Melbourne returns to lockdown

Australia has been viewed as an outperformer in the global battle against Covid-19, and with justification. Australia’s death toll of 106 and currently just 10 people in intensive care is indeed one of the better national containment outcomes to date. But optimism has cooled notably since Victoria started to record a resurgence in new cases last month.

Last week Victoria announced restrictions on a number of Melbourne suburbs which accounted for the bulk of the outbreak. This week saw daily totals exceeding even March’s highs, prompting the state government to return all of Melbourne to “stay at home” restrictions, albeit not as severe as those imposed on a handful of public housing blocks linked to the outbreak.

The obvious economic impact is on Australia’s second-largest city, with Westpac trimming its Q3 Australian GDP growth forecast from 1.5% to 1.1%. If Melbourne’s restrictions are eased after the declared 6 weeks, there will be some bounceback into Q4. But there is also the impact on other states.

Queensland normally receives many Victorian tourists at this time of year and other state premiers and territory chief ministers are either tightening rules on inbound travel or even reconsidering the pace of intrastate reopening. Western Australia for example is reviewing its reopening plans which could have seen 60,000 fans at an AFL match in Perth this month.

In this light, we will be particularly interested in Westpac’s July consumer sentiment survey on Wednesday, to see whether consumers in states other than Victoria are becoming more worried about the economic outlook.

If they are, then this matches the tone of the RBA Board at this week’s meeting. Governor Lowe said that a global economic recovery is expected to be “bumpy.” His discussion of Australia’s labour market was also more downbeat than in June, noting that, “As some businesses rehire workers as demand returns, others are restructuring their operations.”

Victoria’s coronavirus setback and the ongoing surge in cases in many US states seems to be worrying Australia’s federal government, enough for it to err on the side of more fiscal support. Treasurer Frydenberg is due to deliver an economic statement on July 23rd , with growing signs that the JobKeeper program will be extended for many companies beyond September, along with increased JobSeeker dole payments and perhaps bringing forward planned income tax cuts to next year.

Despite all these concerns, the Aussie dollar has risen slightly over the week, again touching 70 cents. Global equity markets have proven resilient and outside the US, economic reopening continues in previously hard-hit countries such as Italy and the UK. Moreover, China’s stock market has surged 15% in the past 8 days and commodity prices have rebounded, including iron ore up to $106 per tonne.

This is obviously a positive backdrop for the Aussie dollar, even if growing tensions between Australia and China over Hong Kong seem to threaten Australia’s exports other than iron ore.

But the busy domestic calendar in the week ahead will provide plenty of food for thought. Along with July consumer sentiment, we see June NAB business confidence and then the June labour force survey. After Australia lost about 800,000 jobs in April and May, many forecasters expect a rebound in June, but Westpac is less optimistic. 

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