Economic and Financial Market Update: Mixed News For March

Summary: 

• There have been big job losses across the states, hitting mainly the young; 
• A jump in the unemployment rate in April to 9-11% is likely;
• The March quarter doesn’t look to have been as weak as had been feared; 
• The month of April will be the nadir for the economy. 

Developments over the past couple of weeks has helped clarify the depth of the current economic slowdown. Globally, the Chinese reported that Q1 GDP fell by around 10%. This is broadly similar to the expected declines in Europe and the US in Q2. The extent of the quarantining in a number countries has been more severe than in Australia (we have kept mining, construction and much of manufacturing going). This would suggest the social distancing impact on the Australian economy will be less. But services is a bigger part of the Australian economy than many overseas economies, and the service sector has been the hardest hit by social distancing policies.

The RBA provided its first guess on 2020 GDP this week (down by 6%, implicitly expecting about a 10% fall in Q2). They think the unemployment rate might get to around 10% in the June quarter (the same as Treasury). They are hopeful of a v-shaped recovery (6%-plus growth in 2021). But this will depend upon the path of the virus, subsequent government actions and how long it takes for business and consumer confidence to recover.

Employment

At the same time the statistics on how the economy is going keep rolling in. And the story is not good. Last week it was the severe blow to business and consumer confidence. This week the ‘flash’ April estimate for a CBA business survey of the services sector plummeted to a reading below 20 (50 is considered average). 

There was also an ABS survey indicating that around 6% of jobs have been lost across the country. The data is not directly comparable with the widely report labour market report because the data are not seasonally adjusted (ie, they are not adjusted for seasonal impacts such as the timing of Easter on jobs). But at face value they do suggest that the unemployment rate in April might rise to somewhere between 9-11% (currently 5.2%). This is near the RBA unemployment rate forecast. What the unemployment rate ends up printing will depend upon whether workers indicate they have lost a job (they might think they will be re-employed when the economy picks up) and/or say they are still in the labour force (people might not think it is worthwhile looking for work in the current economy).

The employment shakeout has impacted the young the most as they are more likely to be working in the accommodation, restaurant, recreation and retail sectors (workers aged 70 and above have also been hurt although they are a smaller part of the jobs market). Interestingly, the 3 states that have been performing the best (Tasmania, Victoria and NSW) have suffered the most. But all states and territories have suffered big job losses.

The mixed nature of economic growth over recent years has meant that the strength of labour markets entering this slowdown differs across regions. Care should be taken when looking at regional unemployment rates given that they are based on a very small sample (particularly for country areas). But they do provide useful broad themes. 

The unemployment rate over the year to March for around three-quarters of regions averaged between 3-7%. Most of the regions with very low unemployment rates (under 5%) are in NSW and Victoria (notably the inner cities) as a result of the stronger state economy (boosting construction and infrastructure) and state industry structure (more workers are in finance or are professionals). Queensland and South Australia had more regions with higher rates of unemployment (above 7%). 

It is possible that there will be a change in regional performance given that quarantining is likely to be tougher in the cities. And the recent job ads data suggests this could be happening. The Department of Employment compile a series based on the number of internet job vacancies. Its series indicates that internet job ads fell by over 20% in March, the biggest fall in the history of the series (and twice as big as the largest drop during the GFC). The biggest fall in job ads were for

• Clerks
• Receptionists
• Call centre workers
• Professionals
• Corporate managers
• Automotive and engineering trades

The only occupation where there was a rise in ads was for doctors and nurses. 

Retail sales

This week we also got our first read on how consumer spending went in March. And the answer was there as a lot. The ABS says that retail sales rose by over 8% in March (and the biggest rise on record beating the June 2000 increase that was a result of shoppers spending before the introduction of the GST). The toilet-roll (and tissue, pasta and rice) splurge meant that Coles and Woolies (and anyone else in the supermarket game) had never been busier. Spending on home office equipment was also up (as well as on freezers). It can be hard to get gym equipment for the home (such as weights). And bike shops have done a roaring trade. Of course cafes, restaurants (and clothes shops) had a very tough March.

I (and quite a few other economists) had been pencilling in a big negative for economic growth for the March quarter. There was the bushfires in January, China’s shutdown in February and a home grown one in (late) March. But jobs growth rose in the month of March, and hours worked for the March quarter barely fell. Exporters have probably done Ok, helped by the mining industry staying open and a very low $A. And we have just found out that retail sales (around 20% of total economy spending) for March has risen a big 8%. All of this means that the economy was not doing as badly in the March quarter as generally feared. The June quarter though will be a very different story. 

We live in interesting times!

Regards,

Peter Munckton - Chief Economist