and April lows, although the past two weekly numbers suggest that the bounceback has now paused. International arrivals and departures have (almost) flatlined. Results from our latest survey of members suggest that directors want to see a cautious and gradual phase out of current government support for the economy, combined with a more radical medium-term agenda.

This week’s readings include a new quarterly bulletin from the RBA, the ABS summary of the first quarter of 2020, COVID-19 fiscal scenarios, Australia’s population growth, trade wars as class wars, lessons from Germany and Sweden, an attempt to measure the economic impact of containment measures and new economic forecasts from the OECD and the World Bank.

What I’ve been following in Australia . . .

What happened:

According to the ABS, employment fell by 227,700 people in May (seasonally adjusted). Full-time employment decreased by 89,100 and part-time employment decreased by 138,600.

graph

Unemployment increased by 85,700 taking the unemployment rate up to 7.1 per cent last month from (an upwardly revised) 6.4 per cent in April. The underemployment rate fell to 13.1 per cent from 13.8 per cent. The underutilisation rate rose to a new record high of 20.2 per cent.

graph

The participation rate fell again last month, dropping from 63.6 per cent in April to 62.9 per cent in May, falling below 63 per cent for the first time since January 2001. The employment to population ratio also fell, dropping to 58.4 per cent.

graph

Monthly hours worked in all jobs decreased by 12.1 million hours (-0.7 per cent), smaller than the 1.8 per cent decrease in employed people. Average hours worked per employed person was around 30.4 hours per week in May, up from around 30.1 hours in April.

graph

All states and territories recorded decreases in employment in May, with the biggest falls in Victoria (down 70,800 people), New South Wales (43,900 people), and Western Australia (30,200 people). Unemployment rates increased in all states and territories except for the Australian Capital Territory, which saw a slight (0.1 percentage point) fall. The largest increases in the unemployment rate were in Western Australia (up two percentage points), the Northern Territory (up 1.8 percentage points), and in Victoria and Queensland (both up 0.9 percentage points).

Why it matters:

This was another grim labour market report. Markets had expected a 78,800 fall in employment in May and an unemployment rate of 6.9 per cent (median estimates). The actual drop in employment was therefore more than three times larger than anticipated. Forecasters were somewhat closer on the unemployment rate, but that mainly reflected another big drop in the participation rate as yet more workers exited the labour force. As the ABS pointed out, the Australian economy has now seen employment fall by an astonishing 835,000 people over just two months, of which about 624,000 have also left the labour force. Absent that drop in the participation rate, the actual unemployment rate would now be well above 11 per cent. And even with lower participation, the jump in the underutilisation rate means that more than one in five workers are now either out of work or working fewer hours than they would like.

One notable feature of this month’s results was that the drop in hours worked (-0.7 per cent) was smaller than the decline in employed persons (-1.8 per cent). That was a reversal from the April result, when the fall in hours worked (revised down to -9.5 per cent) outpaced the decline in employment (-4.7 per cent).

Another notable feature is the way the pattern of job loss over the past two months has led to a sharp drop in the share of part-time employment in total employment, which has now fallen to below 30 per cent for the first time since January 2013.

graph

What happened:

New ABS data on payroll jobs and wages up to the week ending 30 May show that between the week ending 14 March 2020 (the week Australia recorded its 100th confirmed COVID-19 case) and the week ending 30 May 2020, payroll jobs fell by 7.5 per cent while total wages paid decreased by 8.3 per cent. However, in the period since the last release (which was the week ending 2 May), payroll jobs have increased by one per cent while total wages paid have fallen by 3.2 per cent.

graph

Between the week ending 23 May 2020 and the week ending 30 May 2020 payroll jobs increased by 0.4 per cent, compared to no change in the previous week, while total wages paid increased by 0.7 per cent in the more recent week, compared to a fall of 0.7 per cent in the previous week.

By industry, the largest changes in payroll jobs were in the accommodation and food services sector, which saw jobs fall 29.1 per cent between 14 March and 30 May, and Arts and recreation services where the decline was 26.3 per cent. Two sectors (electricity, gas and water services and financial and insurance services) have now added jobs since 14 March. In the previous release covering the period up until 2 May, only the finance sector had a positive result.

graph

The largest falls in total wages paid were in the Accommodation and food services sector (down by 25.4 per cent) and in Mining (a fall of 20.8 per cent). The only industry to see an increase in the wage bill was the education and training sector, with a 0.7 per cent increase. In the previous release five sectors had seen an increase in wages paid, but the ABS noted that wage data are subject to large revisions relative to the jobs numbers.

graph

By state, the largest falls in payroll jobs over the period were in Tasmania (9.5 per cent) and Victoria (nine per cent) while the biggest falls in total wages were in Western Australia (10.7 per cent) and Tasmania (10.2 per cent).

graph

Why it matters:

The payroll data suggest that the labour market hit bottom around mid-April and since then has seen a – very – gradual recovery in job numbers. In this context, it’s worth noting that reference period for the labour force survey that underpinned the labour market results discussed in the previous story covered the period 3 – 16 May and so preceded the improvement captured in the latest weekly numbers.

