Economic reports released in June in the US, Europe and much of Asia show economic activity lifting sharply in response to government stimulus measures and further easing of COVID-19 lockdown measures. The bounce in economic activity is off a very low base in April and May and recovers only a small part of the greatest reduction in economic output since the 1930s depression.
An optimistic scenario based on slow winding back of government stimulus and uninterrupted easing of COVID-19 economic shutdown measures would see output return to the pre-COVID-19 trajectory in two years or so. A pessimistic scenario based on more rapid removal of government stimulus and a return to widespread shutdown measures to contain the spread of COVID-19 would see output take much longer to recover, probably a decade or more.
The good news is that most major economies, including the Australian economy, are tracking closer to the optimistic recovery scenario than the pessimistic. The bounce in the economic reports released in June was stronger than expected. Governments added more stimulus in June and where there are dates set for measures to end are actively reviewing the shape of economic support programs beyond. Central banks are promising to maintain monetary policy support for growth for years if necessary.
Government responses to COVID-19 infection rates continued to evolve in June with more emphasis on reducing infection containment restrictions and re-opening economies, even in the United States and parts of Europe] which are still experiencing high infection rates. Probably irrevocably the emphasis has shifted to trying to live with occasional COVID-19 outbreaks and attempting to deal locally with those when they occur rather than one size fits all blanket shut-down.
Returning to the June economic numbers and reports, in the United States it has been a consistent story of upside surprises starting with the May non-farm payrolls up 2,509,000 (market forecast –8,000,000) compared with –20,500,000 in April. The unemployment rate fell from 14.7% in April to 13.3% in May (market forecast 19.7%). Other standouts included May retail sales up 17.7% m-o-m (market forecast +8.0%); May durable goods orders up 15.8% m-o-m; and May new home sales up 16.6% m-o-m (market forecast +3.5%).
Several June survey reports were also much stronger than expected. The National Association of Homebuilders’ index rose to 58 (forecast 45) from 37 in May and the regional manufacturing surveys for New York (Empire) State lifted to –0.2 (forecast –27.5) from –48.5 in May and the Philidelphia Fed survey rose to +27.5 (forecast –25.0) from –43.1 in May.
The rebound in the US economy looks set to continue in the near term even in the face of a high rate of COVID-19 infections. Household income support from Government initiatives and the Federal Reserve’s reaffirmation in June that it will leave current low interest rates in place for years together with unlimited buying support for government and corporate bonds provide strong support for US economic recovery.
China’s recovery from the depths of the COVID-19 recession is looking a more tepid affair compared to the United States. China was first in to the crisis and first out, experiencing the worst of its economic downturn in Q1 and started to recover in April. China is using a combination of easier monetary policy, preferential loans to ailing businesses, infrastructure spending ramp up and limited income support to boost the economy. While China has experienced some success boosting industrial production, up 4.4% y-o-y in May from +3.9% in April, improvement has been less than impressive in fixed asset investment spending, -6.3% y-o-y in May from –10.3% in April, and retail sales, -2.8% y-o-y in May from –7.5% in April. China looks set to have a less strong rebound from the COVID-19 economic crisis than other major economies on the numbers to date and China’s deteriorating international political and trading relationships may add another impediment to its recovery prospects.
In Europe, most economic reports released in June related to April when economic conditions were at their worst. Retail sales, for example, fell by 11.7% m-o-m in April after falling 11.2% in March. There were still some positive surprises however. Europe’s unemployment rate has stayed lower than expected, 7.3% in April from 7.1% in March assisted by Government schemes providing income and keeping stood down workers linked to their employers. During June Germany and France announced they were working on a support fund to help with the economic recovery of smaller European countries worst affected by COVID-19 restrictions. Some of the world’s most severe restrictions were substantially lifted in June, including some national border restrictions. May and June surveys of businesses and consumers have been stronger than expected. The ZEW June economic sentiment survey lifted to 58.6 from 46.0 a sign of a relatively strong lift in economic activity over coming months.
In Australia, Q1 GDP released early in June showed a fall in the quarter of –0.3% q-o-q although still up 1.4% y-o-y. The sharp fall in most key economic readings in April means that Q2 GDP will almost certainly be negative as well meaning that Australia is in its first recession in 29 years. However, while spending and output are in recession income grew in Q1 supported by government initiatives and will grow again in Q2. The unusual combination of income growing while spending falls is the key reason why the spending fall and GDP recession are likely to be short-lived.
Spending has already shown a spectacular bounce in May with retail sales on preliminary report up 16.3% m-o-m after falling 17.7% in April. Consumer sentiment, according to the Westpac survey, has also lifted sharply in May, +16.4% m-o-m and June, +6.3%.
Whether retail spending continues to strengthen will depend largely upon confidence that business and household income growth will continue to be supported at first mostly by government income support programs but changing to support from the growing economy. At this stage, there is little doubt that the Government will continue to provide budget stimulus as the economy recovers from COVID-19, but the issue is the balance in the stimulus between income support and growth-enhancing spending. What is unlikely is an abrupt halt to income support measures at the end of September. An Economic Statement outlining the Government’s spending plans will be provided in July and should allay the more extreme fears of the economy plunging off a fiscal cliff when JobKeeper and JobSeeker reach their currently legislated conclusion.
One area of greater certainty is that the RBA will continue to support economic recovery with low interest rates. During June the RBA reaffirmed that the 0.25% cash rate will stay in place for years until the economy returns to full-employment and higher inflation becomes more likely.