Key insights from the week that was.
This week, the RBA Governor spoke on Australia’s economic exposure to COVID-19 and the outlook. Preliminary reads on key economic data were subsequently released by the ABS.
Westpac Chief Economist Bill Evans detailed the key messages found in both the April RBA Board meeting minutes and Governor Lowe’s subsequent speech. Of greatest significance, the speech provided a first look at the RBA’s updated forecasts, to be released in full in the May Statement on Monetary Policy.
Broadly in line with our own view, the RBA’s central scenario looks for restrictions to be “progressively lessened as we get closer to the middle of the year and mostly removed by late in the year”, except perhaps for international travel. On this basis, the RBA forecast a 10% contraction in Australia’s economy in the first half and for activity to be down 6% for 2020 overall. Westpac’s own view is broadly in line for 2020 at -5%, but we see a much more modest recovery in 2021 of 4% compared to the 6-7% growth the RBA forecast.
Despite the 2021 recovery, the RBA see the unemployment rate holding “above 6% for the next couple of years” after peaking at 10% mid-2020 (Westpac 9%). Highlighting the degree of underemployment over and above outright job loss, the RBA also projects hours worked will decline 20% over the first half of 2020. It is not surprising then that wages growth is expected to fall below 2%yr, and underlying inflation will remain “below 2%yr for the next couple of years”.
Highlighting the need for ultra-accommodative policy over the long recovery, in the Q&A the Governor speculated that the 3-year yield target, currently in line with the cash rate at 0.25%, will remain in place for a number of years until there is progress towards the RBA’s full employment and inflation goals. The cash rate will therefore remain on hold for the foreseeable future.
Of the preliminary data released this week, retail sales for March were the focus. A huge 8% increase was reported for total sales in the month as a result of a 24% increase in basic food spending. This highly atypical outcome is, of course, due to the stockpiling of necessities amid fears of a COVID-19 lockdown. Retail sales excluding these necessities fell sharply, declining 2.6%mth – the biggest monthly decline since 1989 – to be down 1.8%yr. Ahead, store closures and fears over income will hit discretionary retail hard. The basic food surge will meanwhile unwind as households recognise that necessary items remain available and excess stocks that households have to hand are used up. Preliminary trade data was also released, though there are significant caveats in its interpretation, as detailed in the note.
Across the world, the virus and the countermeasures against it are creating a massive shock. Japan’s Jibun Bank PMI for both the manufacturing and service sectors moved lower in April to deeply contractionary levels (44). The service sector saw an even greater shock, its index falling to a never-before-seen low of 23 (remember, 50 marks the threshold between contraction and expansion).
Europe PMIs were weaker still, the Markit manufacturing index falling another 10pts to 34 as the services PMI collapsed to just 12. The UK’s measures came in at similar levels, respectively 33 and 12 for manufacturing and services.
These outcomes come at the height of the region’s lockdowns. An improvement will be seen in coming months as some restrictions are lifted, but it will only be gradual and highly susceptible to a shock. While the virus is slowly being brought under control, European officials are at odds over the scale and form of stimulus necessary, and who will bear the cost. Measures announced to date will provide only a marginal benefit to the Continent. There is a risk that the debt levels of a number of nations, particularly Italy, will get in the way of necessary economic support being agreed, delaying and materially reducing the strength of the recovery.
Finally in the US, initial jobless claims continued to rise rapidly last week, up another 4.4mn to a total of around 26mn over five weeks. This latest update implies that the unemployment rate will rise to between 15% and 20% at April, up from 4.4% in March. The shock to the services sector in the US has been less severe than in Europe, a flash reading for the US Markit PMI in April of 27 was reported versus 12 in Europe and the UK – in keeping with the severity of their respective lockdowns. Regardless, the US is entering a severe recession that will prove very challenging to recover from, particularly if fiscal authorities there also continue to take a passive approach to stimulus.
Quickly looking ahead to next week, Australia’s CPI for the March quarter will be released. Our preview is now available, highlighting that we expect a price gain of just 0.1%, 1.9%yr.
