So Far So Good
There is no way Australia will avoid a very sharp fall in GDP in Q2 because of covid-19 shutdowns and restrictions. But there are increasing signs that the worst of the economic damage will be confined to Q2. There is a reasonable chance that the next GDP report for Q1 will show positive growth, propped up by a 0.7% q-o-q increase in real retail sales and a substantial net export contribution. There is also a reasonable chance that after falling in Q2 GDP will be starting to rise again in Q3 assisted by the re-opening of key parts of the economy in the second half of Q2 – earlier than thought possible even a week ago.
A better than expected GDP trajectory will also help to ensure that Australia’s unemployment rate will not rise to 10% and that whatever its peak over the next month or two that it will fall faster than the pace indicated in official RBA and Treasury forecasts later in 2020.
The unemployment rate rose much less than expected in April. The labour force report released last week showed that the unemployment rate rose one percentage point to 6.2%, well below the 8%+ rate forecast widely. There were quirks that helped to contain the unemployment rate - WorkKeeper recipients were counted as employed and a record monthly fall in the participation rate to 63.5% in March from 66.0% in March ensured a massive fall in employment in the month, -594,300, did not translate to a larger lift in the unemployment rate than was recorded.
Looking ahead one month, there are also likely to be quirks aplenty in the May labour force report when it is released in mid-June. The survey for the report will have been conducted in the first two weeks of May, ahead of the early steps re-opening parts of the economy. Most likely employment will show another large fall, but unlike in April the large fall in employment is unlikely to be substantially offset by another big fall in the participation rate. If the participation rate steadies or even rises recovering some of the unusually big April fall, the unemployment rate is likely to show a bigger increase than occurred in April taking it to 8% or higher.
Looking further ahead to the June labour force report due in mid-July, it will reflect the survey conducted in the first two weeks of June, a period when many restaurants, hotels and clubs will be in early stages of re-opening as well as much discretionary retailing. It is reasonable to expect a noticeable lift in employment in June as many workers in these businesses that were hit earliest and hardest by covid-19 restrictions ended up on JobSeeker support rather than JobKeeper, or no support (foreign student and some back-packers) and counted as job losses and unemployed.
The likely lift in employment in June may come hand in hand with another lift (possibly substantial lift) in the labour force participation rate. The unemployment rate may be steady or rise a little but is still unlikely in our view to threaten 10%.
Looking beyond June factors influencing the unemployment rate include the likely lift in economic growth from the staged re-opening of the economy that started from the second week of May. By the beginning of July restaurants, pubs and clubs will be operating with up to 100 patrons all being well; retailing generally will be open with social distancing; domestic travel will be restarting; schools will be open and many other social and business activities will be ramping up.
In Q3 the economy should be bouncing off a very low Q2 base priming a sharp rise in the number of people employed. How many of that number count as being “employed” and potentially reducing the unemployment rate will depend in part upon how the Government winds back the Jobkeeper support program. The worst outcome for medium-term growth (late 2020 and early 2021) and unemployment would be if the Government closes off JobKeeper support and the JobSeeker supplement payment entirely in September.
The best outcome for growth and unemployment would be some form of tapering process that recognises that some businesses and workers will return to pre-covid activity more fully and more quickly but others will take much longer to ramp up because of longer-lasting covid 19 restrictions. For example, international travel and associated businesses will still be operating at a fraction of pre-covid levels of activity well beyond September and will need support for much longer.
A well-conceived tapering process allowing faster reduction of covid-19 support benefits for some, but much longer support for others will help to prevent a future jolt lower in growth and upwards in the unemployment rate.
Barring the problem of conceiving a well-designed taper for covid-19 benefits, the signs are promising that GDP growth will be starting to recover in Q3 2020, and that the unemployment rate will peak short of 10% in May or June and will start to fall beyond. The most positive change has been the indications from the National Cabinet and the various announcements from State and Territory leaders that restrictions on economic activity are likely to be eased earlier than previously thought likely.
There is an important caveat on this more optimistic view. If easing restrictions leads to a new and large wave of covid-19 infections causing restrictions to be re-imposed growth will be much weaker and for much longer than indicated above with the unemployment rate rising well above 10%. A few weeks ago, this looked like being a base case forecast. It is now a risk case forecast and our base case forecast is much brighter for the second half of 2020.