Data and economic reports and announcements due this week should help to clarify how the Australian economy performed in Q2 while casting some light on how it might perform beyond Q2. Partial indicators of how the economy performed in Q2 include preliminary reports later in the week of June retail sales and international trade. How the economy may perform beyond Q3 will be informed by reports during the week from the RBA and the Government of the shape and duration of combined monetary and fiscal stimulus support for the economy.
The where have we been part of the story is coming into sharper focus and it is a story of Australia performing better than expected in the early stages of the covid-19 pandemic. Australia’s infection rate even with the current resurgence has been low by international comparison. Government responses to the pandemic have been good in taking measures to suppress the infection rate and among the world’s best in providing timely and adequate income support to most businesses and households adversely impacted by the levels of shutdown necessary to suppress the spread of covid-19.
Restrictions in parts of the country have been lifted earlier than might have been expected going back to the first stages of the covid-19 outbreak back in February and March accounting for much of the reason why Q2 is shaping up much better than expected. There are, however, notable setbacks occurring early in Q3 indicating that the story of unexpected improvement could be starting to change. Nevertheless, as far as Q2 is concerned that story appears to have turned out better than expected.
One important indicator of a better-than-earlier-expected Q2 is the unemployment rate. The June labour force report released last week showed a 210,800 lift in employment in the month recovering some of the 730,00+ loss in April and May. Despite the large lift in employment in June the unemployment rate still rose to 7.4% from 7.1% in May. However, just three months ago, many forecasters including Treasury and the RBA were predicting an unemployment rate in June of 10% or more.
The effective unemployment rate allowing for those on Job-keeper is much higher at around 13.3% in June, but it is worth keeping in mind that most forecasters three months ago saw the effective unemployment closer to 20% in June. It is also worth keeping in mind that those on Job-keeper are receiving an income of $1,500 a fortnight a relative fortune compared with assistance available to those unemployed in the earlier recessions of the 1980s and 1990s when the unemployment rate was above 10% for protracted periods.
Lower-than-expected actual and effective unemployment through Q2 and with those unemployed on more generous income support has led to retail spending that has been higher-than-expected three months ago. Retail sales had one bad month during the covid-19 restrictions, April when spending fell 17.7% m-o-m. A recovery of much of that loss occurred in May when retail sales lifted 16.9% m-o-m. Preliminary June retail sales due later this week are expected to show another increase of around 3.0% m-o-m. Retail sales are likely to have been flat over Q2 but a far better result than the –8 to –10% q-o-q result factored into many forecasts three months ago.
Preliminary June international trade data will also be released later this week and are likely to indicate another monthly trade surplus around $8.0 billion driven by exports holding up better than imports. Net exports look set to make a small positive contribution to Q2 GDP growth.
At this stage, Q2 GDP due for release in early September, which many forecasters had falling in the range –5.0% to -10.0% q-o-q three months ago now looks set to come in around –1.0% to –2.0% q-o-q. Australia will still suffer back-to-back negative GDP quarters, but the recession is much less severe than previously feared likely.
While the recent past has improved relative to earlier expectations, the near-term future (Q3 and Q4 2020) have become less promising than expected entirely because suppressing covid-19 is proving a trickier and much less predictable task. Our base-case forecasting assumption a few months ago was that the reduction and flattening of the covid-19 infection curve would allow progressive reduction of restrictions through Q3. After a weak Q2 GDP growth would rebound strongly in Q3.
Part of our forecast assumption is now obviously wrong. Covid-19 is spreading in the community in Victoria and probably New South Wales forcing a return to some restrictions that will hinder business recovery and will likely push up the measured and effective unemployment rates over the next few months. If that was all the story, the renewed weakness in Victoria and New South Wales would be sufficient to turn around a prospective Q3 GDP rebound to another quarter of negative growth threatening to deepen and prolong Australia’s stay in recession.
It is becoming clearer that the new blow from covid-19 is not all the story. The turn of events combating covid-19 in Victoria and New South Wales and its potential negative effects on the economy are prompting responses from the RBA and the Government that essentially boil down to stimulus extended longer than previously expected.
While the RBA made no change to the record low 0.25% cash rate at its early July policy meeting it has made it even clearer that interest rates – the official cash rate and its newer target for the three-year government bond yield – will be no higher than 0.25% for years to come. This message on interest rates plus the RBA’s commitment to ensuring adequate liquidity in financial markets and its commitment to work with Government to fund necessary fiscal expansion are all likely to feature prominently in the minutes of the July policy meeting to be released tomorrow.
On Thursday, the Government will provide an Economic Statement that is likely to provide some certainty that income support will be provided on an extended basis for those sectors of the economy that need it. Importantly, the Government is also likely to make it plain that it will respond with whatever additional support is needed as circumstances change. Covid-19 is an unpredictable enemy. The Government is less likely to place hard end dates on support until it is much clearer that covid-19 is contained.
Extension of monetary and fiscal support for as long as is needed is likely to be the message this week and that should mean that while the rebound in Q3 GDP will not be as large as thought likely a few months ago there should still be some modest improvement even with the negative effect of renewed restrictions in Victoria and potentially New South Wales.