Deep V recovery

Some good data suggests a recovery from the dramatic COVID-19 economic lows but there are still plenty of variables and risks

21 June 2020 | Shane Oliver, AMP Capital (Image: Shownen)

The past week has seen an avalanche of data showing a strong rebound in economic activity in May/June after the huge shutdown related hit to data in April.

There’s been very strong gains in a whole range of data including US regional business conditions surveys, the Eurozone ZEW expectations index, US retail sales and home builder conditions and in Australian retail sales which are now higher than they were before coronavirus.

This is all directionally consistent with high frequency data that has been showing that April was the low and since then things have started to recover. Our weekly economic activity trackers for the US and Australia based on high frequency data for things like restaurant bookings, confidence, retail foot traffic, box office takings, hotel bookings, credit card data, mobility indexes and jobs data are continuing to rise. The Australian Economic Activity Tracker has now risen for nine weeks in a row.  

A modest rise on share markets

Share markets rose over the last week as ongoing signs of economic recovery and stimulus measures helped offset concerns about a “second wave” of coronavirus cases. US shares gained 1.9%, Eurozone shares rose 3.1%, Japanese shares rose 0.8% and Chinese shares rose 2.4%.  

Australian shares also gained 1.6% helped by the positive global lead with strong gains in IT, energy, telco and consumer discretionary stocks. The rally came after a 6% to 7% pullback in share markets and still leaves them below their recent highs. Bond yields were little changed in the US, Germany and Japan but fell in Australia. Oil prices and metal prices rose but the iron ore price fell as did the Australian dollar.

Shares remain technically overbought and vulnerable to a further correction or period of consolidation, but we continue to see it as a pause in a rising trend. So far the pullback has been just 6% to 7% before markets bounced up again in the last week on ongoing stimulus measures.

Risks around the growth outlook flowing from second wave worries remain significant and could drive a further correction. However, contrarian support for shares remains from a record amount of cash sitting in US money market funds, surging bank deposits (including in Australia) and investor sentiment remaining relatively cautious.

The three big risks are: a second wave of coronavirus cases (which is a big risk in the US as noted below); collateral damage from the shutdowns resulting in a delayed or very slow recovery if bankruptcies surge and unemployment goes higher; and the US presidential election with Trump likely to try and appeal to his base by ramping up tensions with China (and maybe even Europe), particularly if his approval rating continues to slide.

COVID-19 still a global concern

The big picture globally has not changed on coronavirus. The trend in new cases remains up driven by a rising trend in emerging countries with big problems continuing in Brazil, India, Pakistan, Mexico, Saudi Arabia, Bangladesh & Indonesia and South Africa. The spike in the last observation in the next two charts reflects an additional 31,000 cases in Chile dating back to March that had not been previously included in official reports.

The Beijing outbreak

What about China? Beijing (which accounts for about 3.5% of Chinese GDP) has announced a return to some lockdown controls after an outbreak around a market. So far, the number of cases is limited, and new cases have fallen back over the last few days.

My base case is that it will be controlled by rigorous testing, tracing, quarantining and some mobility restrictions. But it’s a risk worth watching. And its puts paid to the nonsense theory that China unleashed coronavirus on the world but forgot to inoculate the people of Wuhan in advance!

While Australia is continuing to see a low number of new cases, it has risen to its highest in over a month – mainly due to various clusters in Victoria and many of the new cases are returned travellers or connected to them. Fingers crossed it remains low – lots of testing, tracking and quarantining should be able to keep it so. The renewed lockdown announced over the weekend is not good news for the Victorian economy, however, the authorities had anticipated a pickup in cases as the lockdown is eased.

True unemployment

The bad news for Australia’s economy is that the “true” unemployment rate is probably a lot higher than 7.1% announced this week. 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 3.5 million 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 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.

Dr Shane Oliver is Head of Investment Strategy and Chief Economist, AMP Capital