This latest ABS release offers another interesting perspective on the JobKeeper scheme by including data on secondary jobs. Before the onset of COVID-19, the ABS estimated that around six per cent of employed people worked multiple jobs at the same time and that as of the March quarter this year, around 93.2 per cent of jobs were ‘main jobs’ and around 6.8 per cent were ‘secondary jobs’ (that is, other jobs worked concurrently by multiple job holders). ABS analysis of the payroll data suggests that around 29 per cent of jobs lost since the week ending March 14 were secondary jobs. Since JobKeeper only covers a single job for an eligible employee, and since main jobs are more likely to be supported than secondary jobs, the different dynamics between main and secondary jobs are one indicator of the impact of the program on job retention: over the 14 March to 30 May period, the number of main jobs fell by 5.6 per cent while the number of secondary jobs plummeted by 38.8 per cent (remember, the total fall in payroll jobs over this period was 7.5 per cent).

What happened:

The RBA published the minutes from the 2 June Monetary Policy Meeting of the Reserve Bank Board (the meeting was held the day before the Q1 national accounts were released by the ABS).

On the international front, members noted that although many countries had seen a reduction in the number of new COVID-19 cases and had therefore begun easing some restrictions on activity, there were still ‘material downside risks to the global outlook, especially if infection rates were to rise in countries where the epidemic had seemed to be under control, or if concerns about the virus or insufficient policy support were to constrain spending.’ On the home front, the discussion stated that ‘activity in Australia had contracted very significantly in late March and April, but more recent data had suggested that it had begun to recover over the course of May.’ The minutes then go on to note:

‘Members recognised that the Australian economy was experiencing the biggest economic contraction since the 1930s. A very large number of people had lost their jobs or were working zero hours, household spending had weakened considerably and some investment was being deferred or had been cancelled. Notwithstanding these developments, it was possible that the downturn would be shallower than earlier expected. The rate of new infections had declined significantly and some restrictions had been eased earlier than had previously been thought likely. However, the outlook remained highly uncertain and the pandemic was likely to have long-lasting effects on the economy.’

Against this backdrop, the discussion also affirmed that supportive monetary (and fiscal) policy ‘would be required for some time.’

Why it matters:

As we noted back at the time of the June meeting, one sign of the strange times in which we live is that recent RBA monetary policy meetings have become something of a non-event: no significant changes are expected in current policy settings for some time, and the central bank’s success in delivering its targets of stabilising markets and pegging three-year government yields at around 0.25 per cent has meant there has been no pressure for any change in its current operating framework (although in that context the discussion did note that that ‘the yields on bonds with one to two years to maturity had risen to be a few basis points higher than the yields on three-year bonds…should these developments continue, the Bank would consider purchasing bonds in the secondary market to ensure that these short-term yields are consistent with the target for three-year yields.’).

By their nature, the minutes reflect the same situation as prevailed in early June, depicting both the RBA’s cautious optimism that the downturn may now turn out be less extreme than originally feared but also emphasising that the CVC is going to have long-term, adverse impacts on the Australian economy, and that as a result, extensive monetary policy support in the form of a very low cash rate is now set to be a medium-term feature of the economic landscape.

graph

Market pricing concurs: the expected profile for the cash rate has collapsed, even relative to the already flat profile that prevailed back at the start of this year, pre-COVID-19.

What happened:

The ANZ-Roy Morgan weekly consumer confidence index rose 0.5 per cent to an index value of 97.5.

graph

Why it matters:

Until last week’s small fall, the weekly measure of consumer confidence had enjoyed nine consecutive weeks of increases. Taken together with this week’s modest increase, recent results suggest a degree of consolidation in consumer expectations – significantly up on their March low but also well below their long-term average. For example, just nine per cent of survey respondents expect ‘good times’ for the Australian economy over the next 12 months while 38 per cent expect ‘bad times’ for the economy. Similarly, while 24 per cent say their families are ‘better off’ financially than this time last year that is outweighed by the 35 per cent saying their families are ‘worse off.’ On the other hand, forward-looking readings on both the economy and financial conditions are more positive: 19 per cent are expecting ‘good times’ for the Australian economy over the next five years compared to 16% expecting ‘bad times’, for example. On this, see also the monthly Westpac consumer sentiment series, discussed below.

