Economy getting ready to move

With a dramatic drop in new infections, Australia is reopening with a three staged easing of restrictions with the aim of having much of the economy operating again by July in a coronavirus safe environment

10 May 2020 | Shane Oliver, AMP Capital

While the major policy direction is coming out of the federal government and national cabinet, with their own particular situations, each state and territory will start to move out of lockdown at their own pace.

The reopening is supported by the sharp decline in the number of new cases along with various criteria around testing, contact tracing, the health care system etc being met. Each phase looks like it will be around three weeks apart with authorities monitoring health risks around the virus before progressing to the next stage.

Step 1 can see gatherings of up to 10 people outside homes and schools, shops, small cafes and restaurants (with 10 people) can reopen along with playgrounds, libraries and golf courses and local and regional travel will be allowed.

Step 2 will see most businesses reopen including cinemas and galleries with gatherings of up to 20 people and some interstate travel but with people still working from home if it works.

Step 3 will see all return to work, gatherings up to 100 people, all interstate travel and possible travel to NZ, Pacific islands and international student travel. While it will be gradual and entail costs for businesses around hygiene and distancing, it is consistent with our view that April or May will be the low point in economic activity with a gradual economic recovery underway through the second half.

Flat domestic demand is key contributor to slump

While full international travel will be the last thing to reopen (the PM said “not in the foreseeable future”) note that the main reason for the slump in the Australian economy is because domestic demand has been locked up and in any case Australia has a tourism trade deficit with the rest of the world so will perversely benefit if international tourist travel remains barred.

That said with Australia joining a First Movers Club of countries (including Austria, Greece & NZ) that have been successful in controlling the virus it’s possible that travel to them may return sooner. Step 3 will also consider the return of international student travel which is important because Australia has a 2% of GDP trade surplus in education.

Have we hit the economic bottom?

Economic data globally and in Australia has generally continued to worsen but actual economic activity may have hit bottom.

Given the lagged nature of most data we will likely be seeing bad news for a while yet with June quarter GDP data which is expected to show a 10% plus slump in the US, Europe and Australia not due for another three months and not due till early September in Australia.

However, there are signs from high frequency data that activity may have hit bottom and markets will mostly focus on this. 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, credit card data, mobility indexes & jobs data are showing signs of stabilisation.

More countries easing lockdowns.

In Europe the progression towards reopening is consistent with the clear downtrend in new cases. Reopening is probably more of a risk in the US though given the absence of a clear downtrend in new cases (outside of New York) and partly reflects political pressure from President Trump.

 However, if the easing of the lockdown in the US is managed sensibly in line with the three phased Opening Up America Again program that is conditional on testing, contact tracing, etc, as released by the Administration last month then a “second wave” should be avoided. NZ looks likely to further ease its lockdown too.

Reflecting the move towards reopening we are starting to see a migration in countries from severe to intermediate lockdowns.

Global infection trend unchanged

There was nothing really new of note over the past week in relation to coronavirus. New global coronavirus cases have been trending sideways for more than a month now.

New cases in Europe remain in a clear downtrend and the US looks to have peaked but various emerging/less developed countries are driving a still rising trend in the rest of the world. This includes Brazil, India and Russia.

Global equity markets (and US unemployment) rise

Share markets rose over the last week as progress continued in reopening economies supporting perceptions that economic activity may have passed the worst.

US unemployment rose to 14.7%, the highest since in the aftermath of the Great Depression but it had largely been discounted and wasn’t quite as bad as feared. For the week US shares rose 3.5%, Eurozone shares rose 0.1%, Japanese shares gained 2.9%, Chinese shares rose 1.3% and Australian shares rose 2.8%.

Australian shares were helped by the positive global lead and the Government’s move to reopen the economy which saw all sectors gain but with very strong gains for IT, materials, real estate and energy shares. Bond yields rose, as did oil, metal prices and iron prices. The Australian dollar also rose despite a rise in the US dollar.

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