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Cliff Notes: US and China, Diametrically Opposed Risks

Key insights from the week that was.

The key release for Australia this week was the July Westpac-MI consumer sentiment survey. Coming immediately after the start of the Melbourne lockdown, it represents the first clear read of its impact, both in Victoria and across the rest of the economy. Headline sentiment for the nation was down 6.1% in the month as sentiment fell 10.4% in Victoria and 4.5% elsewhere. If the cluster in NSW had been found before the survey period, then arguably greater concern would have been seen outside of Victoria. Chief Economist Bill Evans outlines the significance of this survey in his weekly video update.

Arguably of greatest importance in the detail of the survey is the sharp fall in the ‘economy, next 5 year’ component. In the July survey, this component fell over 10%, twice the decline seen in March/April. This points to consumers becoming increasingly concerned that COVID-19 and its economic consequences could be with us for an extended period. Unemployment expectations also moved materially higher in the month, reversing much of the improvement seen in May/June, and leaving the index materially above its long-run average. The scale of the impact of COVID-19 on our economy and its persistence will have a material effect on the fiscal update to be presented next week by the Federal Treasurer – a preview of which is also offered by Chief Economist Bill Evans in the video above.

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The other major release for Australia this week was the June labour force survey. Employment growth was materially above expectations in the month at +211k, but that was solely due to part-time employment (+249k), with full-time roles down 38k. Despite the surge in employment in June, a 1.3ppt jump in participation saw the unemployment rate rise 0.3ppts to 7.4%. Moreover, even though hours worked rose by 4.0% in the month, they are still down 8.5% for the June quarter. These outcomes highlight both the scale of the shock and the slack it has created despite significant support from JobKeeper and JobSeeker. In June, the NAB business survey employment measure was pointing to a further strong recovery in jobs in coming months. However, this survey pre-dates the Melbourne lockdown and, as per the June labour force survey, also does not necessarily mean the new jobs created will fully occupy employees. Business conditions are still weak and confidence soft, limiting labour demand.

For a wide-ranging discussion of current conditions and the outlook for Australia and the world, see our latest Market Outlook in conversation podcast.

The key discussion point for the global economy in this month’s podcast is the striking contrast between the US and China with respect to the spread of COVID-19 and its economic cost.

On the latest WHO data: reported new cases in the US currently total 61k; in China, the count stands at just 20. Other new case counts reported in the press put the US number even higher, around 70k. While available economic data for the US continues to show a strong rebound in activity, this information is only available to June. This uptrend is at risk of turning abruptly in coming months if COVID-19’s spread is not halted. Moreover, activity is also at risk from the unwinding of legislated stimulus from the end of this month. Our baseline forecast assumes a sharp decline in activity in Q2 is followed by little-to-no growth through the three months to September. The sharp rebound that is then forecast to occur from Q4 assumes current risks around COVID-19 subside. Clearly, to this view, the balance of risks seem heavily skewed downward.

Regarding China, the latest available economic data highlight how rapidly curtailing the virus’ spread in Q1 has provided an opportunity for a stellar recovery in Q2. Essentially, the 10% loss of activity in Q1 has been offset in just three months, GDP having risen by 11.5% in the three months to June. At June 2020, the level of GDP is actually 3.2% higher than a year ago. Expenditure detail for GDP has not been released for Q2, but partial indicators released to date emphasise that the quick return of productive capacity across manufacturing and services and an investment program which is seeking to aggressively make up for lost time is behind the result. Chinese growth over the remainder of the year will be much more modest than in Q2, but will leave the level of GDP at end-2020 above the year’s starting point – a highly atypical outcome for the globe in 2020. To conclude, note also that, while the risks to Europe and the US are to the downside, they are to the upside for China – particularly coming into 2021 as the rest of Asia also rebounds.