What happened:

Residential property prices (the weighted average of eight capital cities) rose 1.6 per cent in the March quarter to be up 7.4 per cent over the year, according to the ABS.

graph

All capital cities recorded a rise in residential property prices over the quarter, with the largest increases in Melbourne (up 2.1 per cent) and Sydney (up 1.9 per cent). In annual terms, all capital cities except Perth (down 0.9 per cent) and Darwin (down 3.1 per cent) also saw rises, with the largest increases once again in Melbourne (up 10.4 per cent) and Sydney (up 10 per cent).

graph

Why it matters:

The ABS data are a lagging indicator of the state of the housing market: as the Bureau points out in the accompanying press release, the majority of restrictions relating to COVID-19 only came into effect in late March and therefore did not have a noticeable impact on property prices in the first quarter of this year.

What happened:

ABS provisional statistics for overseas travel in May showed a continuation of record lows. Total arrivals were just 19,400 last month, or 98.8 per cent less than in May 2019, of which 11,100 were Australian citizens. There were an estimated 35,400 departures in the same month, a 97.8 per cent decrease compared to the same month last year, of which 5,000 were Australian citizens. (Note that the data show the number of international border crossings, rather than the number of people.)

Why it matters:

Travel restrictions imposed due to COVID-19 continue to see international arrivals and departures running at a tiny fraction of their previous levels. As we’ve noted before, the (associated) decline in net overseas migration also has significant implications for Australia’s rate of population growth, and therefore for overall GDP growth: in 2019, 39.8 per cent of annual population growth was due to natural increase compared to 60.2 per cent due to net overseas migration

What happened:

The Westpac-Melbourne Institute Index of Consumer Sentiment for June was released last week. It showed a 16.4 per cent rise to a reading of 93.7, building on the sharp rebound witnessed in May. The index level is now only two per cent below the average reading for the preceding September 2019 – February 2020 period.

graph

All the component indexes recorded gains this month, but the largest improvements were around views on the economic outlook and ‘time to buy a major item’. The ‘economy, next 12 months’ sub-index rose 8.4 per cent in June while the ‘economy, next five years’ sub-index climbed 6.4 per cent. Comparing the levels of these two indices tells a contrasting story, however: at 77.2 the former is still lower than any reading since the global financial crisis (excluding the previous two months) and indicates continued near-term weakness while the level of the latter at 102.4 marks an 18-month high.

Why it matters:

The rise in the monthly reading in June took consumer sentiment back up to near pre-COVID-19 levels and is also consistent with the recovery in consumer confidence that has been depicted by the weekly ANZ-Roy Morgan series. One way to see these trends is that consumers appear to be looking through the near-term economic pain created by the pandemic and anticipating better times ahead.

Balanced against that relatively optimistic interpretation of the data is the observation made in Westpac’s accompanying analysis that the pre-COVID index readings to which we have now returned were already quite weak, with pessimists consistently outnumbering optimists (shown by an index reading below 100) since July 2019. So, despite a second consecutive monthly gain, the overall level of the index remains stuck in pessimistic territory and is also down seven per cent on the same period last year. Moreover, that improving sentiment about the future needs to be set against a current situation that continues to reflect pressure on family finances and deep concern about short-term economic prospects.

What happened:

Also released last week was the NAB monthly business survey for May. Business conditions rose 10 points in May to -24 index points while business confidence rose 25 points to -20 index points.

graph

Forward orders saw a modest improvement last month but remain below the levels seen in the 1990s recession and although capacity utilisation did enjoy a bounce back in May after April’s record decline, it too remains historically weak.

Why it matters:

Despite the recovery in both conditions and confidence readings in May, both remained very soft. Business conditions are at GFC-like levels while business confidence is at a level last seen at the bottom of the 1990s recession. Overall, therefore, the results are still consistent with a large decline in business activity in the second quarter.

What happened:

Last week, the AICD released the results of a new survey of members, which shows boards are very focused on practical questions around managing health and safety as and when their staff return to work. The survey was conducted between 18 May and 2 June and attracted more than 2,300 responses (and many thanks to those readers who participated).

Details of all the results are available via the link including a full data pack that can be downloaded.

Why it matters:

The survey results provide a rich source of insight into how AICD members and their organisations have been managing during the CVC across a range of issues but here I’ll highlight just four of the results that caught my attention.

First, in a theme that carries over from last year, high levels of uncertainty continue to raise major challenges for Australian businesses. Then, much of that uncertainty reflected the US-China trade and technology conflict. Now, of course, the uncertainty relates to the pandemic and its aftermath.

graph

Second, boards are also very focused on the practical questions around managing health and safety as and when their staff return to work. These two issues (uncertainty and the return to the office) are flagged as both critical challenges and strategic priorities.

graph

Third, in the near-term our respondents were very clear that they wanted to see a careful and cautious phasing out of supportive government policies such as JobKeeper and the Coronavirus supplement, even at the cost of increased strain on the public finances.

graph

Finally, COVID-19 has triggered an appetite for radical measures that go beyond traditional prescriptions such as tax reform (although unfortunately our survey did not offer an opportunity to explore what those measures might comprise).

