Signs of a bounce up in economic activity from the depths of the COVID-19 recession proliferated in September in most countries and regions. Stronger economic readings and surveys for August and September occurred despite rising infection rates in many countries and a return to some restrictions to suppress outbreaks. In Australia, Victoria, one quarter of the national economy, was subject to some of the world’s toughest restrictions through August and September, but most Australian economic readings were repeatedly stronger than consensus forecasts. Resilient economic readings also occurred despite a widening range of non-COVID-19 potentially negative forces including deteriorating political and trading relationships between China and the United States, Europe and Australia and rising tension within the United States in the increasingly fractious presidential election campaign.
The main reason why economies have bounced more strongly than widely expected since mid-Q2 has been the stimulus measures implemented by governments (the biggest spending measures since World War II) and central banks (promising official interest rates near-zero or less for years to come while also expanding their balance sheets to facilitate massive increases in government spending and borrowing).
Government income support measures during the COVID-19 recession have been especially important, keeping employees connected to their employers and supporting household and business cash flow. In some countries, such as Germany, these payments have been extended in full to the end of 2021. In the United States, however, supplementary unemployment benefit payments have been interrupted in September with necessary legislative extension caught up in political wrangling. In Australia, the rates of payment for JobKeeper and JobSeeker have just stepped down. Income support is less generous moving into October and that may temper the strength of partial economic reports for October and November.
Returning to the US, economic readings released in September mostly rose, with several stronger than expected. Readings of housing activity, a key leading indicator of general economic activity, remained strong. August existing home sales rose by 2.4% m-o-m after a 24.7% lift in July; new home sales rose by 4.8% m-o-m (up 14.7% in July; and July pending home sales rose by 5.9% m-o-m (up 15.8% in June). The National Association of Homebuilders’ Survey at a boom-time 78 in August surprised by rising higher to 83 in September. Very low long-term fixed mortgage interest rates and the Federal Reserve’s (Fed’s) buying support promising to keep mortgage rates very low for a long-time ahead are adding fuel to already booming US housing activity.
US retail sales rose 0.6% m-o-m in August (up 0.9% in July) while industrial production lifted 0.4% m-o-m in August (up 3.5% in July). There is some evidence of fading strength in both readings although they remain consistent with a large lift in Q3 GDP after the 31.7% annualised fall recorded in Q2.
Another factor consistent with a large lift in US Q3 GDP is the recovery in US employment over recent months and the surprisingly quick fall in the unemployment rate. In August non-farm payrolls rose by 1,371,000 after lifting by 1,734,000 in July. The unemployment rate fell in August to 8.4% (market consensus forecast 9.8%) from 10.2% in July. Even so, the US unemployment rate has a long way to fall to match the pre-COVID-19 low reading of 3.5% earlier this year. The Fed confirmed at its September policy meeting that it wants to get back to that territory and perhaps lower before it starts to think about lifting official interest rates. That was the message implicit in the Fed’s turn to targeting an average inflation rate of 2% (spot annual CPI inflation was 1.3% in August, but other measures that the Fed prefers are below 1%). The Fed wants to let the economy run at full capacity for a period with inflation above 2% before lifting rates and on its September forecasts that will not happen this side of 2024.
In China the bounce off the bottom of the COVID-19 economic downturn has started. GDP rose 3.2% y-o-y in Q2 after falling 6.8% in Q1. July and August monthly readings point to the recovery continuing but at modest pace. The best of China’s recovery remains in exports, up 9.5% y-o-y in August from +7.2% y-o-y in July but that improvement is likely to be tempered over coming months on growing trade tensions with the US and Europe. Other parts of China’s economy are showing slow improvement. August fixed asset investment spending fell 0.3% y-o-y (-1.6% in July). Industrial production rose 5.6% y-o-y (+4.8% in July) and retail sales rose 0.5% y-o-y (-1.1% in July). China’s Q3 GDP report due in mid-October is likely to show positive growth but at a slower pace than in Q2.
In Europe, revised Q2 GDP showed a fall of 11.8% q-o-q, -14.7% y-o-y. Recovery in Q3 started well but is now threatened by a second wave of COVID-19 infections causing several countries to resume restrictions. Most data releases in September reflect the period of substantial easing of restrictions in July and most but not all are relatively strong. Even back in July, European retail sales fell 1.3% m-o-m (June +5.3%). On the positive side July industrial production rose 4.1% m-o-m (June +9.1%), Europe’s trade surplus lifted to 27.9 billion euros from 21.2 billion in June and the unemployment rose less than expected to 7.9% in July from 7.8% in June. Despite rising COVID-19 infections and renewed restrictions, there are factors that should help Europe’s economic recovery over time. Government income support to those affected by shutdowns has been generous by international comparison and most certain to continue. The EU has also set out a clear and substantial fiscal stimulus program to assist European economic recovery.
In Australia, Q2 GDP was released early in September and showed a bigger-than-expected fall of 7.0% q-o-q, -6.3% y-o-y compared with Q1 –0.3% q-o-q, +1.6% y-o-y. The GDP fall driven primarily by a collapse in household consumption spending occurred despite a huge lift in government transfer payments driving large increases in household disposable income and company profits. A notable feature of the Q2 national accounts was a big increase in the household savings ratio to almost 20%, the highest reading since Q2 1974. Effectively COVID-19 restrictions almost stopped some household spending early in Q2, but income support measures and rising household savings provided a springboard for spending to recover down the track.
The July and August readings released in September mostly showed the springboard effect, although tempered by the late July shutdowns in Victoria. July retail sales rose 3.2% m-o-m and were up 12.0% y-o-y (although the preliminary August report weighed by Victorian restrictions showed a 4.2% m-o-m fall). On the housing front, July housing finance commitments rose 10.7% m-o-m, the biggest monthly rise on record, and home building approvals rose 12.0% m-o-m. The August labour force report was surprisingly strong with employment up 111,000 (consensus forecast –50,000) and the unemployment rate fell to 6.8% (consensus forecast 7.7%) from 7.5% in July.
While the initial bounce from recession has been stronger than widely expected, most forecasters, including the RBA and Treasury, expect the recovery to become a slow and bumpy affair. Victoria’s lockdown through August and September and slow release program will limit the economic rebound that might otherwise have occurred in Q3 and Q4. The form of the Government’s economic stimulus is changing its spots from predominantly income support to spending on job programs that may cause some bumps in household spending. The RBA expects that it will be a long, slow bumpy road returning the economy to near full-employment and has committed to keeping all facets of monetary policy growth-accommodating for years to come including possibly easing further the 0.25% cash rate to perhaps 0.10%. We are now penciling in a 0.10% cash rate forecast from October or November through to 2023 at least.