But policymakers are faced with the reality of high long-term unemployment and that government stimulus will be needed well beyond the health crisis
15 August 2020 | Shane Oliver, AMP Capital (Image: M Gonzalez)
Major global share markets, with the exception of Chinese shares, rose over the last week as US new coronavirus cases trended down and on optimism regarding a vaccine and the economic outlook, with the US share market briefly surpassing its February closing high.
The positive global lead along with a fall in new Victorian cases saw Australian shares rise to the top end of the range they’ve been in since June with strong gains in consumer staple, financial, real estate and retail stocks leading the gains.
The global news on coronavirus has been a bit more positive on three fronts recently. First, progress continues towards a vaccine with several now in final trials to hopefully show that they work and some of the producers already manufacturing doses. While news that Russia had approved its own vaccine for use added to the excitement, its yet to undergo final trials.
Second, the number of new cases globally has been flat over the last two weeks, after rising since mid-April.
The improvement basically reflects a decline in developed countries with falling new US cases more than offsetting a still rising trend in Europe. New cases in Japan may also be slowing again.
Finally, the second wave of new coronavirus cases in developed countries has continued to be far less deadly than the first wave with deaths running well below their April high whereas new cases have been well above. This continues to be evident in the US – where hospitalisations are now falling too – but is also evident in Europe and Japan. This adds to confidence that a generalised lockdown will be avoided in most countries – in favour of more surgical measures.
This in turn adds to confidence that the economic recovery that has been seen in developed countries since April can continue.
With cases falling, deaths remaining relatively low and a return to a lockdown averted (at least for now) our US Economic Activity Tracker looks to be resuming it upswing, albeit gradually. Key components for consumer confidence, retail sales, mobility and job ads have turned up again.
Concerns in Victoria
Of course, Victoria has taken a much tougher stance with a lockdown despite far less new cases than seen in other countries (and New Zealand has also gone down the same path after a rise in cases), but we have also seen some better news on coronavirus over the last week with new cases in Victoria trending down – highlighting yet again that lockdowns work. It’s still a horrible depressing situation in Victoria and I really feel for all those impacted, but at least there is a bit of light at the end of the tunnel (fingers crossed).
Reflecting the Victorian lockdown and some impact on confidence in NSW our Australian Economic Activity Tracker fell further over the last week with weakness pretty much across the board – in restaurant and hotel bookings, consumer confidence, shopper traffic and mobility indicators.
However, if Victoria continues to come under control and NSW remains under control then hopefully the recovery should resume sometime in the next month.
Our view remains that the delay in the Australian GDP recovery out to the December quarter along with the gradual and uncertain nature of the pace of recovery thereafter will necessitate more policy stimulus in Australia.
The bulk of this will fall to fiscal policy and this is where the biggest impact will come but the RBA will likely also have to ease further.
Uncertainty is certain for equity markets
For share markets it’s the same story – the negatives remain: uncertainty around coronavirus, the pausing or reversal of reopening, very high unemployment, the hit to earnings, the US election, US/China tensions and the seasonally weak period of the year for shares that we have now entered.
But these are arguably more than offset by a long list of positives including continuing good news on coronavirus treatments and vaccines, the second wave in developed countries being less deadly than the first, several countries showing that it is possible to contain the virus, China tracing out a Deep V recovery, the safe haven $US falling which is normally a positive sign, monetary and fiscal policy remaining ultra-easy, low interest rates and bond yields making shares look cheap and there is still a lot of cash on the sidelines.
Shares are still vulnerable to further volatility, with coronavirus and US/China tensions being the main risks. But the positives should keep any volatility to being a correction in a still rising trend.
Australia in double-digit unemployment
Australian jobs data surprised on the upside for July with employment up by nearly 115,000 and unemployment “only” rose to 7.5%. The good news is that 343,100 of the 871,500 jobs lost between March and May have been recovered and “effective unemployment” (which is a guide to what unemployment would be were it not for JobKeeper and the decline in labour force participation) fell to 10.2% from 14.9% in April.
The bad news is that effective unemployment of 10.2% is still very high, underemployment remains a very high 11.2%, the July jobs data relates to the first half of July and so missed much of the Stage 3 lockdown of Melbourne and unemployment is likely to rise significantly this month as the now tougher lockdown of Melbourne impacts.
As a result, we remain of the view that official unemployment will rise to around 10% by year end. But at least the decline in the effective rate shows that it can go in the right direction as the economy reopens.
Dr Shane Oliver is Head of Investment Strategy and Chief Economist, AMP Capital