Australians were finally provided some clarity as to the precarious positioning of the local economy, with Treasury modelling the grim near-term outlook in its July Economic and Fiscal Update (JEFO). The budget update – the first since December – documents a continued contraction of GDP through 2020, as well as a slowdown in activity that will cause wage growth to halt, unemployment to peak near 10 per cent, and public debt to skyrocket.
The admission from global leaders that it will likely get worse before it gets better, comes as a stark comparison to just weeks earlier, where the commercial boost from an initial easing of restrictions provided the catalyst for consensus-beating economic data.
The crises on the public health and economic fronts are inexorably linked, as countries dealing with renewed spikes in infection rates would attest. In Victoria, for example, the fast deteriorating situation and desperate fight to achieve broad-based compliance with isolation, is set to cripple the state’s budget, with reinstated lockdowns to cost some $1 billion a week.
Early super access scheme continues to offer insight into the true state of the local economy
Although hidden from view, the true state of the country’s economic crisis has not been kept secret from those willing to dig beyond headline statistics.
According to the latest figures provided by APRA, some 2.8 million applications have been paid out under the Federal Government’s COVID-19 Early Release Scheme, including 800,000 in repeat applications. Despite $18.1 billion in super savings being paid out under the first tranche of the scheme, so eager were struggling Aussies to access the second instalment, the rush in web traffic caused the ATO site to be rendered inoperable on the first day of new applications.
The sheer number of these applications – particularly repeat applications – is frightening, given that even struggling Australians tend to worry more about reductions in their retirement wealth, than not having an extra $10,000 to cover their current expenses.
CoreData has been a strong proponent of the potential merit of super withdrawals for those in hardship, imploring funds to consider that immediate reductions in financial stress may outweigh the future impact on retirement outcomes. The desperation many are coping with is perhaps more apparent when considering that 400,000 Aussies under-35 have entirely depleted their super wealth through the scheme.
Stimulus measures and data flaws muddy the water
Despite the cavernous hole in which the global economy finds itself, the average Joe could have been forgiven for putting his faith in the thesis of a V-shaped recovery. Government stimulus and other support measures such as mortgage deferrals, income supports, and even early super access – and their global equivalents– have obfuscated the informative nature of traditionally reliable economic data.
The ABS, for example, documented a 16.9 per cent increase in retail trade in May, and a subsequent improvement in payroll jobs and wages, as restrictions initially eased across the country. A similar story emerged from the US, where unemployment figures bested consensus forecasts, as the addition of 4.8 million jobs pushed the headline unemployment rate down to 11.1 per cent in June.
The crowning glory, however, of economic deception lies in the rapid recovery in global equities, most appropriately highlighted by the continued advance of the Nasdaq to all-time highs.
Market commentators have been quick to question the accuracy and relevance of economic data, sighting a disconnection between equity markets and their respective economies, as well as time lags and flaws in measurement of figures like unemployment.
For one, unemployment data is notoriously slow to deliver, often lacking relevance by the time it becomes available. Headline rates are also inherently flawed in current circumstances, given sharp falls in participation rates – like the 3.0 per cent fall in participation in Australia since March – and an obfuscation of how employment status should be classified, as a result of employment support packages like JobKeeper.
Similarly, loan repayment holidays and enhanced benefit payments have provided an artificial boost to consumption and trade across many countries. An irrational rebound in equities is just one product of unconventional fiscal policy, with retail figures in Australia also seemingly inspired by the misappropriation of super withdrawals for discretionary spending.
Indications financial hardship is on the rise, with younger Australians most impacted
Amongst the noise, timely and robust data unearths the depths of the financial struggles, with reports that the number of Australians not able to meet their regular housing costs more than doubled in May, whilst retail trade and payroll figures improved.
Young people provide a true microcosm of the strain COVID-19 has put on the broader economy, with 44 per cent of those aged 18 to 24 unable to pay their rent on time. Half of Australians aged 25 or younger have lost income during the pandemic, due in large part to their over-representation in the casual workforce and in some of the hardest hit industries, including tourism, retail and hospitality.
Avoiding the fiscal cliff, or merely delaying it?
Recent weeks have seen the extension of both mortgage repayment deferrals and the JobKeeper/JobSeeker support payments(although undergoing some adjustments), as the country neared the schemes’ originally slated end dates, and the broadly anticipated ‘fiscal cliff’.
Despite providing a necessary buttress for the local economy, these various support measures have undeniably masked much of the true economic effect of the COVID-19 crisis, and skewed data that is ordinarily relied upon.
Although hopeful that extended support measures will help avoid September’s ‘fiscal cliff’, it seems more likely that it will instead merely ‘kick the can down the road’ until March of next year, especially as it becomes clear that many mortgagors on deferred loans are still unable, or simply unwilling, to restart their payments.As the dreams of a V-shaped recovery begin to weaken, it seems only now that the nation is coming to realise that even in the best case scenario, our first recession in almost three decades will leave jobs, wages, and many Australians, lagging behind for some time to come.
