Via Bill Evans at Westpac:
Events have been moving quickly in the Australian economy.
With the announcement of the Australian Government’s latest JobKeeper Payment (JKP) policy and further tightening of social distancing guidelines we have reviewed our employment, GDP, and Budget deficit forecasts.
Key forecasts had been: a peak in the unemployment rate of 11.1% in the June quarter; a GDP contraction of 3.5% in the June quarter; and the likely issuance of an additional $250bn in Australian government bonds over 2019/20 and 2020/21.
In reviewing those forecasts we have maintained the approach of assessing employment and output across industry sectors to arrive at a more granular estimate of the impact of the various government policies on the Australian economy.
We also maintain our core view that while the intensity of the policies to address the virus will peak near the end of the June quarter, most policies will be maintained through the September quarter and the recovery will be delayed until the December quarter. Conditions in the global economy will remain very weak until well into the December quarter.
With the shutdowns and social distancing policies being tightened we now expect a much more severe impact on the output of most industries.
As expected, the most seriously affected industries are likely to be: retail; accommodation; restaurants; transport; recreation; and real estate. However we also expect negative impacts for other industries including manufacturing; construction; and distribution. Other industries such as health, government, and telecommunications will see a lift in employment and output.
We expect GDP will now contract by 8.5% in the June quarter; to be followed by a 0.6% contraction in the September quarter; and a 5.2% lift in the December quarter.
Overall, the economy is expected to contract by 5% through the 2020 year.
All else being equal, these growth forecasts would be consistent with the unemployment rate peaking at 17% in the June quarter and settling around 9% by year’s end. These unemployment estimates are consistent with a loss of jobs in the June quarter of around 1.7 million to be followed by a bounce back of around 1 million jobs in the December quarter.
However the JKP has been a game changer for employment and the unemployment rate.
The JKP aims to keep workers connected with their employer by subsidising eligible employers with $1500 per fortnight to supplement their employees’ wages. That is much more generous than the unemployment benefit – Jobseeker Payments, which, including a $550 boost per fortnight, now see a maximum base rate of around $1100 a fortnight.
The JKP is also available to sole traders and small companies where the owner can be considered the employee. It is also available to workers who have been stood down since March 1.
Although traditional demand for a firm’s services or products may have collapsed, reconnected workers may be able to generate activity for the businesses in other areas – e.g. expanding take away facilities for restaurants.
Small businesses in particular, however, will still be challenged by other costs including rent; utilities; and government charges.
Under the JKP, businesses with sales of less than $1b will be eligible for the payments if their revenue has fallen by 30% or more over the last 12 months, and those with turnover above $1b will be eligible for payment if revenue falls by 50% over the year (banks are excluded).
We have assessed that 80% of three sectors – retail and wholesale trade; accommodation and food services; and arts and recreation Services – will be eligible for the payment.
For other sectors that will be adversely affected by the shut down and social distancing policies, we assess that 40% of businesses will qualify for the payments.
Note, that the take-up rate of businesses for this new program is difficult to gauge and any variations relative to the 80% and 40% will have an impact on these calculations.
The JKP will have a profound impact on the unemployment rate.
Compared to the peak forecast rate of 17% unemployment in June without the JKP we expect the rate will peak at 9% in June and subsequently fall to around 7% (compared to 9%) by end December.
This would be consistent with a loss of around 500,000 jobs up to the June quarter to be followed by a jobs recovery of around 350,000.
The bold $130bn JKP initiative will impact the government’s finances.
Last week we assessed that the previous two rescue packages, which were costed at $62bn over 2019/20 and 2020/21, coupled with the cyclical impact of the recession would require new issuance of Australian Government bonds of $90bn (2019/20) and $160bn (2020/21). That would compare with total bonds outstanding of $540bn in June 2019.
With the $130bn JKP the total cost of the rescue packages would be around $190bn – about $60bn in 2019/20 followed by almost $130bn in 2020/21.
Because the JKP would result in a lower peak in the unemployment rate than previously expected (9% compared to 11%) and a lower level at the end of 2020 (7% compared to 9%) the cyclical deficit will be lower than we estimated last week, (and much lower if we used our revised pre JKP jobs forecasts).
We expect the cyclical deficit will deteriorate by 4% of GDP over the two years compared to 5% in our earlier estimates.
For 2019/20 we anticipate a budget deficit of $100bn (5% of GDP), including $60bn in stimulus policies and a $40bn cyclical deficit.
In 2020/21, the budget deficit widens to $210bn (10.5% of GDP), including about $130bn (6.5% of GDP) in stimulus policies and $80bn (4% of GDP) in cyclical deficit.
If the increased deficit is fully funded by bond issuance (the fragile economy is unlikely to be resilient to fiscal tightening in 2020/21) the bond supply is expected to lift by an additional $310bn compared to the $250bn we estimated prior to the JKP.
Note that the JKP has been costed at $130bn yet we are only expecting an increase in bond issuance of $60bn relative to our earlier estimates. That is attributed to the success we expect the JKP will have in containing the lift in the unemployment rate and lowering the cyclical deficit.
Indeed if we had estimated the likely lift in the bond supply under our revised but pre-JKP outlook, the larger expected damage to the cyclical deficit is likely to have seen a substantial further addition to the bond program – with starting estimates of at least an additional $60bn – making the JKP an astute ‘investment’ from the perspective of the government’s finances.
In turn by keeping employees connected with businesses, business will be better positioned to accommodate the lift in demand which will come with the easing of restrictions.
Coupling this finance dividend with the social benefit of containing the lift in the unemployment rate, there are certainly strong grounds for supporting the government’s bold decision to introduce the JKP.
The JKP is NOT a job keeping policy. It is much more generous dole paid via businesses. Many of the jobs will never come back and the moment JKP ends so will the “employment”.
It makes no sense to lower the debt flow for the budget on this basis given all the JKP does is pay a greater unemployment benefit, still via the government.
Other than that it’s not a bad assessment though I reckon Q3 will fall more than that because the lockdown will need to be even tigher in Winter. All those virus spreading building sites will have to shut.