graph

What I’ve been reading

The Prime Minister’s address to CEDA’s state of the nation conference. The speech began by justifiably highlighting Australia’s impressive success in dealing with COVID-19 relative to many of our peers but also noted that while this means that the economic fallout here will be less than in many other economies, the hit will still be substantial. According to the PM, over $100 billion of economic activity has been lost this year, and it will take an estimated two years at least, just to get back to the level we were at before COVID-19. In April alone, the economy lost the equivalent of 30 months of average jobs growth, for example. Record budget deficits will be one consequence of this, but the PM also said that the government would pursue ‘neither excessive austerity, nor higher taxes’ in response. He also emphasised the key role that infrastructure investment would play in supporting the recovery, including announcing an acceleration of existing projects plus a further $1.5 billion to ‘immediately start work on small priority projects identified by the states and the territories as part of our partnership.’

The June 2020 RBA Bulletin was published this week. As usual, plenty of interesting looking stuff here, including a review of the economic effects of Australia’s 1919 experience with the Spanish Flu, a new indicator of ‘news sentiment’, and an explainer on recessions.

Also from the RBA: an insight into the central bank’s views on COVID-19 and the housing market, via a Freedom of Information disclosure.

The ABS summarises Australia’s first quarter of 2020, a quarter marked by drought, severe bushfires, cyclones, hail storms and the outbreak of COVID-19. It notes that ‘the extraordinary conditions that shaped the March quarter disrupted almost every aspect of Australian society and the economy.’

According to the ABS, Australia’s population rose by 349,800 people (1.4 per cent) last year, to 25,522,169 people at 31 December 2019. Roughly 40 per cent of that annual growth was due to natural increase while the balance was due to net overseas migration

The Bureau has also released a new interactive map depicting the local labour market impact of COVID-19.

The Parliamentary Budget Office (PBO) has produced new medium-term fiscal projection scenarios that take into account the impact of COVID-19. Under its scenarios, net government debt by 2029-30 could be between 11 per cent and 18 per cent of GDP higher than it would otherwise have been, reflecting a combination of lower receipts and higher payments relative to the 2019-20 MYEFO projections.

A couple of pieces from the FT. Tim Harford asks whether the pandemic might help us fix our technology problem (both the specific problem of the lack of a vaccine and the more general problem of ‘sputtering’ scientific and technological progress leading to lacklustre productivity growth), with a look at prizes for innovation, subsidies for vaccine producing factories, the often-neglected importance of simple innovations, and the possible stimulatory effects of a crisis. And Martin Wolf thinks about how COVID-19 might reshape the world, predicting a shift to a more virtual globalisation, the accelerated adoption of technologies that offer both more safety and more social control, even more polarised politics, larger debt and deficits, and ‘dreadful’ international relations, a mix he sums up as a world that is both less cooperative and less effective.

Adam Tooze discusses Michael Pettis’ and Matthew Klein’s new book, Trade wars are class wars, with the authors.

Case and Deaton on the United States of Despair.

John Authers examines the US Fed’s latest intervention in markets and the idea of a ‘Robin Hood’ effect on US stocks.

Three from the IMF (which is also due to release its updated forecasts for the world economy soon - next week, I think). First, Economic Counsellor Gita Gopinath sets out the ways in which the CVC (or what the Fund is calling ‘The Great Lockdown’) differs from previous economic crises: the unprecedented scale, the uniquely large blow to services, the broad decline in inflation and inflationary expectations in the face of a major adverse supply shock, and the striking divergence between financial markets and the real economy. Second, a look at Germany’s Kurzarbeit scheme, the ‘gold standard’ of state-sponsored work sharing schemes. And third, an assessment of how COVID-19 economics has applied in the case of Sweden.

An updated version of the Corrreia, Luck and Verner paper on lessons from 1918 on pandemics, the economy and public health intervention (via Marginal Revolution).

New estimates of the economic impact of containment measures. Using a variety of high frequency measures including international and domestic flights, energy consumption, maritime trade, retail mobility indices and in particular nitrogen dioxide (NO2) emissions (the latter are available daily, strongly correlated with industrial production, and can be directly linked to overall economic activity), the authors estimate that containment measures may have led to an average loss of 15 per cent in industrial production.

Are some countries at risk of a negative spiral whereby poor public health policy leads to increased public distrust of government which in turn undermines the effectiveness of policy?

Barry Ritholtz pushes back against the ‘This changes everything’ view of COVID-19.

Finally, both the OECD and the World Bank have released new sets of forecasts this month. The OECD now thinks that world output will fall by six per cent this year (or by 7.5 per cent in its ‘double hit’ scenario) while the Bank’s baseline forecast sees global GDP shrinking by 5.2 per cent in 2020.