• Alexander Funds Management
    • Aug 23

The July Bounce

Some key July Australian economic readings are showing a better-than-expected lift in economic activity. This is surprising given that Melbourne and parts of regional Victoria were placed under tighter restrictions to contain a second wave of COVID-19 infections. The surprising size of the improvement in retail sales; employment; and hours worked in July, at the start of Q3, provide hope that the run of negative quarterly GDP growth readings in Q1 and Q2 2020 will be broken by a positive reading in Q3.

Retail sales provided the latest positive surprise, rising on preliminary reading by 3.3% m-o-m to a record high $A30.75 billion in the month. That reading is up 12.2% compared with July 2019. It is also up 24.0% compared with April this year ($A24.79 billion) when the restrictions associated with the first wave of COVID-19 infections in Australia took retail sales down to their lowest point in the recession.

The sharp recovery in retail sales since April has been assisted by several factors, but has been made possible essentially by Government income support programs such as JobKeeper and JobSeeker payments. Income support has allowed the stay-at-home economy to thrive in the face of rising unemployment. Households although physically restricted by COVID-19 have been able to spend more money on eating at home; home entertainment; home offices; home renovations; and much more.

While parts of retail trade have been hit hard by COVID-19 restrictions, other substantial parts, notably grocery; liquor; hardware; and whitegoods have more than compensated and boomed.

In the latest recorded monthly retail sales for July, only Victoria under much tighter restriction during the month showed a fall, and a relatively small fall of 2.0% m-o-m in the circumstances. Spending rose strongly in all other states and territories.

The high July retail sales reading sets a cracking pace for retail sales in Q3. With the first month of Q3 running 24%, or $6.0 billion (alone 1.3% of quarterly GDP), above the first month of Q2, even if August and September show big retail sales falls, Q3 retail sales are likely to be 10% or more above Q2.

Rather than falling in August and September, there are some reasons to expect retail sales to hold up. Government income support is still at high rate through August and much of September. Also, the improving economy from its low point back in April and May is generating higher employment income.

Employment and hours worked data for July provided positive surprises. Total employment rose by 114,700 in July (market consensus +40,000) and at 12.46 million stands 343,100, or 2.8% above the low point monthly reading of 12.12 million in May.

In the world of COVID-19 restrictions and income support measures, there are reasonable questions about whether people listed as being employed are doing their usual work or in some cases any work. This concern, however, is allayed by the measure of monthly hours worked. The low point for hours worked was also in May at 1.593 billion hours. The July reading of 1.681 billion hours was 5.5% higher than in May.

Total employment in July was up 2.8% from the May low point, but total hours worked was up 5.5% over the same period. This would seem to imply that there is nothing false in the employment numbers. Instead it seems that those employed are working more fully than in May and being paid for the extra hours.

There is an important proviso with the employment and hours worked data for July, the labour force survey used to construct the data was conducted in the first two weeks of July ahead of the new shutdown in Victoria. As the effect of the shutdown is taken to account in the labour force report, employment and hours worked data are likely to soften in August and perhaps September. Even so, given the depth of the trough in May, the July to September (Q3) employment and hours worked numbers are still likely to be higher than those in April to June (Q2).

Continuing Government income support through Q3 and better employment earnings compared to Q2 provide the wherewithal for the stay-at-home economy to spend up in Q3 and the preliminary July retail sales numbers provide testimony to how unexpectedly strong that spending may be even with Victoria in lock down.

Strong retail sales in Q3 should boost household consumption accounting for more than 60% of GDP. There is a good chance that will be enough to push Q3 GDP into positive territory. But the Q3 GDP is more than three months away in early December. The next quarterly GDP report to be released is for Q2 and is due next week. That number will be very weak. It will be mired by the deep trough readings for April and May for various economic indicators. Q2 GDP may have fallen as much as 6% q-o-q, but it now seems that some of that fall will be recovered in Q3.