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CFO Economic Outlook for May 2020

The deepest economic downturn since the 1930 Depression

Hard economic news that takes account of COVID-19 is starting to flow and it is confirming what most business people have experienced in the past few months – the economy is on its knees with mass business closures, an unprecedented collapse in the labour market and a free-fall in turnover in all but a few sectors of the economy.

In addition to what is an obvious collapse in consumer sentiment and business confidence, preliminary data from the Australian Bureau of Statistics confirms that employment, based on payrolls data, fell by 6 per cent or close to 800,000 people in April. In concert with the collapse in job vacancies and further business closures, it suggests the unemployment rate is on track to hit 10 per cent with a further 12 per cent of the labour force underemployed.

The retail sales data for March showed extremes in sales in different segments of the sector.

“Supermarket sales surged, driven by massive 100 per cent plus increases in sales of items such as toilet paper, rice and pasta. Sales of liquor were also strong.”

Clearly, with households having huge stock piles of these items, it is highly likely that sales in these areas will reverse in coming months.

There were strong falls in industries including cafes, restaurants and takeaway food services, and clothing, footwear and personal accessory retailing, which were impacted by new social distancing regulations introduced in March.

Other areas to show severe weakness are motor vehicle sales, the real estate market, tourism, hospitalities and housing construction.

It is noteworthy, in these troubling times, that exports of resources and rural products remain strong, as for the moment is non-residential construction which is still benefiting from increased investment in infrastructure.

The policy response

The government has rolled out stimulus measures which at last are starting to flow into the economy.

The wage subsidy, the additional payments to pensioners, carers and the unemployed will all help to put a floor under the weak economy. It is likely that more fiscal measures will be needed not only to support the economy in the near term, but to give it a boost as the lock down measures are slowly and carefully reversed and when some of the current stimulus measures end.

“It will need a fine balancing to get the economy growing as the current stimulus unwinds.”

The Reserve Bank has also played its part in supporting the economy. With it forecasting GDP to drop a massive 10 per cent in the first half of 2020, it has indicated that official interest rates will remain at a record low 0.25 per cent until it is confident that the economy has a sustainable recovery and the inflation rate is confirmed to be back in the 2 to 3 per cent target.

Most economists expect this to be for many years.

The Australian dollar, which has bounced off the recent low of 55 US cents, is still at a competitive level in 61 to 65 cent range.

Looking forward

Given the stunning success Australia has had in containing COVID-19 from the general population, the case is building for a cautious and careful gradual lifting of some of the lock down and social distancing restrictions.

Of course, such decisions will be difficult, but with each step, however minor, easing those rules and regulations will help the economy gain some support. An eagle eye will of course remain on the number of COVID-19 cases and any sharp lift in numbers would see strict rules quickly imposed.

“Foreign arrivals into Australia are likely to be the last area where restrictions will be eased which is likely to keep considerable pressure on the education and tourism sectors.”

After a depression like fall in GDP in the first half of 2020, it is reasonable to expect a moderate and patchy economic recovery over the second half of 2020 before a more meaningful rebound in 2021.

A degree of stimulus is likely to remain in place until policy makers have a high degree of confidence that a solid pace of economic growth is sustainable, the labour market improvements are locked in and wages and inflation are permanently higher from the lows.

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