Fiscal stimulus of $75bn, or 3.7% of GDP so far; but only 1.5% of GDP is in Q2
The total Government (Federal + State) fiscal stimulus, so far, is ~$75bn, or ~3.8% of (2019) GDP – but only ~$31bn (or 1.5% of GDP) in Q2-20. In addition, the authorities (RBA/AOFM/Treasury) created credit support and guarantees of $125bn (or 6.3% of GDP). Together, fiscal measures total almost $200bn, or 10% of GDP. Meanwhile, the RBA’s QE bought $21bn of Government bonds ($18bn Commonwealth & $3bn Semis), or 1% of GDP, or 2% of debt. Lenders also paused repayments (principal & interest) for 6 months, for both SMEs (~$8bn) as well as household debt (potentially ~ $30-$50bn).
Q2 GDPe cut to -10% q/q, worst ever; persistent lockdown may see Depression
However, given further lockdowns this week (and more looming), we again revise down our real GDP forecast for 2020 to -6.1% y/y (was -5.4%), by far the worst since WW-II. Q1-20 is likely sharply negative already at -1.4% q/q and +0.3% y/y – given that even before the lockdowns, consumer sentiment had the largest ever fall (-28% w/w), and shopping centre foot traffic was ~flat two weeks ago, but -46% y/y last week. Q2 GDP is set to collapse to ~-10% q/q (i.e. -40% annualised, revised from -7% q/q), and to -10.4% y/y. This is even worse than any quarter during prior Depressions. Indeed, prior downturns – which are mainly demand &/or financial shocks – aren’t comparable. This time is unprecedented, as the supply side of the most of the economy has been (partly or fully) shut to combat a health crisis. Our new forecasts assume lockdowns ‘flatten the curve’ of COVID-19 cases, allowing some easing of restrictions, & hence normalisation of activity from late-Q2 onwards (which sees a sharp rebound in Q3 GDP onwards); but also relies upon material further fiscal (wage) stimulus in the near term.
Unemployment of ~10½% in months, with upside risk to most since Depression
US jobless claims had a record rise this week of 3.3mn, or 2.2% of employment (and were likely under reported given lags). In Australia, we now expect ~1mn job losses within a few months, a ~7% slide in employment. It is impossible to precisely measure how many are ‘stood down’ and hence can potentially return to work relatively quickly once the health crisis passes; vs how many are ‘permanently unemployed’. But we assume a 2% drop in participation (which is normal during prior recessions, especially given this time welfare rules have also been eased), meaning unemployment is likely to spike from 5.1% now to ~10½% in coming months, around prior recession peaks.
Far bigger fiscal stimulus (wage subsidy) needed now to provide some hope
But critically, without far larger fiscal stimulus in the very near-term – like several countries paying a large share of salaries for 3+ months if small businesses keep them employed – there is a clear risk unemployment surges even more to the highest since the last depression. That dire scenario would also see an L-shaped GDP recovery (vs our expected V), keeping unemployment elevated at 10%+ (vs our expected retracement). While operational difficulties could mute and/or delay the rollout of a wage subsidy program, it can be tailored from other major economies doing much larger packages (~5%-~15% of GDP). We think it is critical to underpin confidence right now. So even just the ‘announcement effect’ would give some hope of a ‘bridge to recovery’ to help minimise the temporary loss of jobs (a supply side shock where businesses temporarily ‘shutter’ and ‘stand’ down workers) instead becoming more permanent – given that >2.5mn or one-quarter of employees have no leave entitlements and can be stood down with pay. Notably, total Australian Government debt is now ~$1tn or ~48% of GDP, and these stimulus measures would increase it by $250bn+ to >70% of GDP; but the impact on bond yields will be likely significantly offset with RBA Governor Lowe already promising to do “whatever is necessary” with “no limit on what we can buy”.
Alas, now we are getting closer to the reality.