Key insights from the week that was.
This week, the focus has squarely been on economic policy, particularly in Australia.
First on monetary policy, the release of the RBA’s July meeting minutes and a speech by Governor Lowe highlighted that the economic cost of COVID-19 to Australia’s economy has been less severe than anticipated, but that considerable uncertainty remains over the outlook. Highlighting the first point clearly, hours worked have declined much less than anticipated, falling 10% in April/ May and recovering 4% in June against the RBA’s forecast for a 20% decline over the June quarter. These outcomes and other signs of recovery such as further robust gains for retail sales in June justify the RBA remaining on hold. However, that much of the Governor’s speech was given over to a discussion of additional policy options emphasises the scale and skew of global risks. An assessment of these options and Governor Lowe’s views was provided by Chief Economist Bill Evans.
Clearly, even if these risks do not eventuate, there is still strong justification to keep policy extraordinarily easy for the foreseeable future. There is also need for continued, large-scale support from fiscal authorities. So it is unsurprising that the Federal Government this week announced an extension of JobKeeper and JobSeeker to end March 2021 and December 2020 respectively, albeit with tighter conditions and reduced pay rates. The cost of extending these policies is material, as was subsequently outlined in the Treasurer’s Budget update. But not continuing this support would be far more costly.
As discussed by Chief Economist Bill Evans with reference to the Treasurer’s update, we also remain concerned over the risks to the outlook here and abroad and are cautious on the strength of Australia’s recovery. As a result, we look for additional support to be offered by the Federal Government in the October Budget. Specific measures we continue to call for include a further extension of JobKeeper and JobSeeker to June 2021, the bringing forward of the 2022 tax cuts as well as additional infrastructure spending and cash payments.
Looking offshore, the big news of the week was agreement in Europe over their proposed fiscal support package. The agreed Recovery Fund framework will provide Euro Area economies with EUR390bn in grants and EUR360bn in loans in coming years to finance investment and promote employment growth. The intent is for the funds borrowed centrally by the European Commission to be given to those economies most in need, to fund projects that will provide the greatest return. While sentiment has been buoyed by the agreement, in assessing its economic benefit, it must be recognised that the package still requires approval by the EU Parliament and all member states. This is unlikely before late this year.
Moreover, these measures are intended to support medium-term recovery not immediate momentum, hence the economic impulse created over the forecast period (to end-2021) is likely to be modest. Still, when actioned, these policies will give meaningful (albeit slow-building) support for growth across the Continent, helping to move the region forward together.
Quickly on the US and China. Albeit offset by further promising signs of progress towards a vaccine, the US has continued to struggle to contain COVID-19 this week. The virus is spread from coast to coast, and the new case count remains near its pandemic highs. The next few weeks will also see an end to the first wave of stimulus, materially impacting household incomes. While there is talk of another round of fiscal support, agreement seems distant with a wide variety of opposing policy options proposed. Based on existing proposals, the scale of the next package also seems unlikely to match the first. Note, the next two weeks will provide crucial context on the state of the US economy, with Q2 GDP, household income detail and the July employment report to be released. It will also be important to assess the FOMC’s viewpoint on the risks and their policy options as they meet at month’s end. To our mind, the risks are crystallising for the US. This is increasing the probability of additional monetary easing being required.
In stark contrast, despite growing geopolitical tensions, this week we upgraded our growth view for China following last week’s strong set of data. China is now expected to grow around 1.25% in 2020 in year-average terms (as the world economy contracts over 4%) followed by a 9.5% gain in 2021 (almost twice the pace of global growth over the period). As we continue to emphasise, China’s recovery was made possible by the suppression of the virus. But the momentum building now is a function of not only the economy bouncing back, but also a strong focus on continued economic development. As Chinese industry takes advantage of these opportunities, household incomes and spending will rise, creating a broad and sustainable foundation for robust growth.
