Weekly Economic Update - 15 May 2020

High-Frequency Indicators (under development)#

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Traffic Movement

Source: Waka Kotahi NZ Transport Agency

Electricity Demand

Source: Electricity Authority

Job Seeker Support

Source: MSD

Freight Movement

Source: Waka Kotahi NZ Transport Agency

Retail Spending

Source: Stats NZ

Fiscal Support: Wage Subsidy (paid)

Source: MSD

The Budget shows the impact from COVID-19

New Zealand’s real GDP growth rate is forecast to decline from 2.8% in the year ending June 2019 to -4.6% in the year ending June 2020, driven by an expected quarterly decline in GDP of over 20% in the June 2020 quarter. Annual average real GDP growth is forecast to become positive from the year ending September 2021 onwards (Figure 3).

Figure 3: Real GDP growth

Source: Source: Stats NZ, the Treasury

 

While government support will help to cushion the impact on employment, the unemployment rate is forecast to reach almost 10% by September 2020 before easing gradually to around 6% by early 2022. The economic impact of the COVID-19 pandemic and the Government’s response will have a significant impact on the Government’s fiscal position. The Government has made $62.1bn available to support the COVID-19 response and economic recovery, which consists of the $12.1bn Economic Recovery Package and $50bn COVID-19 Response and Recovery Fund (CRRF). The level of core Crown expenses is forecast to peak at just under $120bn in 2021/22 while tax revenue is expected to fall in the first two years of the forecast period, owing to the economic slowdown and tax policy changes. Net core Crown debt is expected to reach 53.6% of GDP in the year ended June 2023.

Spending drops sharply…

Retail card spending in April 2020, when the country was in lockdown, was 48% lower than in April 2019 (Figure 4). Spending fell in all categories with the largest falls recorded in hospitality, apparel and services. Hospitality spending was down 95% on the same time last year, while spending on consumables remained resilient, up almost 10% on the same time last year, following on from a sharp rise in spending on consumables in March as people stocked up in advance of the lockdown measures.

Figure 4: Electronic card spending by industry

Source: Stats NZ

While spending will lift as alert levels drop, weak demand may persist for some time due to rising unemployment and lower confidence levels.

…but business confidence bounces back

Business confidence improved 21 points to -46% in the preliminary May read of the ANZ Business Outlook survey. Own activity lifted 13 points to a net 42% of firms expecting lower activity for their firm in the year ahead. A net 45% of firms expect to cut jobs while a net 38% expect to reduce investment. A net 60% of firms expect lower profits. Backward-looking indicators continue to deteriorate with a net 61% of firms reporting lower activity and a net 36% already reporting having fewer employees compared to a year ago. Pricing and cost indicators remain weak. One-year inflation expectations are at a record low of 1.28%.

The RBNZ expands the large scale asset purchase programme

The RBNZ announced that they will expand their Large Scale Asset Purchase (LSAP) programme potential to $60bn, up from the previous $33bn limit. The expansion of the LSAP programme aims to continue to reduce the cost of borrowing quickly and sharply. The RBNZ expects to see retail interest rates decline further as lower wholesale borrowing costs are passed through to retail customers. The OCR is being held at 0.25% as indicated on 16 March. They also indicated that they are prepared to use additional monetary policy tools if needed.

US unemployment rate reaches record high…

The official unemployment rate in the US increased to 14.7% of the labour force in April, compared to 4.4% in March (Figure 5). This is the largest monthly increase as well as the highest unemployment rate in the history of the series (which goes back to 1948). There was also a spike in the number of people classified as employed but who were absent from work; accounting these people would push the unemployment rate to close to 20%. Employment fell by more than 22 million, while the labour force participation rate declined from 62.7% to 60.2%. The services sector accounted for the majority of job losses. There was little reaction from markets, for two reasons. Firstly, the increase was widely expected and even slightly better than anticipated. Secondly, a silver lining was that 78% of unemployed workers said that their layoff was temporary, which raised hopes that there will be a quick recovery. However, judging by jobless claims figures, the unemployment rate will likely deteriorate further in the May survey month.

Figure 5: US unemployment and labour force participation rates

Source: Bureau of Labor Statistics / Haver Analytics

United Kingdom GDP declines in first quarter…

UK GDP contracted by 5.8% in March compared to February. In the first quarter, GDP fell by 2.0% compared to the December quarter, better than market expectations of a 2.6% fall. The Bank of England said last week they expect GDP to decline by 25% in the second quarter and by 14% in 2020 as a whole.

