Key insights from the week that was.
With respect to COVID-19, a stark contrast has become evident between China and the US this week. Having controlled the virus’ spread, China is now getting back to work. Meanwhile in the US, unemployment is rising rapidly as the economy shuts down in response to the virus.
A month ago, the collapse in China’s official NBS PMI’s shocked the market. The manufacturing PMI fell from 50 (the threshold between expansion and contraction) to a historic low of 35.7. The decline in the service PMI was larger still, the index falling from 54.1 to 29.6. The March rebound announced this week was equally as spectacular however, the manufacturing and services indexes rising back to around 52. Importantly, new orders point to these gains being sustained, allowing for a normalisation of employment.
Assuming a second wave of the virus is not seen in China, robust growth will quickly return across the nation as stimulus is ramped up. This will provide a benefit to the broader Asia region; though the lingering effect of the virus in these nations combined with the deterioration evident in the US and Europe will suppress broader-Asia’s economic rebound.
At March, manufacturing PMI’s for Japan, South Korea and the ASEAN nations were consistent with a deep contraction in economic activity. Available data for Europe also points to a deep and broad-based recession becoming entrenched as a result of the restrictions necessary to stop COVID-19’s spread.
The most significant data outcome released this week globally however was US initial jobless claims. As highlighted by the New York Times, the latest report indicates that 6.6 million Americans filed for unemployment benefits last week, bringing the total of new filers over the second half of March 2020 to around 10 million.
A decline in employment of this scale will see the unemployment rate jump from its 50-year low of 3.5% at February to around 10.0% in April. Note, this is unlikely to be the end of the shock. As highlighted by the ISM manufacturing index this week, COVID-19 was only beginning to be felt by the US economy in March. More weakness has to be expected ahead, likely resulting in an unemployment rate materially above 10%.
Australia and New Zealand are certainly not immune from the contagion or its economic effects. However, the policy support provided by our respective governments is laying the foundation for a robust recovery once the virus threat passes.
Whereas we viewed the effect of the Australian Government’s initial stimulus measures as a limited offset to the COVID-19 shock, this week’s announcements are likely to provide the economy with significant protection. Our forecasts for the unemployment rate make this clear.
As highlighted by Chief Economist Bill Evans, the rapid rise of COVID-19 cases in Australia over the past week and the proportional response of authorities left us with the belief that, absent additional support from the Government, the unemployment rate would have likely risen to a peak of 17% at June 2020 instead of the 11% we forecast on 24 March. Following the introduction of the JobKeeper policy (JKP) however, the unemployment rate is now likely to peak around 9% at June 2020 and end the year at about 7%.
The JKP aims to keep workers connected with their employer by subsidising each employee’s wage by $1500 per fortnight for six months. Those who have been stood down also receive $1500 per fortnight and remain attached to their employer (because the employer disburses the payments to their staff). This scheme is available to all businesses, including sole traders and not for profits, giving it significant reach. Those with turnover of less than $1bn only have to show their revenue has or will likely fall by 30% to access the program; for turnover above $1bn, the threshold is a 50% loss.
We have assessed that 80% of three sectors – retail and wholesale trade; accommodation and food services; and arts and recreation services – will be eligible for the payment. For other sectors that will be adversely affected by the shut down and social distancing, we assess that 40% of businesses will qualify for the payments. Note though, the take-up rate of businesses for this new program is difficult to gauge. Any variations relative to 80% and 40% will have an impact on these calculations.
For GDP, JKP will not stop a sharp contraction in the near term, an 8.5% decline in the June quarter is expected to be followed by a 0.6% fall in the September quarter given large sections of the economy have had to materially reduce capacity or close in response to the virus. But the fact that employees can be remunerated through the crisis and remain connected to their employers will allow for a more rapid rebound once the COVID-19 threat dissipates. Initially this results in a 5.2% GDP gain in the December quarter. In 2021, we expect growth of 4.0%yr as the recovery from 2020’s deep recession continues.
A full summary of stimulus measures introduced by the Australian government authorities and the RBA in response to this crisis is now available on Westpac IQ. The one addition to this list is the policy that has just been announced to support childcare. This essential service will now be made available to Australian households for free for six months. This will aid household finances; provide flexibility for working families and aid confidence.
New Zealand’s response to COVID-19 differs to Australia’s in a number of aspects, most notably New Zealand have entered a total lockdown. Still, after a sharp decline in activity to mid-year as a result of the lockdown, growth will also bounce back sharply there too. Having fallen 15% in the six months to June, GDP will bounce around 13% in the second half. From a peak of 9% at June, the unemployment rate will fall back to 7% by year end.
As is the case in Australia however, it will take a number of years before conditions return to ‘normal’. Highlighting this, New Zealand’s unemployment rate is not seen near 4% again until 2022. Like the rest of the world, the other enduring burden of this crisis for Australia and New Zealand will be the financial cost to the government of providing this very necessary stimulus. Outstanding debt is set to rise materially.
