Key insights from the week that was.
In Australia, the labour market has been in focus this week given the release of the May labour force survey. As we anticipated would be the case, employment surprised to the downside, falling 228k in May. This brings the cumulative loss of jobs since March to 835k and is behind the near 2ppt rise in the unemployment rate in just two months despite a 3ppt decrease in participation. At May, 360k employees worked zero hours and 1.2 million worked less hours than they typically would, clearly highlighting the degree of underemployment in addition to ABS defined unemployment.
There was some positive news in this report however. The decline in hours worked in May fell by less than the decline in employment (0.7% versus 1.8%), implying that demand for labour is starting to improve in some sectors. As the economy continues to open up, labour demand should firm, limiting further increases in the unemployment rate from here. Still, with social distancing to remain in place for the foreseeable future, and given our belief that the recovery will underwhelm, the unemployment rate and underutilisation more broadly will remain elevated.
The release of the RBA May Board meeting minutes highlighted that the RBA remain pleased with the response of our economy to the policy measures introduced to date, and are hopeful on the recovery from the second half of 2020. Highlighting this, the Board noted “It was possible that the downturn would be shallower than earlier expected…. However the outlook remained highly uncertain and the pandemic was likely to have long-lasting effects on the economy”. The benefit offered by policy globally and the risks to the world outlook were both recognised and are being monitored closely. A focal point for assessment going forward will be the recent strength of the Australian dollar to levels well above the USD0.64 assumed by the RBA when they put together their last set of forecasts in May. As discussed by Chief Economist Bill Evans this week, with the global recovery looking more entrenched (COVID-19 outbreaks in the US and Beijing notwithstanding), we believe that the Australian dollar is likely to continue to rise over the medium-term, to USD0.72 end-2020 and then USD0.76 end-2021.
If the global recovery does hold, then the US dollar is likely to continue to depreciate not only against the Australian dollar, but many other currencies too. Of particular significance is the decline we expect against the Euro (as downside risks for European growth diminish) and China’s Renminbi (as their growth capacity is proven, for this recovery and the long-term).
Data out this week across the globe has highlighted promising signs of recovery as well as the risks that remain.
NZ GDP surprised to the downside, activity falling 1.6%. This was the worst quarterly outcome since 1991, though this is just a fraction of the weakness that will be seen in the June quarter, when the lockdown restrictions were in full force. As highlighted by our New Zealand team however, with the restrictions now having been removed, the recovery in the September quarter will be similar in scale to the June quarter collapse, both around 14%.
For the US, data points jarred this week, retail sales storming higher in May (+18%) after April’s plunge as initial and continuing unemployment claims stubbornly held up in mid-June despite the re-opening of the economy (respectively 1.5mn and 20.5mn). This fits with our view that the US labour market recovery will be protracted and highly susceptible to the risks that emanate from the continued high level of new cases across the US as well as the lasting economic consequences of the pandemic. It is not surprising then that FOMC speakers continue to emphasise the scale of the accommodation provided to the economy to date as well their capacity and willingness to do more if necessary. Across the Atlantic, the Bank of England offered more support this week, adding another GBP100bn to their asset purchase program which will now total GBP745bn.
