Developments in Industrial Stocks Amidst Covid-19 Pandemic - DOW, CWY

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Developments in Industrial Stocks Amidst Covid-19 Pandemic - DOW, CWY

 Developments in Industrial Stocks Amidst Covid-19 Pandemic - DOW, CWY

Australia may have eased few coronavirus restrictions, but it is not going to be a smooth ride for the country. Economic data continues to be dismal with increasing indications by the Government and RBA that the economy will recover at a slower pace during the coming months.

Though the Government is supporting workers and businesses by providing JobKeeper payments, it is planning to roll back the payments in the next 6 months. Treasurer, Josh Frydenberg has stated that there is no money tree to continue helping people and government spending must be cut during 2H20, highlighting that the new spending measures were not designed to go forever but to help build a bridge to ensure that Australia bounces back even stronger.

Must Read: Morrison Government’s 3 Step Reopening Plan for Economic Recovery

Australian businesses stayed cynical during April amid persistent coronavirus induced lockdowns and social distancing measures to contain the virus, as per the monthly business survey conducted by National Australia Bank for April. National Australia Bank Limited (ASX: NAB) carries out a business survey with a sample of businesses to perceive business sentiment and conditions during a definite period.

Let us have a look at the details of the survey conclusion for April.

Business Conditions and Confidence Remained Weak

Business conditions remained gloomy and below the levels seen in the global financial crisis (GFC) while business confidence was very weak despite an improvement during the month of April 2020.

The confidence of businesses rose 19 points to -46 index points and is about 2 times below the trough entered during the recession in the 1990s. It was a broad-based improvement in confidence led by an uptick in industries including retail, construction, and mining but remained negative across all industries and states. Across the business sector, the manufacturing, transport & utilities, and service industries now have the weakest outlook. Confidence rose in all states except Tasmania; however, it remained very weak in the state of New South Wales.

ALSO READ: Australian states ease restrictions, road ahead for the economy

Business conditions declined by 12 points to -34 index points, with conditions remaining negative across all non-mining industries that include the most significant decline in wholesale.

Conditions roamed in the negative territory in all the industries except mining which experienced a significant increase. While transport and utilities remained flat, conditions were the weakest in recreation and personal services. Conditions deteriorated across all states except Tasmania in the month with softest conditions in South Australia.

3 components drove the result - Trading conditions fell by 14 points reaching to -33 index points, profitability reduced 7 points to -35 index points and employment index declined by 15 points to -35 index points.

Weak Economic Indicators in April

Leading indicators did not show any improvement. Though there has been an improvement in confidence, forward orders declined by 8 points, reflecting activity would weaken further in near-term, and capacity utilisation was down by 3 percentage points after sharply declining in the past 2 months, suggesting a sharp downturn in activity for a substantial part of the economy.

ALSO READ: A juxtaposition of Market Optimism and Investors’ Fear Across the Globe

Alan Oster, NAB Group Chief Economist, stated, capacity utilisation fell to a very low level with new coronavirus supplement measures in place for April. It is about 10 percentage point lower than two months before, but the effect of reduced demand is evident across all industries due to coronavirus containment actions.

The percentage of respondents who wanted to borrow and the comparative struggle in borrowing has remained unaltered. Also, capital expenditure has reduced sharply and is at a very low-level, signifying that companies are dragging back on outlays where likely.

Labour indicators remained bleak during the month. The employment index decreased by 15 points to -35 index points in April, which is consistent with substantial shedding of employees by business and ABS Payroll data, suggesting a significant rise in the unemployment rate in April as per the NAB economist.

Labour costs reduced sharply while the wage bill measure is expected to be significantly affected due to the decline in employment during the month. The retail prices have stayed unchanged, but the overall deflation in final product prices strengthened.

Outlook Ahead

As Australia moves towards restarting its economy with easing restrictions and reopening of businesses, recovery is expected to begin but at a slower pace. Loss of earnings, rising unemployment and declining house prices are likely to impact Australian households amid the coronavirus situation.

According to the ABS data, unemployment rate rose to 6.2% in April with the expected jobless rate to increase till the point 1 in 10 Australians is out of work. About 6 million people are on JobKeeper wage subsidy while more than a million on unemployment benefits. With the Government hinting an end to such allowances in the upcoming period, households and businesses can witness a significant crunch including Australian banks if the economy does not return back to normal.

As per Mr Oster, the pace of decline in consumption-based spending has stabilised after COVID-19 measures continue in May and across many industries. However, business payment inflows have weakened across most industries. He added that coronavirus containment measures are likely to be relaxed soon but will be a gradual process. The current hit to confidence is expected to have some impact on employment and capex, might dragging on growth for some time.

NAB has forecast a V-shape recovery for Australia while predicting GDP to achieve pre-COVID levels not before 2022 and unemployment to remain above 7% and match the level by the end of 2021, thereby increasing the need for more fiscal actions from policymakers to support the economy for some time.


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