ACTUAL ECONOMIC PERFORMANCE
This past week, the ABS released employment data, which edger higher, at 7.45% in June, compared to 7.08% in May. The most remarkable element in the jobs report was the increase in part-time jobs created versus full-time jobs.
Besides high unemployment rates, the Australian economic situation is marked by a steady increase in inflation and lower GDP growth. As seen on the chart below, headline CPI for the first quarter of 2020 reached a level of 2.2% on a year-over-year basis. That level has been previously unseen since 2014.
However, inflation is expected to come below that level in the second quarter due to the coronavirus and lockdown effects, low business, consumer sentiment, and the sharp decrease in commodity prices.
Likewise, GDP growth is also expected to appear weaker in Q2 due to the same reasons. Retail sales were highly affected by the lockdown measures, reopening, and then a partial re-lockdown. The situation sparked much volatility in the data.
GOVERNMENT AND CENTRAL BANK MEASURES
The Australian Government and central bank are keeping close eye on the COVID-19 pandemic and how it affects the economy.
The Reserve Bank of Australia, in its Monetary Policy Decision earlier this month, decided to “maintain the current policy settings, including the targets for the cash rate and the yield on three-year Australian Government bonds of 25 basis points," and showed that “The Bank is prepared to scale-up its bond purchases again and will do whatever is necessary to ensure bond markets remain functional and to achieve the yield target for three-year AGS."
Notwithstanding the signs of a gradual improvement, the RBA expresses that the nature and speed of the economic recovery remains highly uncertain.
LEADING INDICATORS
In forecasting future economic performance for the third quarter 2020, leading indicators are sending mixed messages, with consumer sentiment slowing down from 93.7 in June, to 87.9 in July, as a result of the re-lockdown measures in major parts of the country.
The AIG construction and services performance indexes are still in the contraction territory below 50, but contraction is set at a slower pace. On the other side, NAB business confidence and manufacturing PMI have both erased earlier slowdown and are back to positive territories near pre-pandemic levels. This contradiction in leading surveys maintains uncertainty among business owners.
GROWTH AND INFLATION FORECAST
As known among hedge fund managers, professional traders, and through statistical experimentation, major leading indicators and surveys are intended to front-run what the real economy will do by about three to six months, and sometimes more. In the table below, we have taken the average past four months' data for each indicator (except for quarterly indicators).
To sum up what the numbers are telling us, most leading indicators for Australia indicate that the Australian economy is still to struggle in the third quarter, and GDP growth is to remain subdued.
On the other hand, inflation is expected to slow down in the second quarter due to low demand and a sharp decrease in commodity prices, and to start picking up by the third quarter after the recovery seen in commodity prices by mid-May, June, and July.
MAJOR RISK THEMES TO THE OUTLOOK
Uncertainty around COVID-19 and solutions for recovery may get clearer a bit by August, but the overall situation is expected to remain as explained; with subdued growth and slight pickup in inflation in the third quarter.
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