WEEKLY E-MAIL

17 August 2020

COULD OUR ECONOMIC RECOVERY BE PEAR-SHAPED?

By Denise Slattery

For the majority of our clients that are based in Victoria, we hope that you are managing the early phase of the Stage Four Lockdown as well as possible.

As the reporting season got underway, 25% of the Australian economy has gone into the lockdown, and an 8.00 pm to 5.00 am curfew for six weeks. This has derailed the recovery in Victoria until at least the first quarter of 2020–21, with significant collateral damage for the rest of the economy.

As expected, the Reserve Bank (RBA) left rates unchanged at its Monetary Policy meeting on 4 August. There were plenty of “V” words in Governor Philip Lowe’s statement, such as “virus”, “very” difficult period. “Victoria” but none linked to the shape of economic recovery. The statement revealed the RBA Board is increasingly concerned about the shape of Australia’s economic recovery.

In its baseline scenario, “output falls by 6% over 2020 and then grows by 5% over the following year”, which is 1.3% below 2019 levels. The outlook for unemployment is not so comforting and raises significant concern over the level of household consumption. In the base case scenario, “the unemployment rate rises to around 10% later in 2020 due to further job losses in Victoria and more people elsewhere in Australia looking for jobs. Over the following couple of years, the unemployment rate is expected to decline gradually to around 7%.”

There was no mention of the underutilization rate (un- and underemployment), which is likely to peak near 20% and similarly decline gradually to around 15%. Total hours worked, and wages growth will be pressured by the excess capacity in the labour market for several years. Key to the headline unemployment outcome will be the participation rate. The higher the participation rate (those looking for work), the higher the unemployment rate. It is likely more people will be seeking work, particularly as support programs are withdrawn.

In his Economic and Fiscal Update presented on the 23 July, Treasurer Josh Frydenberg alluded to Treasury’s forecast for unemployment to peak in the December quarter at 9.25% after both JobKeeper and JobSeeker programs were extended. Forecasts showed unemployment still well above 8% at 30 June 2021. Those forecasts assumed the Victorian economy would re-open by mid-august. The RBA’s base case now suggests unemployment “around 7%” in a “couple of years”, suggesting a further delay in recovery in the labour market.

With the official cash rate at 0.25%, and not wanting to cut to zero, let alone go into negative territory, the RBA effectively admits it is out of conventional ammunition. Given the significant increase in government bond issuance to fund support programs, the yield on the three-year bond has lifted above the targeted 0.25% in recent weeks. The RBA re-entered the secondary market to ensure the yield on the 3-year bond is consistent with the target, buying $500m of the $900m offered, paying a weighted average yield of 0.2575%. Further purchases will be undertaken as necessary.

While the RBA is assisting with the supply of credit, the latest financial aggregates reveal there is little demand for such credit. The June credit numbers are the worst for decades.

Financial aggregates (%)

Source: Reserve Bank of Australia

The accommodative approach will be maintained as long as it is required. “The Board is committed to [doing] what it can to support jobs, incomes and businesses in Australia. Its actions are keeping funding costs low and assisting with the supply of credit to households and businesses. The Board will not increase the cash rate target until progress is being made towards full employment and it is confident that inflation will be sustainably within the 2–3 per cent target band.”

We’re living in an unprecedented time. And in this time, it is important to remember that the health and safety of you & your loved ones are of the utmost importance.

Our team is always available to answer any questions on recent events, markets or discuss anything you may have on your mind.

We will get through this!

Stay safe & well.

Denise Slattery
Senior Para-Planner
Authorised Representative No. 304356

If you have any questions or comments, please email me at denise@gfmwealth.com.au

Disclaimer: This document is not an offer or invitation to any person to buy or sell any interest in or deposit funds with any institution. The information here is of a generic nature, and does not take into account your investment objectives or financial needs. No person should act upon this information without firstly seeking competent, professional advice specifically relating to their own particular situation.

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