After the flurry of central bank policy steps in early to mid-March, the past week has been somewhat less dramatic. To be sure, the US Federal Reserve still managed 6 policy press releases over the week, including a facility to provide an alternative to foreign central banks to dumping Treasuries if they need access to US dollars.
But the Fed’s money printing program is really only just getting started. Balance sheet expansion of a staggering scale is under way. Ultimately we expect the US’s loss of global growth leadership and the Fed’s aggressive QE to undermine the US dollar.
The extent of the damage to the US economy from Covid-19 is becoming clearer. Initial filings for jobless benefits had averaged 212,000 per week until early March. As lockdown orders began to be issued in several states, claims surged to 3.3 million in the week to 20 March. Then new jobless claims for the week to 27 March exploded to 6.65 million.
For comparison, weekly claims peaked around 665,000 during the GFC, so the speed of the deterioration of the US job market is much faster now.
The RBA was slow off the mark in terms of its response to Covid-19 in February, but March produced a rapid response, including cutting the cash rate to 0.25% and the launch of its first QE program. Having taken these huge steps, there is limited market tension over the RBA Board’s policy decision on Tuesday. Perhaps there will be some guidance on forecasts not officially due until May.
Westpac had to revise its own key forecasts this week after the announcement of the government’s wage subsidy scheme to help thousands of smaller businesses “hibernate” during the shutdown of “non-essential” services.
The proposed JobKeeper Payment is a radical plan befitting an extraordinary hit to the economy. By paying businesses hammered by a collapse in revenues $1500 per fortnight per employee for 6 months, the government should save a large number of jobs and limit the contraction in GDP.
Australia’s unemployment rate should be much lower than it would have been otherwise thanks to the scheme. We now see unemployment peaking around 9% in June. But Australia is still facing a deep recession. Westpac forecasts a small fall in Q1 GDP but a brutal 8.5% slump in Q2 and only partial recovery over the second half of the year.
And of course the JobKeeper Payment is very expensive, with the government estimating $130bn of subsidies over 6 months. The much pledged return to budget surplus becomes a deficit of -$100bn in the year to June, blowing out to -$210bn in 2020/21. This equates to -10.5% of GDP, the largest deficit since World War 2.
The economic devastation in Australia from Covid-19 is clear from the shuttered shops, queues to apply for unemployment benefits and near-empty public transport. But in terms of data on the virus impact on the economy, so far we have mostly seen consumer and business surveys rather than Bureau of Statistics reports.
This starts to change in the week ahead, with February trade data to show the hit to tourism and education exports from the 1 February ban on arrivals from mainland China. This will provide further guidance for the Aussie dollar, which has traded mostly above 60 cents this week, supported by a softer US dollar. But with global investor sentiment still very fragile, we should not be surprised by renewed pressure on the Aussie dollar in coming days.