Key insights from the week that was.
It has been a quiet week for data, and so the market’s focus has largely been on COVID-19’s continued spread.
While in Australia the majority of headlines have reported on the pick-up in cases in Victoria, elsewhere in the world, the increase in cases has been far more dramatic and concerning – the global case count rising quickly above 9 million.
Chief among global developments is the acceleration in new cases in the US back to around peak levels (34,000 yesterday, according to WHO data). It is not just the scale of new cases that is a concern, but also their geographic spread. As we write, the New York Times report that 29 states have seen an increase in cases in the past 14 days; the new case count in another 12 states is more or less the same as the prior period.
The implications for the US of these developments are material. As highlighted this week, fear associated with the virus will likely hold back services consumption for an extended period as well as investment. More broadly for consumption, it also has to be emphasised that disruptions to domestic trade as a result of the halting or reversal of the re-opening of state economies will impede the labour market’s recovery, creating an additional, material, headwind for spending.
Note that last week US initial jobless claims remained above 1 million for a 14th consecutive week. At 1.5 million, this latest outcome was above market expectations; continuing claims for the prior week also remained stubbornly elevated near 20 million. These outcomes highlight how difficult a full and timely recovery will be.
Whereas the risks are clearly against the US, for China they seem manageable given a very low case count (just 21 yesterday, according to WHO data) and clear strength across production and investment. The IMF’s latest forecast revisions highlight the striking contrast in the immediate outlook and risks for the US and China (2020 year-average growth of -8.0% and +1.0% respectively, revised from -6.1% and +1.2%). Westpac’s own 2020 forecasts show a similar divergence, -5.5% and +0.1%, which is expected to grow in 2021 as a year-average gain of +2.1% is seen in the US versus 10% in China
Strong growth in our largest trading partner is a welcome positive for Australia as we deal with the economic consequences of the virus. The latest COVID-19 related release from the ABS this week highlights the scale of the impact the virus has had to date on our business sector. The key takeaway is that “two thirds of all businesses reported a decline in revenue”. And, of those businesses reporting a fall, “almost one third reported a dramatic hit to revenue, in excess of 50%”. As the virus is kept under control and businesses re-open, conditions will improve. However, the starting point is weak and the road back very long.
As highlighted by Chief Economist Bill Evans this week, the Government’s work is far from complete. Had it not been for the support the Government provided through JobSeeker and JobKeeper, the unemployment rate would have been much higher and household incomes much weaker. Highlighting this, almost 624k people left the labour force in April/May, 360k individuals were classified as employed but did no work in May, while 1.2 million others worked fewer hours than usual. As we continue to emphasise, the state of household income (and the sentiment that goes with it) will be critical to the recovery. Assessing Government policy decisions in coming months will therefore be crucial.
Finally to New Zealand, where the RBNZ met this week. There was no change in policy at the meeting, but the caution shown over downside risks (despite recent positives) made clear their concern over the outlook as well as a willingness to ease further. Our New Zealand economics team believes an increase in asset purchases and a cut in the cash rate to -0.50% will be seen over the coming year.