Updated: Apr 6, 2020
Most economic readings released over the past month reflect a pre-covid 19 world showing moderate to improving economic activity in January and February. One exception is China, the first country to experience covid-19 and the lock-downs associated with it to contain the spread of the virus and seemingly the first country to reduce the infection rate to the point of allowing limited reduction of lock-down restrictions.
The economic reports from China for February when the lock-down was most extreme show an over-the-cliff reduction in economic activity. Fixed asset investment spending rising at an annual rate of 5.4% y-o-y in January fell 24.5% in February. Industrial production rising 6.9% y-o-y in January fell 13.5% in February and retail sales up 8.0% y-o-y in January fell 21.1% in February. Exports up 7.9% y-o-y in January fell 17.2% y-o-y in February. Some of the many businesses closed in China during February were allowed to start operating again in March and barring a secondary resurgence of covid-19 infections in China, something that occurred more often than not in previous global pandemics, China’s economy might continue to open up for business in a series of stages over the next few months.
Assuming no secondary surge in covid-19 infections in China its GDP growth rate will show its sharpest fall in Q1 (data to be released in mid-April) and after rising by 6.1% y-o-y in Q4 2019 will probably fall by at least the same amount in Q1 2020 a very steep downturn. Q1 may be China’s worst quarter as the economy starts to re-open in Q2.
The economic experience with covid-19 in China, however, may not provide a template for what happens elsewhere. The onset of the sharp rise in infections was later in the Europe and the US starting in late February and the start of lock-down quarantining measures was not as timely as in China, was more piecemeal and was not as draconian. As a result, infection rates in the Europe and the US are rising above those experienced in China and a peak in infection rate is yet to be achieved.
Unlike China, where a sharp fall in GDP is likely in Q1 2020, the sharp falls in GDP in Europe and the US are likely to start in Q2, are likely to be deeper than the fall China experiences in Q1, and are likely to extend longer than in China because of the likely more extended lockdowns likely in the US and Europe needed to contain the virus spread than appears to have occurred in China.
Very big increases in unemployment are likely to start showing in March readings and beyond in the Europe and the US. The next unemployment reading for Europe is a February reading due later this week and is still likely to show the unemployment rate at a decade low 7.4%. When the March report is released in late April the figure will jump higher.
In the US, March non-farm payrolls are due later this week and after back-to-back strong monthly increases of 273,000 in both January and February are likely to fall sharply. The latest weekly initial jobless claims travelling between 200,000 and 283,000 over recent months jumped by 3,000,000 to 3,283,000 an early sign of the huge rise in the US unemployment rate that lies ahead. In February, the last of the pre-covid-19 months the unemployment rate was at a 50-year low 3.5%. The March reading this week will be much higher.
In past recessions rising unemployment rates have gone hand-in-hand with loss of household income that at times have created negative feedback loops through lower spending serving to deepen and extend downturns. The approaching covid-19 recession is different in that Governments are introducing measures to support household incomes at a substantial percentage in some cases of working income pre-covid-19.
The measures announced in Europe and the US run to trillions of dollars and the additional government borrowings necessary to fund the measures are back-stopped by central bank purchases of bonds through extended quantitative easing (QE) programs. The US Federal Reserve has announced that its QE is unlimited meaning that barring the constraint of the political process the US can continue to provide additional support for households and businesses if needed beyond what has been announced.
In Australia, data releases over the past month still relate to January and February before the cumulative introduction of shutdowns and quarantining restrictions in March. The nuances of the Australian experience with covid-19 are mostly positive compared with the US and Europe. At this stage, the infection rate and mortality rate are lower and achieved with less extensive restrictions than have needed to be imposed in the US and Europe.
Our first key economic report to reflect covid-19 impact is likely to be the March labour force report due mid-April. In February, employment growth was still still strong, up 26,700 and the unemployment rate fell to 5.1% from 5.3% in January. In March the unemployment rate will lift sharply and will quickly rise beyond to 10% or more. Everyone who is unemployed and registered for benefits will receive the $550 a fortnight New Start supplement (doubling the existing benefit). It is also likely that some who have been stood down will receive additional income support from their employer in an additional benefit to businesses to be announced later this week.
The Australian Government is developing the concept of “hibernating businesses”, businesses that have to close because of covid-19 lockdown provisions but will effectively pay no regular bills (rent, taxes and the like) while shut-down and will receive payment to continue paying some wage to staff they have needed to stand down.
People will still be unemployed in large numbers in Australia because of covid-19, but their income may not suffer the substantial hit that usually happens when becoming unemployed. These cushioning measures for businesses and the income of households are likely to mean that the approaching recession will look different. GDP will fall sharply. Unemployment will rise sharply. Some businesses may disappear but many will go into hibernation. Bankruptcies should rise much less than in previous recessions and financial hardship for households should rise less as well. In some ways it will be a “Clayton’s” recession. We will look at the consequences of the approaching “Clayton’s” recession for financial markets next week.