Australia's first recession in 29 years

Chris Scicluna
Emily Nicol

Australia’s record contraction and first recession in 29 years:
The domestic focus in Australia today was on the release of the national accounts for Q2, which cast further light on the economic damage wrought by the coronavirus outbreak. Following a modest 0.3%Q/Q contraction in Q1, real GDP slumped 7.0%Q/Q in Q2 – the largest decline since records began in 1959 and delivering the first ‘technical’ recession recorded in Australia since 1991. This outcome was worse than the median market expectation – which was for a 6.0%Q/Q decline according to Bloomberg’s survey – and left the level of output down 6.3%Y/Y. This compares with the 6%Y/Y (rounded to the nearest whole number) contraction that the RBA had estimated in the August Statement on Monetary Policy.

The detail of the national accounts was broadly in line with what had been suggested by the various partial indicators. In the detail of the expenditure measure, domestic demand fell 7.4%Q/Q, driven by a 12.1%Q/Q contraction in household consumption. Indeed, spending on services fell 17.6%Q/Q, not least due to reduced activity in the transport, accommodation and café/restaurant sectors. Residential building activity fell 6.8%Q/Q and investment in machinery and equipment fell 6.9%Q/Q. As had been indicated yesterday, net exports contributed 1.0ppts to growth in Q2 (exports fell 6.7%Q/Q but imports fell an even greater 12.9%Q/Q, with imports of services halved during the quarter). Meanwhile, health-related spending helped to drive a 0.6ppt positive contribution to growth from public demand. With government transfer payments helping to support household incomes, and spending curtailed sharply, the household savings rate jumped to 19.8% from 6.0% previously – a level last seen in 1974. Elsewhere in the accounts, nominal GDP fell 7.6%Q/Q in Q2 to be down 5.9%Y/Y. The GDP deflator thus fell 0.6%Q/Q, while the domestic final demand deflator fell 0.3%Q/Q.

With today’s outcome somewhat weaker than market expectations – and at the outer limits of what could be viewed as consistent with the RBA’s most recent central estimates – longer-term bond yields moved 2-3bps lower as investors contemplated the likelihood of extended monetary accommodation. Together with Wall Street reaching a new high, this helped to support a 1¾% rally in the ASX200. Of course, today’s figures are historical and the prospects for monetary policy will depend more on the scale of the rebound in activity – and hence the evolution of the pandemic – that takes place over the current quarter and beyond.

German retail sales weaker in July despite VAT cut:
German retail sales fell for the second successive month in July, dropping 0.9%M/M in real terms following a decline of 1.9%M/M in June. Nevertheless, given the strong rebound in May (+13.2%M/M), the level of sales was still up 4.2%Y/Y and 0.9% above February’s pre-pandemic level, to leave total sales in the year to-date 2.6% higher than in the same period last year. Within the detail, sales of food, beverages and tobacco was similarly up 4.2%Y/Y (5.7%YTD/Y), while non-food sales were up a similar 4.4%Y/Y (but only 0.8%YTD/Y).

There was significant variation in the various categories of goods, however. Supported by the temporary 3ppt cut in the main VAT rate to 16%, to last from 1 July until year-end, sales of furniture, sales of household appliances and building supplies were up a vigorous 12.9%Y/Y in July, albeit only up a modest 1.6%YTD/Y in the first seven months of the year. In contrast, sales of clothes, textiles, etc. fell 8.0%Y/Y to be down a whopping 27.8%YTD/Y. And sales of cosmetics and pharmaceuticals were down 4.1%Y/Y in July, albeit still up 1.1% in the year to-date compared to the same period last year. The shift to increased online shopping brought about by the pandemic remained intact, with internet and mail order sales up 15.6%Y/Y and 20.4%YTD/Y in real terms.

Spanish employment up again in August despite resurgence in pandemic:
Despite the resurgence in Spain’s pandemic over the past month, which has seen numbers of new Covid-19 cases rival those in the first wave in March and the resumption of local restrictions on activity, employment in the euro area’s fourth largest member state rose for the third successive month in August, up 232.6k from July (1.25%M/M). That left it still down 528k from a year ago (-2.7%Y/Y), compared to the trough year-on-year decline of 882k and -4.6%Y/Y in June. While the number of jobless claims rose 29.8k to be up 24%Y/Y in July, that compared to the drop of 89.8k (and rise of 25.3%Y/Y) the prior month.

