Is the economy a step away from the cliff?

Summary

  • Australia is set to witness its first recession in around thirty years.
  • Policymakers have introduced large-scale stimulus to make a bridge for the economy to pass this crisis.
  • Effective containment measures by the Australian Government have been fruitful, and the country is moving away from the COVID-19 led economic jams.

June will mark end of the second quarter of this year and possibly the first recession in Australia in nearly three decades. Policymakers had been proactive to suppress the possibility of a catastrophic spread of COVID-19; this was in part possible due to early travel ban on China in late-December last year.

But before sliding into a COVID-19 led economic jam, the country was reviving from the damages caused by natural calamities, including a devastating bushfire season and droughts. In January, the Federal Government had announced policy measures to ramp-up recovery from bushfires.

Most recently, the Government has announced HomeBuilder grants, which combined with First Home Loan Deposit Scheme will likely drive some demand for residential construction from households that are not in financial distress as a result of COVID-19.

Job Losses and Potentially Weaker Household Demand

As per the Australian Bureau of Statistics (ABS), seasonally adjusted unemployment rate reached 7.1% in May 2020, up by 0.7 points from 6.4% in April 2020. And, the participation rate also came down by a similar margin to 62.9%.

Labour markets, like everywhere in the world, have been severely impacted by the COVID-19 crisis, but since economies are re-openings – the number of furloughs will likely be lower now, and labour force would see some pick-up.

Retail stores, which are one of the largest employers in the country, have started trading again in most cases, except for places like airports. It shall be expected that some stores may not open again, and people employed in such stores would need jobs.

ABS suggested that a large number of workforce experienced reduced working hours, and labour market data reflected falls in hours worked. In May, the 0.7-point increase in unemployment rate translated to an increase of around 85k in the unemployed labour force.

And, the total number of unemployed people could have been higher to around 1.11 million, implying unemployment rate of around 8.1% -- when the number of people not in the labour force (142k) between April and May were added to the reported number of unemployed people in May (927k).

Similarly, if the cumulative of March to May (623k) is taken to account, who were not in the labour force, the unemployment rate is implied at around 11.3% or 1.55 million people.

ABS estimated that a total of 2.3 million people were affected by either reduced number of working hours or job loss between the months of April and May. However, the number was down from 2.7 million in the preceding two months.

During the period from the week ended 14 March 2020 to 30 May 2020, ABS indicated that payroll jobs fell by 7.5% and total wages paid were lower by 8.3%. However, payroll jobs increased by 0.4% and total wages went up by 0.7% in the period from the week ended 23 May 2020 to 30 May 2020.

The Reserve Bank of Australia (RBA) expects employment growth to pick-up concurrently with GDP growth. The central bank expects unemployment rate to average around 10% in the June 2020 quarter before coming down to 9% by December 2020.

Due to a period of low-income growth and unemployment, household consumption growth will likely remain muted to some extent over the near term. However, green shoots in employment and wage growth paint a better picture of household consumption.

Investments and Exports

Public expenditure is expected to be higher in part due to the large-scale fiscal stimulus introduced by the Government, including COVID-19 related policy support as well as bushfire related measures. It is likely that policymakers will be inclined to up the ante in infrastructure development, translating into favourable multiplier effects.

Private investments are sensitive to demand, which is expected to be lower bound. Management commentaries from the ASX-world have been indicating deferral of capital expenditure. Excluding mining investments, private investment will likely be subdued over the future.

Mining investments could fare better than the non-mining investments given that commodity demand has been consistent and oil prices have recovered from the lows. With economies re-opening gradually, the demand for energy will likely recover.

But a slower global economic growth will weaken the demand for bulk commodities in the near term, which would be reflected in commodity exports. Service exports could be impacted materially due to international travel restrictions, hurting the travel and education sectors. Imports could be impacted by the lower demand, and a depreciation in exchange rates will likely weigh on the import decision.

Global Economic Recovery

It would be challenging for Australia to grow when the global economy is in recession. A pick-up in global demand, as well as unrestricted flow of goods, services and people, will likely be favourable for the Australian economy.

Any medical breakthrough for the COVID-19 virus and effective containment of virus will continue to remain the most vital bridge to get to the other side of the crisis. It is also important to consider the impacts when measures like moratorium on loan repayments, JobKeeper and JobSeeker would come to an end.


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