AMP Capital chief economist Shane Oliver says that while consumer confidence and spending is recovering, the Australian economy faces a long road back to recovery:
ABS labour force data showed a further sharp deterioration in the Australian labour market into mid-May with employment falling another 228,000 and unemployment rising to 7.1%. This is worse than economists including ourselves expected but still far better than we expected a month or two ago when we saw unemployment going rapidly up to just below 10% this quarter. Whatever it is it’s a devastating outcome for those impacted.
The bad news is that the “true” unemployment rate is probably a lot higher than 7.1%. The change to JobSeeker that allows people to receive it and not have to look for work has contributed to a 3% decline in the participation rate (from 65.9% to 62.9%) since March. If the participation rate had only fallen by around 1% as occurred in the early 1990s recession unemployment would have risen to 10%. Furthermore, JobKeeper covering 3 to 3.5million jobs has prevented an even steeper fall in employment – a rough guesstimate of which is around 500,000 jobs. If this is also allowed for it would take the “true” unemployment rate up to around 13.8% which would be the highest since 1935.
The good news is that employment should improve over the next few months consistent with the reopening of the economy that has been underway since mid-May (which was too late for the May labour force survey that covered the first half of May) and has seen a significant return of economic activity. This was evident in an improvement in the ABS’s payroll jobs data through the second half of May and also in a huge rebound in preliminary retail sales for May.
Retail sales surged a record 16.3% in May. Of course this followed a record fall of 17.7% for retail sales in April but it does seem that the reopening of the economy that was seen from mid-May has unleashed a lot of demand that had been pent up through the lockdown and got Australians back into the shops again. Interestingly over the last 3 months retail sales averaged $28bn a month which is what they were pre-coronavirus. Of course, consumer services were a lot harder hit and parts of retailing (clothing and restaurants/cafes are down 20 to 30% on a year ago). But it does suggest upside risks to our forecasts for June quarter GDP to contract by 8% quarter on quarter.
The real test will come once JobKeeper ends in September and JobSeeker reverts to requiring recipients to be in the labour market looking for jobs. This is likely to see the unemployment rate head higher, particularly after September. While we expect the “true” unemployment rate to have fallen back by then its still likely to be high at around 8%, so our view remains that the measured unemployment rate will peak at around 8% and will remain elevated well into next year. Ideally the Government will utilise some of its $60bn savings on JobKeeper and possible savings to be had by taking it away from those who no longer need it, to support those parts of the economy (and exposed workers) that will see a slower recovery – notably in tourism, education and parts of retailing…
The next chart from AMP tells the story:
While Australian economic activity has risen for nine weeks in a row, it remains around 30% below its pre-crisis level.
There is now also the clear and present risk that a virus second wave could result in further draconian restrictions, stifling any recovery.
Leith van Onselen is Chief Economist at the MB Fund and MB Super. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.
