COVID-19 impacts on the Australian economy & housing market

Westpac predicts Deeper recession and unemployment rate to 7%

https://westpaciq.westpac.com.au/wi...h/er20200318BullRevisedGrowthUnemployment.pdf

We have increased our estimate of the shock to the most exposed component of consumer spending (hotels; restaurants and cafes; recreational services; and air travel) to minus 40% over the two quarters from minus 25%. We have increased the expected shock to consumer durables to minus 7% and revised up the negative impact on home renovations and additions.We expect outbound and inbound tourism to contract by 80% over the two quarters.Overall we now see consumer spending contracting by 0.1% (March quarter) and 2.8% (June quarter) before recovering by 1.9% in the September quarter and 1.0% in the December quarter.We have also made adjustments to inventories; government spending (lifting health expenditure further). Growth through 2020 is now estimated at 1.5% with minus 1% in the first half and 2.5% in the second half.The unemployment rate is now forecast to reach 7% by October 2020 (up from the previous estimate of 5.8%-6.0%) due to the larger negative shocks to the labour intensive sectors such as recreation; tourism; education; renovations and additions; and dwelling construction. This lift in the unemployment rate is despite reducing the participation rate from 66.1% to 65.4% as a discouraged worker effect – that is, as workers respond to a deteriorating labour market the participation rate is likely to decline.Please note that these forecasts are not based on Australia following a European style full lock down. Not surprisingly, the forecasts are subject to downward revision in the event of such an occurrence.

Bill Evans, Chief Economist

 

No chance it stays below 7%
Happy to take any wager on that


This is the exact same as before all about softening the impact little by little

Not a bad job , as they never Get called to account down the track for their predictions

 

If casinos and pokies venues close, good! They are the last places we want to see stimulus spent. I just feel for the employees.

 

How many staff do you employ?
What industry are you in?
How enabled are your staff to work from home?

I’m not arguing that their are also many great benefits to being in an office as you have listed.

But I do not agree a lot of people are not more productive isolated and away from the office.
The other day at the office I had a 2 hour conversation about toilet paper.
Most Meetings are arguably the biggest waste of time possible. It’s so refreshing working from home and not having meetings OR having them but also working on my laptop multi-tasking and not being seen as rude.

I could write a thesis on the benefits and not just from work ethic but what having flexibility to work from home offers for ones mental health and family relationships.

 

Brady (works for CBA) made an interesting post about people cancelling appointments and contacting the CBA to discuss their concerns with making repayments due to employment issues. I can understand people delaying purchases because of the uncertainty in the current climate. It is concerning to hear of people worrying about being able to meet their repayments though. On the other hand at least they are being proactive and contacting the bank to discuss their concerns instead of just defaulting etc. If Australia goes into lockdown for the next 6 months I can't see how the property market will become immune from the havoc.

 

As noted, cost & availability of credit is one of the biggest risk factors to housing/people at the moment. Thankfully this is being actively managed.

As counter-intuitive as this may be, with a massive sell-off of financial assets around the world, bank funding costs are going to rise substantially shortly. This is because their funding isn't solely tied to the RBA cash rate, but rather the securitised market around the world. If we were operating in a standard world, then right now bank profits will be getting hit, fixed rate costs will be rising & it won't be long before there'd be large out of cycle variable rate rises across all mortgage holders in Australia.

This of course, would be absolutely diabolical at this current time. If mortgage rates rise, relatively rapidly, at this current point in time, the pressures on households will only get worse.

Standard tools like cutting interest rates are no longer an option. I.e. we can't cut rates far enough to account for the additional funding pressures banks will face in coming months.

The RBA have a very large role in creating a marketplace to ensure the liquidity in this market, and do whatever it takes to ensure that funding continues and banks can continue to operate without passing on additional costs to Aussies.

I'm not sure what the mechanism may actually be, but as of right now, it is one of the most important economic interventions required. The RBA will likely be required to fund this market entirely, or play a role in bringing the spreads back down.

RBA plots cheap bank loans

 

7% unemployment is an incredibly bullish forecast IMO, unless we see a miracle (e.g. early vaccine) that sees the emergency measures end in less than 3 months. Otherwise, with talk of up to 6 months of the country being partially shut down, I can't see how it can remain that low. It will surely spike above 10% until the worst of this passes.

Whole discretionary / customer facing sectors (tourism, hospitality, retail, etc) will have their revenue fall by 80%+, most businesses can't stay solvent for 3 months+ without revenue, unless they lay off most of their staff. Many, many businesses will go bankrupt. Big sectors such as resources and energy will also see significant revenue contraction as demand for these inputs locally and globally dries up.

As I see it, the following sectors are basically safe from any job losses:
- Healthcare
- Public sector
- IT & telecom
- Utilities
- Food & essentials

The rest of the economy will be hard hit too, just like in any recession.

