Key insights from the week that was.
The past week has seen expectations of recovery remain high across the world as the early economic effects of COVID-19 continued to be quantified.
For Australia, the focal point was Q1 GDP. As expected, the March quarter reported the start of a recession, GDP declining 0.3%. Domestic demand was weaker still, activity falling 0.5% in the three months to March to be only 0.5% higher over the year. Of course, the decline in the three months to March will pale into insignificance against the decline in the June quarter, which we believe will be around -7%. The recovery seen thereafter will depend on continued success in restraining the virus’ spread within our borders and the consequent sustained re-opening of our economy. For all the detail on the Q1 2020 GDP report, see Westpac Economics’ Bulletin.
This week also saw the release of some April partial data for household demand and international trade. Beginning with consumer spending, the final report for April retail sales confirmed a near 18% decline in activity in the month, in line with the preliminary estimate. This follows March’s 8.5% surge on panic buying as restrictions came into force.
Notably, of the April decline: 40% was due to falling supermarket sales after April’s surge; 20% came from cafes, restaurants and takeaways; and the remainder was due to reduced small ticket discretionary purchases. With restrictions now being lifted, sales should rise from here. That said, social distancing and weak incomes are likely to remain enduring headwinds, so too declining house prices.
On international trade, the Q1 2020 balance of payments reported a fourth consecutive current account surplus and continued robust direct investment inflows into Australia as COVID-19 hit. April international trade subsequently reported a 11% fall in exports and a 10% decline in imports. For the year to date, exports are now down 9% while imports have collapsed 20%. A key story to call out here is that COVID-19 has had a much larger impact on tourism imports than exports, with overseas travel by Australians down 99% since end-2019. This situation will prove a significant support for GDP through net exports during 2020.
For the RBA, there is reason for cautious optimism over the outlook. This was on display in their decision statement following the June Board meeting, with the Governor noting “it is possible that the depth of the downturn will be less than earlier expected” and that ”some restrictions have been eased earlier than previously thought likely”. However, the outlook is still highly uncertain, and there will therefore be need for historic policy support for some time.
If additional policy support does prove necessary, adopting negative interest rates would be an option. Governor Lowe has downplayed the possibility of this policy’s use in Australia; but we believe that, in a small open economy with a strong banking system like Australia, negative interest rates’ benefit would be greater than say in Europe or Japan. This week, Chief Economist Bill Evans considered the arguments.
Overseas, market participants remain of the view that the gradual easing of restrictions globally combined with extraordinary monetary stimulus will lay the foundation for a robust recovery. The expansion of the ECB’s asset purchase program, in scale and duration, and expectations of fiscal co-operation on the Continent has given additional support to sentiment this week. This is despite dramatic downward revisions to the ECB’s growth and inflation forecasts which highlight the scale of COVID-19’s economic effect. Meanwhile in the US, weak labour market outcomes have had little effect on the market’s exuberance, particularly given the policy support on offer from the FOMC.
