Economic Outlook – Is there light at the end of the tunnel?

By Chief Economist | Stephen Koukoulas

Obviously, the recession in Australia is deep.

The labour market has collapsed with 19.9 per cent of the labour force unemployed or underemployed, GDP is set to fall by 10 per cent in the June quarter, car sales and retail spending have dived, the annual budget deficit is set to hit $100 billion and government debt is skyrocketing towards $800 billion. This is with interest rates just above zero, a record low.

With this gloomy background, it may seem fanciful to be taking a positive view on the economic outlook, but there are a few hints to suggest the economy is poised to show at least a partial recovery over the second half of 2020.

To be sure, the pace of recovery will be hard to judge, it is likely to be patchy and will leave conditions weaker than they were pre-COVID-19 until. But as the economy slowly reopens, people get out of their houses and spend, many businesses will regain a positive cash flow, they will be able to reengage their workers, they will be able to invest and the economy will be in better shape.

Consumers the key

The ANZ Roy Morgan measure of consumer sentiment has risen for seven straight weeks. It should be noted that this followed a dive of over 50 per cent in mid to late March as the COVID-19 lockdowns and health fears were at their peak, but the cumulative rebound in those seven weeks is a welcome change in conditions.

As shops, cafes and internal borders reopen through June and the months ahead, the improvement in conditions will gain momentum.

Internal CBA data on weekly credit card usage also shows a turning point in spending. In annual growth terms, credit card turnover dropped almost 20 per cent in late March / early April but in the most recent data, the rate of decline has eased to just 2 per cent. With retail and other businesses now slowly opening, it is likely to return to positive growth in June.

Businesses less gloomy?

Clearly, businesses conditions and confidence were hit hard but according to the NAB survey, confidence jumped 19 points in April and although the absolute level of that index was still historically weak, the rebound was somewhat encouraging.

While conditions in financial markets remain choppy, global stock markets including the ASX have also recovered from the battering that greeted the lock downs and the global recession. The ASX is over 20 per cent above the low as investors look to a pick-up in activity and corporate profits, a reopening of many businesses and the containment of COVID-19 within Australia.

While the labour market is still in a dreadful state, Seek has reported a lift in job vacancies in recent weeks (from a record low base), with the strongest increases in States where the lockdowns have been eased.

Commodity prices rebounding

For Australia, commodity prices are vitally important for exports, national income and the performance of the mining and agriculture sectors. On that score, the price of iron ore – Australia’s largest export – remains buoyant. Export volumes are strong. Energy prices and oil in particular, have risen strongly from the low point in April as markets look to a lift in oil consumption as cars return to the roads and planes to the sky.

Risks remain and new ones emerge

These tentative signs of less bad news need to be built upon for many months before full confidence in the economy can be confirmed.

In Australia, there remains a debate about how consumers will respond when the Jobkeeper and Jobseeker payments end in September.

There is the additional question, does the $60 billion error in the funding means the economy is getting less stimulus than it should?

And will the government step up with stimulus that helps in the transition when these payments end?

The trade dispute with China is a new wild card that risks hurting Australian exporters already under pressure from the global recession. This will play out over a long time and for now, the effects are relatively contained.

But for now, there are signs of a bottoming out or even a slight turning point up in economic conditions.