But retail, Accommodation, hospitality, entertainment, tourism, real estate and other related sectors (employing over 20% of the workforce) will be largely wiped out for a few months with massive job losses to result.

It's not unrealistic that 10% or more of Australian businesses will go bankrupt, without significant targeted government support.

 

True Redom, but the RBA created the bubble that created the instability, that created the shock.

We are now asking the entity that created the instability to fix the problem.

When central banks intervene to fix the problem, they can only do it by adding currency into the system. But they aren't adding any productivity into the economy. Which means that they can inflate and deflate, but they can't really stimulate.

What we are now contending with is the result of leaving interest rates at zero for a decade, and all of the malinvestment that arises. The market has been desperately seeking to discover its prices, and in particular the price of credit. But interventions from the central banks interfer with that price discovery mechanism.

The economy has been a bubble in search of a pin. And when people argue for more intervention to distort the economy further as that is a cure (rather than the toxin itself), I get very nervous.

 

Yep. And....liquidity will be key. They are kicking the can and the syringe down the road. Just wait till unemployment kicks in here and globally. My Aussie bank and VAS orders have not yet been filled because they are rather cheeky. There is no rush to buy anything. Everything will be on special for some time. Stay well everyone. Health is the first wealth

 

What interest rate rises are you thinking if you had to take a guess?

 

I disagree- I can't think of any time in the last 30 years when the Australian economy would have been prepared to weather this black swan event. Inflation of asset prices and debt over the last 10 years due to dovish central banks perhaps aggravating factors right now, but of little significance in comparison to the dominant factor - a complete evaporation of demand and revenue for huge sectors of the economy, which can't really be addressed until the virus peak has passed.

 

@Barny - I don't think this will happen, given the RBA will intervene. It should theoretically mean that its harder for banks to pass on rate cuts if the RBA does have an emergency meeting tomorrow. Funding costs are rising in this climate, which in usually markets gets passed on. The RBA will be working actively to ensure this does not happen.

 

You are blaming the pin, not the bubble. If it wasn't corona, it would have been something else.

 

How will you know when to buy?
What if you buy when stocks are 40% down, but they end up trending down 90% like in the years from 1929?
When would you cut your losses?

Something else may have crunched or crashed stock prices, but to the extent we are seeing? I really don't think an event that is shutting down the global economy can be compared with standard cyclical peaks which may take something far less severe to start a correction.

 

Here is my highly professional and very scientific modelling of the outlook for Australian employment in a 3 month+ lockdown scenario.

So taking the very optimistic assumption that only 25% of jobs are lost in the "Dead" sectors, and 5% job losses in impaired sectors, at least 7.5% of all jobs will be lost by the end of this. That's approximately one million people losing their jobs and without income.

In view that this is by nature a temporary external event, the government needs to get Australia through this by:

• Support businesses in affected industries in order to keep staff on, via direct payments tied to retention of staff, etc; and
  
• Provide direct payments to households without income, much more than current Newstart and without all the onerous eligibility criteria.

Conventional broad stimulus measures that stimulate demand are completely useless right now - nothing is going to get people back on planes or back in to restaurants until the virus is controlled. Targeted payments to support the impacted industries and/or households are what we need IMO.

 

The.more I think about it , the more angry I am with Westpac 7% statement , it’s a deliberate attempt to flatten the curve to borrow a term

they do this every single time , and never once called to account

They put out statements like this and it’s complete ******** and they know it .

This is history repeating , and the only things human don’t Learn from history is the history itself

 

Add in "Insolvency specialists / liquidators" in the list. Endless work for them for the next few years.

I have been trying to find stand-alone entities on ASX specialising in liquidation but haven't found one. They are all either private or linked to one of the big consulting companies.

 

This is a very good read. Whilst there would always be variations within a sector based on countless variables inc debt, management, cf, stimulus, etc, this is a very good list and guesstimate around the worst case scenario.

 

I don't know much about equity markets in crises, but I think trying to pick any stock for gains during this chaos is like swimming against a strong tide. Even if there are companies that benefit and see fantastic earnings, they are still in the baskets of stocks held by ETFs and even managed funds that are being indiscriminately dumped en masse. So you are fighting this.
Much better to buy stocks that look cheap and are likely to recover well when things return to "normal" IMO.

 

I couldn’t disagree more.
I think they should be going much harder!

Whether you agree with my sentiment that people can be just as productive from home or not IF YOU CAN (even if it’s at a percentage less productive) then it should be mandatory.

Anyone who doesn’t believe this I think has two key massive misunderstandings:
1 - They have never travelled on public transport or worked in a large office environment
2 - They simply underestimate the seriousness of the virus.

It’s non sensical to me that people who work in certain sectors even this early in the pandemic are still commuting on sardine filled trains with 20 people holding the same handle when they can access everything they need from a laptop in their home.

The more people we have in this environment, the more it will spread, the longer it will take, the more that will die. That’s not a wild guess, it’s cold hard fact.