Bill Evans: Unemployment to hit 11% by June

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.

David Llewellyn-Smith

Comments

  1. This guy is dreaming. Unemployment is 11% today, right farking now !
    We should let this virus run its course, we will never win with this strategy. In six months the economy will be a pancake then they will announce someone in Sunshine has it and lock everything down again.
    The suicide rate will 1-2% of the population they way they are breaking people.

    • Ronin8317MEMBER

      ‘Lock everyone in their home’ approach means shutdown for 4 weeks, while “let the virus runs its course’ means shutdown for the entire year. People won’t go out and spend when dead body litters the streets like in Wuhan and Italy, and when you have 4 million infected with no hospital beds, that will happen.

      What we have right now is shutting down business without quarantining people inside their home. It’s the worse of both world.

    • Spot on Rod. If not 11% today it will be by the end of the week.
      In the SMH today is an article describing that ASX listed Michael Hill Jewelers is shuting 165 stores nationally and booting all employees.
      WHAAAAT!

  2. adelaide_economistMEMBER

    Corona virus is giving many companies the chance to do the liquidation they were probably planning on (or heading for) in the near future anyway. We’ve already seen pre-corona the flurry of retail collapses and obviously an interruption of this scale will bring forward the collapse of not just the marginal retailers but also ones who weren’t doing too bad (in some sectors). They won’t be coming back whether this is over ‘short and sweet’ and certainly not in a long drawn out scenario.

    There will – as noted by Bill – clearly be ongoing enlargements in the public and health sector after this which will soak up some of that excess and I can imagine in the short term a big increase in people engaged in delivery programs and longer term might even be a sustained uptick in some small areas of manufacturing. I’m pretty sure even governments as totally irresponsible as our current lot will be happily signing up long-term contracts for things like face masks and other basics even a country as denuded of capability as this one now is could feasibly make, for example.

    Kleenex might even continue making toilet paper in Australia, not out of economics (I’m sure they’ll be a demand collapse at some point) but out of terrible optics of quitting and no doubt they will be in prime position for some ‘industry assistance’. Governments will happily go along with it, because it’s an easy way to look like they are paying attention without tackling the ‘harder’ stuff – like ventilators, tin to can food and pharmaceutical precursors.

  3. Jumping jack flash

    No way.

    April “lockdown” will mean they will need a ton of delivery drivers, shelf stackers and home shoppers to get the food to the people who weren’t allowed to hoard (and shamed if they did).

    Under the Howard Definition of unemployment which is cleverly defined so unemployment will never rise significantly above 5%, this will soak up almost all unemployment and it won’t crack 6%. In fact it may even go lower than what it currently is.

    As I’ve said, this is a coronavirus-led economic recovery.
    We now have panic buying with money from who knows where being used to flood retail causing inflation and very likely wage increases as a result. Assuming the money is credit, because nobody has any savings, then in conjunction with QE-cheapened debt this will grow the debt and eventually, because all roads lead to the bank, be used to chip away at that 100 billion dollar interest bill we have to pay by the end of the year for our mortgages.

    The next release of stats will show everything is fine. The Libs and the RBA will look smug and point to the stimulus, which isn’t completely wrong, but the real reason was the panic from the coronavirus.

    The economy is saved.

  4. Underemployment is probably the key figure because they can goose the unemployment number by counting someone as employed if they do one Deliveroo delivery per fortnight.

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