UK: Weak price pressures on the high street, but house prices rebound
UK consumer price inflation has recently surprised on the upside, driven by likely one-off and temporary factors associated with the impact of the pandemic. In contrast, today’s BRC shop price index illustrated the ongoing difficulties facing retailers’ profit margins on the high street, as they continue to offer discounts to entice consumers back to shops. Indeed, average shop prices were down a steeper 1.6%Y/Y in August, to mark the fifteenth consecutive annual drop. And this was driven by a steeper decline in non-food goods prices (-3.4%Y/Y), as prices of DIY and electrical goods fell further and retailers’ clothing inflation was still down more than 10%Y/Y. But on the BRC measure, food inflation eased back slightly too, down 0.2ppt to 1.3%Y/Y. Not least given continued uncertainties surrounding the pandemic as we head into the autumn, demand on the high street seems likely to remain subdued, maintaining downwards pressure on prices. Of course, depending on the outturn of the ongoing negotiations on the future trade relationship between the EU and UK, significant upwards price pressures could emerge from the supply side from January on, particularly if a new FTA is not agreed.

Meanwhile, as suggested by certain leading indicators in the housing market, the Nationwide house price index today suggested a notable increase in house prices last month as pent up demand during the lockdown continued to be released, demands for housing changed due to working from home, and the Stamp Duty holiday also provided a boost to activity. In particular, house prices rose 2%M/M in August – the largest monthly increase since early 2004 – to leave them up 3.7%Y/Y and back above the pre-pandemic level. However, Nationwide also cautioned that the housing market outlook remained uncertain, not least as government support measures – including the temporary Stamp Duty cut and furlough scheme – will soon come to an end and concerns over the future path of the pandemic persist.

Japan’s monetary base maintains steep upward trajectory:
In a quiet day for economic news, the BoJ reported that the monetary base rose 11.5%Y/Y in August, up from 9.8%Y/Y in July. This maintains the steeper upward trajectory that has been evident since April, and reflects the BoJ’s stepping up of securities purchases as part of its response to the economic consequences of the coronavirus pandemic. On that score, speaking today to business leaders in Saga, BoJ Deputy Governor Masazumi Wakatabe noted that the Bank would continue to exercise the “utmost vigilance” concerning economic and price developments and that it would continue to respond to the crisis, working together with the government.

RBNZ’s Orr reiterates seeking additional policy tools to use if needed
Speaking today at a local university, New Zealand’s Reserve Bank Governor Adrian Orr reiterated that the Bank is “actively preparing” a package of additional monetary policy tools that could be deployed “if needed”. According to Orr, the additional tools that could be deployed include negative wholesale interest rates, further quantitative easing, direct lending to banks, and ongoing forward guidance. Orr also called on banks to use their capital and liquidity headroom to support their customers’ long-term interests. Orr went on to note that the Bank does not want to rely overly on a single tool, as this could lead to suboptimal outcomes. There was little market reaction, with the NZ dollar continuing to trade near the upper end of this year’s range despite the Bank’s ongoing dovish commentary. 

Look ahead to today’s remaining data from the euro area and US:
Looking ahead, after yesterday’s euro area CPI release for August surprised on the downside, as headline inflation fell into negative territory and core inflation hit a record low, and ECB Chief Economist Lane flagged awareness of the likely deflationary impact of the recent appreciation in the euro (stating that the exchange rate “does matter”), this morning will bring euro area PPI figures for July, which should highlight weakness in prices of imported goods. 

In the US, ahead of Friday’s payrolls data, today will bring the ADP employment report for August, which is expected to show that private sector payrolls jumped by about 1.0mn last month. Meanwhile, in line with last week’s durable goods orders figures, final factory orders data are expected to have posted another strong increase (6.1%) in July. The Fed’s latest Beige Book will also be published, while FOMC member Mester is scheduled to discuss the US economic and monetary policy outlook.

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