The negative impact on economic activity of restrictions aimed at containing the spread of covid-19 are showing in many economic indicators released in major economies during April. Sharp reductions are showing in March and April reports and early reports of Q1 GDP (China’s GDP falling from +6.0% y-o-y in Q4 2019 to –6.8% y-o-y in Q1 2020). Australia is an exception at this stage where March economic reports have held up and even strengthened and Q1 GDP may show positive change. This exception will not last and a sharp Australian GDP fall is likely in Q2.
How deep and long the falls in GDP are likely to be is difficult to forecast. Promising signs of slowing in the covid-19 infection and mortality rate, especially in Australia, have prompted the beginnings of staged removal of restrictions which combined with substantial economic support programs by governments and central banks could start the process of economic recovery as early as Q3. On this optimistic scenario, Australia could avoid experiencing a technical recession (back-to-back quarters of negative GDP growth) providing Q1 GDP growth is positive. However, the fall in GDP in Q2 will still be substantial and in most respects, it will seem and feel like recession, albeit a very brief one.
This optimistic scenario depends upon the covid-19 infection rate not rekindling as restrictions are lifted on business and social distancing. Any substantial resurgence of the covid-19 infection rate requiring return of restrictions will prolong and deepen the economic downturn compared with the optimistic scenario. Ultimately, the risk of a new rise in covid-19 infection rate can only be eliminated with the widespread availability of an effective vaccine and that is unlikely until late this year if at all. Having said that, the current flattening and reduction of the covid-19 infection curve provides some cause for optimism.
Returning to the economic indicators released in April, in the United States there is clear evidence of a sharp down-turn in the March and April readings. Housing indicators slumped in March with housing starts down 22.3% m-o-m; existing home sales down 8.5% m-o-m; and new home sales down 15.4% m-o-m. March retail sales fell 8.7% m-o-m. March industrial production fell 5.4% m-o-m and durable goods orders fell 14.4% m-o-m. Regional manufacturing purchasing manager reports point to a deepening downturn slumping in April. The Empire (New York) State survey fell to –78.2 from –21.5 in March while the Philadelphia survey fell to –56.6 from –12.7 in March.
US labour market indicators showed a massive jump in initial jobless claims between 4.4 million and 6.6 million each week during April lifting ongoing claims to more than 18 million. Non-farm payrolls fell 701,000 in March after rising 275,000 in February and the unemployment rate lifted from 3.5% in February to 4.4% just the tip of an iceberg that will see the US unemployment rate lift well above 10% during Q2. The preliminary reading of US Q1 GDP is due on Wednesday and is expected to show annualised growth around –4.0% from +2.1% in Q4 2019.
The Federal Reserve announced extension of quantitative easing to virtually unlimited buying support extending to corporate credit. High US corporate leverage especially among energy companies presented a potential channel for the covid-led economic downturn to precipitate a financial crisis. The Fed’s announcement that it will effectively do whatever is necessary to avoid a financial crisis was timely with energy companies coming under extreme pressure from collapsing global oil prices caused by sharply weaker global demand for oil. The Fed, like most major central banks is likely to do whatever it deems necessary to ensure adequate liquidity and confidence in financial markets.
In China, the data released in April showed an economy that was probably at its weakest in February and has become noticeably less weak in March and April as restrictions started to be relaxed. Several March readings were noticeably less weak than in February. Exports fell 6.6% y-o-y in March compared with –17.2% y-o-y in February; Imports fell 0.9% y-o-y compared with –4.0% y-o-y in February; and industrial production fell 1.1% y-o-y compared with 13.5% y-o-y in February. Fixed asset investment spending, -16.1% y-o-y from –24.5% in February and retail sales, -15.8% from –20.5% showed less pronounced falls in March but remain very weak. The official purchasing manager reports for March are more promising with the manufacturing report lifting to 52.0 from 35.7 in February and the services report lifting to 52.3 from 29.6. While China’s GDP growth collapsed to –6.8% y-o-y in Q1 this looks like the low point and the re-opening of much of China’s economy together with the support of the Peoples’ Bank of China to keep loans flowing to already highly leveraged companies, many precariously poised financially, points to recovery starting in Q2 – providing covid-19 numbers do not force a return to restrictions.
In Europe, preliminary Q1 GDP is due later this week and is likely to show a fall around 3.2% q-o-q and near –3.5% y-o-y. GDP is likely to fall again in Q2 even on the most optimistic scenario. Several countries in Europe have experienced high covid-19 infection and mortality rates during April including Italy, Spain, France and the United Kingdom. In all these countries daily infection and mortality rates appear to have peaked and tentative easing of restrictions has started in Italy and Spain. Wage and business support programs introduced are generous in most European countries and if restrictions are progressively eased over the northern summer European GDP recovery may start in Q3 or Q4.
In Australia, the negative impact of covid-19 restrictions on GDP growth is unlikely to show until Q2. The next Q1 GDP report due in early June may show positive change making Australia an odd man out in a world of sharp reductions in GDP. Preliminary March reports of retail sales, +8.2% m-o-m the second biggest monthly increase on record, and exports, up $A8 billion or +29% m-o-m both tip the scales towards a positive Q1 GDP report. The out-sized increases in March retail sales and exports are likely one offs with covid-19 related panic-buying generating the retail sales result and sharp recovery in iron-ore shipments to China in March prompting much of the export result.
However, retail sales and exports were not the only surprisingly strong Australian reports released in April, February home building approvals rose 19.9% m-o-m and March employment rose by 5,900, much better than the –40,000 expected, and leading to only a small nudge up in the unemployment rate to 5.2% against 5.5% expected. These results are mostly a matter of timing. February home building approvals occurred ahead of the sharp fall in home sales that set in from late March when social distancing restrictions were extended to no physical home inspections or auctions. The labour force survey was conducted in the first half of March ahead of the sharp rise in people being stood down later in March.
Q2 will be catch up quarter in Australia for the downturn in housing, retail sales and the labour market. Various surveys released in April point to what lies ahead. The NAB March business survey showed business conditions collapsing to –21 from +3 in February while business confidence tanked to –66 from –4. The April ANZ job advertisements survey fell 10.3% m-o-m. The April Westpac consumer sentiment survey showed a fall of 17.7% m-o-m the biggest monthly decline in its 40-year history.
Having said that, key and timely government spending programs supporting businesses and households will help to cushion the fall in spending in the economy in Q2, especially the doubling of job-seeker payments to $1,100 a fortnight and the now flowing job-keeper payments of $1,500 a fortnight. The definition of those receiving job-keeper payments as being employed will also limit the rise in the unemployment rate over the next few months possibly to a peak below 10%.
Beyond Q2, if covid-19 infections stay low, there is a good chance that Australian GDP could start to recover in Q3. Special government support payments and the RBA’s efforts holding the cash rate at 0.25% plus its commitment to liquidity support, loan support arrangements and bond yield curve management are all likely to extend beyond when economic growth bottoms adding to the pace of recovery in its early stages. Covid-19 infection rate permitting, there is a good chance that Australian GDP growth could lift strongly later in 2020 and after only a single quarter of negative growth.