…as government plans phased exit …

Governments in the UK and Australia announced plans to ease COVID-19 restrictions in coming weeks. The UK plan foresees a move from phase 1 (widespread lockdown) to phase 2 (smarter controls) in three steps, conditional on the re-infection rate (r-number) remaining below 1. The first step, on 13 May in England, encourages a return to work by those unable to work from home, and who work in sectors that are not closed. Second, no earlier than 1 June, will be the reopening of non-essential retail and a limited reopening of schools. Third, no earlier than 4 July, a limited reopening of personal care and other social consumption sectors. The Government emphasises that there will be no ‘quick return to normality’, with the only feasible long-term solution a vaccine or effective therapeutic treatment. This is likely to be several months away, which implies some impairment to supply and increases the prospect of long-lasting changes in consumer behaviour – away from some types of services.

…and Australia proceeds in steps…

In Australia, the government has outlined a three-step framework to ease restrictions. Step 1, schools, restaurants and most shops will be allowed to open, more people are allowed to return to work, non-work gatherings of up to 10 people are allowed, and domestic and regional travel is permitted. Most entertainment venues (such as cinemas) remain closed. Step 2 allows for slightly larger gatherings and for entertainment venues to have up to 20 visitors, but pubs and nightclubs remain closed. Under Step 3, most restrictions are lifted, but gatherings are still limited to up to 100 people. International student travel may also be reopened at Step 3. States and territories will implement these changes based on their own COVID-19 conditions.

Figure 6: Daily new COVID-19 cases by state in Australia

Source: Johns Hopkins University

The National Cabinet will review progress on a regular basis to assess the impact of the easing in restrictions, considering the spread of the disease, the health system’s capacity to detect, isolate and treat cases, and how well people are abiding by the rules. Prime Minister Morrison has stated that he hopes Step 3 could be achieved by July.

...supporting sentiment…

The timing of the government’s announcements coincided with the May Westpac/MI consumer confidence survey, which rose sharply, unwinding most of April’s fall, but remaining well below the 100 level separating optimists from pessimists (Figure 7).

Figure 7: Business and consumer confidence

Source: Haver

The National Australia Bank’s (NAB) April Business Survey showed business confidence remained weak at -46 points in April, but it did improve 18 points from March, amid talk of restrictions easing. Business conditions fell a further 12 points to -34, with mining the only industry with a positive outlook. NAB economists warned that declines in the forward orders component of the survey raised the risk of a further deterioration in conditions.

…as costs of lockdown become clearer…

The Australian Treasurer estimates that both households and businesses will have received around AU$55bn (3% of GDP) worth of fiscal stimulus by the end of June. The monthly financial statements for the fiscal year to March showed an underlying cash deficit of AU$22.4bn, AU$10bn higher than forecast in December, driven by a AU$11.3bn drop in tax receipts. The Treasury will release an updated economic outlook in June, followed by the Budget in October.

The Reserve Bank of Australia’s (RBA) May Statement on Monetary Policy featured three economic scenarios; a baseline, upside and downside (Figure 8). The baseline forecast is for GDP to contract sharply in the June quarter, unemployment to rise to 10% and a recovery starting in the September quarter as health restrictions are eased. Annual average GDP growth of -5% is forecast in the year ending December 2020, rising to 4% in 2021, similar to market expectations. The unemployment rate is forecast to remain above 6% until end-2022, indicating persistent excess capacity and weak inflation. Underlying consumer price inflation is forecast to be around 1.5% by June 2022, below the RBA’s 2%-3% target.

Figure 8: RBA unemployment forecast scenarios

Source: RBA

Meanwhile, trade tensions emerged as China halted meat imports from several Australian suppliers that did not meet required standards. This comes amid reports that China is considering whether to impose anti-dumping duties on imports of Australian barley.

GDP contract in Philippines and Malaysia

In the Philippines, March quarter GDP fell 5.1% from the previous quarter, and -0.2% annually. Lockdown measures in place since mid-March contributed to annual household spending growth slowing to 0.2%, compared to its recent average of 6%.

In Malaysia, March quarter GDP fell 2.0% from the previous quarter and annual growth slumped to 0.7% from 3.6% in the December quarter.

 

Tables#

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Data in Italic font are provisional.
... Not available.

(1) Seasonally Adjusted
(2) Ordinary time, all sectors
(3) Westpac Mcdermott Miller
(4) Quarterly Survey of Business Opinion
(5) Reserve Bank (11am)
(6) Daily close