From Bill Evans at Westpac:
Despite releasing new forecasts only last week we are now revising those forecasts in light of the current extraordinary circumstances.
Our key focus has changed from the usual GDP forecast approach where a view on expenditure components (consumption; business investment; dwelling investment; net exports) led to a GDP forecast which then fed into our employment forecasts.
In these extraordinary times the key forecast is, indeed, the unemployment rate and jobs growth.
We find it intuitively easier to assess the shock by looking at impacts from an industry perspective and aggregating to an economy-wide view.
We think we have a clearer oversight of how certain industries will be affected from a jobs perspective than working through the expenditure lens.
Last week we forecast a peak in the unemployment rate of 7%. Since then we have seen the roll out of more extensive shutdowns than we had originally envisaged. Economic disruptions are set to be larger as the government moves to address the enormous health challenge which the nation now faces.
That challenge is probably best summarised by a potential shortage of ICU beds in coming weeks if we do not significantly slow the rate of infection immediately.
The sectors we see most impacted in the June quarter from a jobs perspective are: accommodation and food services (accounting for 921k total employees); retail trade (1264k); arts and recreation services (254k); manufacturing (894k); transport and warehousing (662k); real estate services (218k); construction (1178k) and professional services (1150k).
In these sectors we see job losses ranging from 40% (arts and recreation services), 29% (hospitality) and 8% (construction).
Sectors we expect to be reasonably resilient are: agriculture (327k); mining (247k); utilities (156k); and finance and insurance (450k).
There are some sectors which we expect will increase employment.
These are: Health Care (1725k); Public administration (841k); and telecommunications (210k). These increases are expected to range from 14% (telecommunications); to 10% (health care); and 5% (public administration).
In most instances our analysis looks into more disaggregated classes of sectors to arrive at these conclusions.
For example, a sector like accommodation and food services (921k employees) includes 300k employees in “take away” which will get a lift in the next weeks.
Using this analysis we estimate that there will be 814k in job losses in the June quarter lifting the unemployment rate to 11.1%.
Working through our GDP estimates on an industry basis and acknowledging that output is not always aligned with employment this approach points to a contraction in GDP of 3.5% in the June quarter.
We have also reviewed our outlook for the September quarter.
While our central view remains that the peak in new cases will occur in the June quarter we expect that the “recovery” in the September quarter will be slow.
Most shut down policies will still be in place leading into the September quarter and will only be gradually relaxed through the quarter.
Net additional job losses are expected to be minimal in the September quarter but little progress is expected to be made in reducing the unemployment rate.
We expect it to hold at 11% while GDP is expected to contract by a further 0.3%.
By the December quarter, with shut downs essentially over and travel restrictions eased, we expect a bounce back of 350,000 jobs with the unemployment rate falling to 8.8% and GDP growth lifting to 1.6%.
However, industries such as manufacturing; construction and retail will still be facing headwinds given the high unemployment rate and the weak momentum from the September quarter.
Overall through the year we expect GDP to contract by –3.0%, while the unemployment rate will have lifted from 5.1% to 8.8%.
This is a more rapid recovery than we have seen in previous recessions but we recognise that the circumstances are quite different.
Historically, recessions have tended to emanate from investment cycles, particularly those centred on property and building with the initial shock centred on construction. As this recession will hit services much harder, the loss in jobs will be much quicker, but so too can the rebound be much faster, all dependent on how many firms remain solvent. In usual recessions it is often uncertain whether the economy is in recovery phase whereas the signals around government policy (particularly shutdowns) will be much clearer and households and business will respond.
The Stimulus Package
These forecasts are based on our assessment of the expected impact of the Package on jobs and growth.
The two stimulus packages cost a total of $25.8bn in 2019/20 and $36.3bn in 2020/2021.
Of that total of $62bn, $22.85bn is allocated to direct payments to the unemployed and social security beneficiaries while $31.9bn is set aside for small business to retain workers.
However small business only receive cash if they retain workers. The subsidy (keeping cash which is withheld from workers for PAYE tax) is only, say, 20–30% of the direct cost of the worker.
Given the current hugely challenging outlook for business, the Package will be measured in terms of its success in keeping people in work.
Our employment forecasts are based on a cautious approach to this issue.