Key insights from the week that was.

Data for Australia this week has been focused on housing. CoreLogic house prices, across the 8 capital cities, declined 0.8% in June following a 0.5% fall in May. Declines were most pronounced in Melbourne and Perth (-1.1%) but relatively muted in Brisbane and Adelaide (respectively -0.4%, -0.2%). Sydney was right in the middle, -0.8%. As detailed in the bulletin, the weakness evident in June was most concentrated in areas of the housing market that had seen the strongest gains over the past year such as top and mid-tier Melbourne and top-tier Sydney. These are also the parts of the national market where affordability is of most concern. Ahead we continue to expect a circa 10% cumulative decline in prices as the income effect of this crisis is felt and given turnover has now largely recovered to pre-COVID-19 levels. Notable risks in the months ahead are the end of the existing JobKeeper and JobSeeker programs and temporary loan repayment holidays. Property investors’ appetite for increased exposure to the sector will also be key – highlighting their current caution, in May investor credit fell.

Dwelling approvals were hit hard by the crisis in May, -16.4%mth; -11.6%yr, after holding up in April. Unit approvals were down 35% in the month, high-rise units likely around -50%. Importantly, the ABS emphasised in the release that the May outcome reflected demand ahead of the April lockdown, hence there is arguably further weakness to come. The Federal Government’s Homebuilder scheme will provide some support in the months ahead. However, we still see approvals troughing near their GFC lows and, because of sharply declining net migration, this level of approvals will remain ahead of ‘underlying demand’.

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This deterioration in net migration is a big concern for growth not only in 2020 but potentially for years to come, a theme investigated in depth by Chief Economist Bill Evans this week. Of greatest concern is the 50% share of net migration foreign students represent which is currently at risk directly from COVID-19 restrictions as well as the lasting impact the virus will have on household incomes and behaviour across the world. Potential growth for the Australian economy is at risk.

Highlighted in our latest Coast-to-Coast report and a key themes video released this week, this net migration story has a disproportionate impact on the states, affecting the south-east the most given the majority of Australia’s tertiary institutions are located there. Other key sectors are also being affected to differing degrees across the nation. Of particular note: housing affordability is also heavily skewed against the south-east, affecting housing activity and consumption; though business investment in mining is warranted, benefitting WA, elsewhere across our economy investment is weak and at risk; finally Queensland’s warmer climate and existing infrastructure set it up to benefit most from domestic tourism as state borders open. Also note, as has occurred in Melbourne in recent weeks, any renewed outbreaks of COVID-19 will affect the distribution of activity as well.

Globally, the US was the focus this week given the release of the June employment report and June FOMC meeting minutes, not to mention comment from several FOMC members. Nonfarm payrolls overdelivered against already optimistic market expectations as 4.8 million jobs were created in the month. The unemployment rate correspondingly fell 2.2ppts from 13.3% to 11.1% despite a 0.7ppt rise in participation. An even larger decline in the U6 measure of labour underutilisation, from 21.2% to 18.0%, further emphasises the rapid erosion of labour market slack possible as state economies re-open. This most certainly is a strong report but has to be put in context.

First, the 7.5 million jobs created in May and June recovers only a third of the job losses of March and April. Second, the 5.6 million reduction in continuing claims in May and June compared to the 7.5 million increase in payrolls suggests many workers have not been brought back to pre-COVID hours, leaving them to rely on government support – this is all the more the case if aid to business through the Paycheck Protection Program is also recognised. Finally, following the June survey week, new cases of COVID-19 in the US skyrocketed to new highs, repeatedly. Rising cases are now being seen in the vast majority of states, and some state and local authorities are responding with new restrictions. It seems inevitable that the September quarter will see an abrupt slowing in employment growth, or potentially a reversal of recent gains. Here it is not just the direct effect of any restrictions and sentiment that matter, but also the cumulative effect of lost business over many months, particularly for small and medium-sized firms.

While the FOMC continue to emphasise the risks before the US economy, in all communications they also make clear their intent to do whatever is necessary to offset the negative consequences of COVID-19 and to set the economy up for recovery. For now, this is enough, but if new cases continue to rise at the rate they have been and authorities are forced to act to stop the spread, financial markets and the broader economy could quickly become acutely aware of the risks. It remains an open question as to whether the monetary and fiscal support that could be offered would be sufficient to offset a resurgent wave of concern.


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