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Cliff Notes: The Stages of Recovery

Key insights from the week that was.

The past week has seen partial data released ahead of Australian Q1 GDP next Wednesday. On the global front, markets have remained optimistic, albeit wary of the risks, particularly with respect to US/China trade relations.

The partials this week for Australia were focused on investment. Construction work done fell 1.0% in Q1, broadly in line with expectations, as a result of declining residential construction and public works. Construction is now almost 13% off its mid-2018 peak, at its lowest level since June 2008. Ahead, the sector is set to experience further weakness given its existing fragility and the impact of COVID-19.

The CAPEX survey subsequently provided an estimate of equipment investment in Q1 along with forward plans for capital outlays. In the quarter, the downside risks we had noted around equipment spending eventuated as activity fell 2.3%. Total CAPEX (which also includes buildings and structures) consequently fell 1.6% in the three months to March. By industry, the decline in CAPEX was concentrated in the service sector – this is unsurprising given the economic threat that COVID-19 poses. Service sector CAPEX fell 5.2% in the quarter, leaving it down almost 13%yr. In stark contrast, mining CAPEX is up 6.9%yr.

CAPEX expectations for the 2019/20 and 2020/21 financial years point to a lasting shock from COVID-19, again focused in the service sector and partly offset by strength in mining. Versus the same estimate from a year ago, estimate 6 for 2019/20 implies a 5.6% fall (estimate 5 pointed to a 2.1% gain) while estimate 2 for 2020/21 suggests a further 7.9% fall in that financial year (estimate 1 had pointed to a 8.8% gain). Note though that early estimates for a given financial year are typically highly volatile.

Apart from the data to hand, this week our team has also been focused on Australia’s housing market and China.

On housing, the latest Westpac Housing Pulse is now available, providing insights into price trends, turnover and sentiment in the sector. COVID-19 restrictions and associated uncertainty have seen a sharp reduction in turnover across the nation and consequently in new listings. As the housing market opens up, the price level will be tested. The biggest risk for prices is unemployment and household income over the coming year to 18 months. Respondents to our Westpac-MI consumer sentiment survey are pessimistic on the outlook for prices, with current house price expectations in line with the weakest readings during the GFC.

On China, two themes have been explored. Foremost on the minds of Australia currently are our export exposures with China given the recent trade tensions between Australia and China as well as the US and China. This is a topic discussed in depth by Chief Economist Bill Evans is his latest video update. The other narrative that is important to focus upon is China’s recovery from COVID-19 and authorities plans for the economy over the short and long-term. While stimulus offered at the 2020 NPC was modest compared to that introduced during the GFC, as well as other nations’ responses to COVID-19, these decisions should be seen as a vote of confidence in China’s economy by authorities there. A staged recovery targeting sustainable growth in production then investment and finally consumption is underway.

Finally to the US. Data made available this week has been limited in flow and market significance. The loss of another 2 million jobs last week brought the cumulative count for this crisis to over 40 million. Durable goods orders also reported a very weak outcome for April, down 17%. The market however remains of the view that this data is representative of a trough that is passing after which growth will quickly return. The 4 million decline in continuing unemployment claims reported this week is supportive of such a view, although 21 million people on unemployment benefits is still a highly abnormal outcome for the economy, with material, long-lasting consequences for growth. Just as the rise in initial claims has slowed abruptly, the decline in continuing claims should also be expected to abate quickly. This is particularly the case if the current high level of new cases persists for a protracted period, limiting US states’ ability to fully open and demand patterns to return to normal.

Westpac Banking Corporation
Westpac Banking Corporationhttps://www.westpac.com.au/
Past performance is not a reliable indicator of future performance. The forecasts given above are predictive in character. Whilst every effort has been taken to ensure that the assumptions on which the forecasts are based are reasonable, the forecasts may be affected by incorrect assumptions or by known or unknown risks and uncertainties. The results ultimately achieved may differ substantially from these forecasts.

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