JobKeeper’s $60 billion ‘bonus’

The miscalculation of how many Australian workers will take up the JobKeeper scheme – some 3 million less than announced – means red faces but less red ink on the national accounts   

24 May 2020 | Shane Oliver, AMP Capital

Friday’s revelation from Federal Treasury that errors on JobKeeper applications had exaggerated the number of employees covered by the scheme proved a shock to all. Numerous business had listed “1,500” when asked their number of staff, when they thought they were answering the dollar amount of the relief applied for ($1,500 per fortnight) per staff member.

JobKeeper is now expected to cost around $60 billion less than budgeted for and likely to cover around 3.5 million workers as opposed to the 6.5 million workers expected, which is mostly good news.

It would indicate that the economy may not be as weak as first feared as less workers work for companies that meet the required 30% or 50% hit to revenue to access the scheme and as the economy opens faster than the six month hibernation originally allowed for.

As we saw with last week’s labour market report JobKeeper is playing its role in keeping people employed and measured unemployment down and there is no change to that.

The estimate that it was covering more than 6 million workers always seemed a bit over the top as that’s nearly half the workforce!

Against this though, it means that the fiscal stimulus will be $60 billion (or 3% of GDP) less than originally announced. This is a negative as it could mean a less robust recovery than had been expected on the basis of that stimulus.

However, the ideal response would be for the $60 billion saving to be used to relax some of the criteria to access JobKeeper and to extend it for those who need it. Given all this, I see no reason to change our forecasts for economic growth and unemployment in Australia.  

Market rollercoaster heads back up

Major global share markets, with the exception of Chinese shares, rose solidly over the last week on optimism regarding the development of a vaccine for coronavirus, reopening, dovish comments from Fed Chair Powell and moves towards a common bond in the Eurozone, despite escalating US/China tensions seeing some of the gains reversed.

For the week US shares rose 3.2% reaching a new recovery high, Eurozone shares rose 4.4% and Japanese shares rose 1.8% but Chinese shares fell 2.3%. Despite giving up some of its gains later in the week on China trade fears, the Australian share market rose a solid 1.7% through the week as a whole and made it to a new recovery high with strong gains in materials, IT, energy and property stocks offsetting weakness in defensive consumer staples, health and utility shares.

Bond yields rose in the US and Germany but fell in Australia and the UK with sharp falls in Italy and Spain. Oil, metal and iron ore prices rose as did the Australian dollar with the US dollar pulling back a bit.

Global COVID-19 situation more or less the same

New global coronavirus cases have ranged sideways since March, although a bit of an uptrend has emerged over the last few weeks.

While new cases are clearly trending down in Europe, the UK, Japan and to a lesser degree in the US, various less developed countries are driving a rising trend in the rest of the world.

Brazil looks particularly bad – populist leaders who don’t like experts are not good for their people’s health!

The trend is still up in India and Mexico. Iran now looks to be seeing a real “second wave” (in contrast to the second waves some claim have occurred in Japan and Singapore but which were really still in first waves).  

Australia is continuing to see few new cases. Australia’s low coronavirus death rate of 4 per million people in contrast to 290 in the US and around 535 in the UK and Italy is well known. Australia also continues to rank only second to New Zealand amongst OECD countries in terms of controlling the virus (as measured by recovery rates, cases per capita and testing per capita). The US is worst at 37th and Sweden is 36th.

Lockdowns easing

Lockdowns are continuing to ease in developed countries pointing to improved economic activity ahead. While economic data has been terrible for April reflecting the full brunt of the lockdown (eg US housing starts down 30%, Australian retail sales down 17.9%), business conditions PMIs in May lifted after their sharp fall into April in the US, Europe, Japan and Australia.

They are not yet available for all countries globally but the rise in PMIs in the G3 (US, Europe and Japan) points a rise in the global PMI for May.

Economic tracker showing signs of life

Consistent with this, high frequency data continues to indicate that activity may have hit bottom. 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 and jobs data hit bottom in April and in Australia have trended up for five weeks in a row.

I am now even finding it harder again to get a parking spot for the Holden in my local suburban shopping centre. Of course, it has a long way to go and our US indicator is lagging a bit.

China-US tensions remain

One big threat to the recovery in markets is the escalating war of words between the US and China around the origin of the virus. With the World Health Assembly unanimously agreeing an inquiry into COVID-19, with the support of China, you would think Trump would wait for the outcome. But the Presidential election is less than six months away now and recession and a massive rise in unemployment have messed up Trump’s chances.

So, Trump and the Republicans are keen to shift the blame to China and paint the Democrats as “soft on China”. Moves by China to tighten national security in Hong Kong may also add to the tensions. A war of words is one thing but escalating tariffs and restrictions (with more in relation to Huawei and a Senate law which may make it harder for Chinese companies to list in the US) are another.

With Trump’s approval around where it normally is, he may not want to do anything too much that threatens shares and the economy. But if it starts to look hopeless for him then he may conclude he has nothing to lose from ratcheting up the conflict and trying to rally American’s around the flag.

Australia-China tensions simmering

Australia may be getting tangled up in the COVID-19 tensions with China putting an 80.5% tariff on Australian barley and concerns about possible restrictions on Australian coal and new inspection rules around iron ore (although the latter looks benign).

Some see this as connected to China’s annoyance at Australia’s push for an inquiry into Covid-19, but then again China does have some concerns with Australia’s trade practices and such tensions have flared up before only to settle down again.

Barley and affected meat exports only account for around 1% of Australia’s total exports to China but it would be a much bigger concern if iron ore and coal are impacted too. Ultimately, I expect that the disruption to trade between the two countries will be limited because it’s in both countries economic interest not to mess it up.

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