00:00 – 01:12
Todd: Hi, Dr Todd Cameron here, Acting Chair of the RACGP Business of General Practice Specific Interests Network.
We are bringing to you a three part series sponsored by the Commonwealth of Australia, now called Comm Bank. The first one in this series of Business resilience and continuity during COVID-19 is presented by Craig James, Chief Economist From Comm Bank and I’m really excited to hear his few on the macro overview of the Australian economy at this point in time.
And we recognise and acknowledge the traditional custodians of the land and sea on which we live and work and pay our respects to elder's past and present.
Without further ado, I'd like to introduce you to Craig James. Craig, take it away.
01:13 – 02:31
Craig: Thank you very much. Now you must be excuse me I'm a relative newbie at these sorts of things. So hopefully I don't press all the wrong buttons and hopefully you can see screen and the slides because that's the most important thing, not to myself, but to be able to see the information that I’m presenting.
I'm going to say right at the very start, these are unprecedented times, these are extraordinary times. Isn't that what I'm supposed to say? Well, certainly we're hearing a lot about, whenever you hear any coverage around COVID. An indeed, we’re not gilding the lily. These are unprecedented times, these are extraordinary times.
Now what I'm hoping to do today, is to be able to step you through the situation which is happening globally in terms of economies. What's happening here in Australia and the expectation of what's likely to happen to us going forward.
So there'll be some forecast certainly scattered through the presentation. I always believe in terms of economics that the most important thing is to be able to ask the so what question.
So we're going to present a fair bit of information today. At the end of the day, you should be asking as you go through the presentation. So, what, what does this mean for me? What does this mean for my patients, what does this mean for my customers and clients, and what does it mean for my friends and family?
With any economic and financial information, I think we should always bring it back to home base, bring it back to our own situation now and ask the question, so what is the importance of this?
02.32 – 02.59
Craig: Now, before I go too much further, I need to put up the disclaimer slide. One thing I've got to do is to be able to put up this screen. You're probably all familiar with this screen, you know, this is the disclaimer slide.
This is one of the slides that the answer is important for me. In the current circumstances, to be able to say I don't know your own personal circumstances. I don't know, your personal your business circumstances. So, this information is very much of a general nature, you knew that already, but certainly it's always important for me to be able to stress for what's going on.
03.00 – 05.27
Craig: Extraordinary times. I've already said that, you know, certainly have an eye and if we go back to sort of a few months ago. I mean, we were basically focused about US/China trade situations and Brexit.
And really, that was the dominating feature as we went through 2019 right really right up to, you know, sort of January, February this year. But now certainly COVID-19 has taken over in a big way. It's all about, you know, the COVID-19, the coronavirus.
The response, well this is a health emergency, not an economic emergency, but certainly we need to deal with the health circumstances first. That's what a lot of countries have been forced to do, they’ve been forced to lock down their economies. We’ll send that right the way across the globe. It's amazing situation. And if you go to Brazil, you go to Australia, you go to Malta, and you’re going to see the same situation occurring that we've had lockdowns in terms of economic activity. People locked in their homes, unable to go out, except for the essentials.
Clearly economies have responded to this in a big way. We've had interest rate cuts to almost zero and a lot of countries around the world, including Australia or 1% or a similar sort of level in terms of United States and New Zealand and a little bit lower than it in the UK.
But rates are being cut decisively, governments have thrown as much as they can in terms of dollars and support into the situation.
Clearly, we need to stabilize this health situation before we can move on the economic situation, improving that, but we are at that point now where we're basically saying the easing of lockdown.
Global recession, it seems almost a certainty, we are going to see recessions right the way across the globe. The expectation from ourselves as well as from the other luminaries like the International Monetary Fund, is what we're going to see a V shaped recovery remains to be seen.
It’s contingent basically on each of us doing the right thing, making sure that we maintain social distance, we maintain good health hygiene and hand hygiene.
Clearly, we'd love to have a vaccine at this point in time. But, you know, we've got businesses working on that across the globe.
05.28 – 07.02
Craig: The global situation, it is quite amazing, the sort of negative growth for us to the decline that we're expected to see in 2021. Our belief and we share that with the International Monetary Fund, is this year for the global economy, we're going to see a 3% fall.
If we look back through the global financial crisis, the decline in 2009 was 0.1% we're talking about a 3% decline in terms of the economy. So much more significant than the last crisis we went through, which was the global financial crisis.
Now, the expectation is that economy, the global economy will rebound. The International Monetary Fund is a little bit more optimistic than ourselves. We believe that there might be setbacks in terms of reopening some of the economies, but certainly, as I mentioned beforehand economies are throwing a lot of dollars at it. And look at the situation in Australia. What we've got to chart representatives, is the direct support that's being provided to the economy, the amount of real dollars that are being spent. You know, so on the economy, and Australia really stands out there with the orange bar in terms of the direct fiscal support. Loans and guarantees for Germany really stand out in terms of the support that they're providing there.
But I think what is going to be more effective is the actual dollars that are being out laid. And Australia, well, we haven't held back. We’ve certainly spended in a big way.
07.02 – 08.52
Craig: One thing that I think is important when we're talking in a global sense and bringing it back down to Australia as well, is watch out for the situation in terms of China. China at the moment is not overly happy with the Australian approach of calling for an inquiry to be able to find out how this crisis began. And where we go from here, we basically just want to ensure that mistakes are not made in the future.
But China has taken unrest at our core for an inquiry and indeed, there's a lot at risk. You know, sort of, we’ve upset China in a big way.
You can see in terms of Australia, we’re one of the most exposed countries in the world to the Australian situation. Now, at the moment, yes the focus has been on the barley and perhaps a restriction in terms of barley export. Barley only represents 0.4% of our exports to China. Beef is being touted as well, it only represents 1.8% of our exports.
Now what would be more significant is if we started to see some controls in terms of things like tourism. Student travel and certainly things like, Iron ore represents 53% of our exports to China. And then you’ve got natural gas at 11% and coal, in the order of 9%.
So as you can see there, they’re the commodities that we really want to focus on. If there was a degree of control put there, there could be a degree of pain happening in terms of the Australian economy. Hopefully, we get over this a little hiccup in our trade relationship, as China stimulates its economy in a big way. And we will benefit from any stimulation of the Chinese economy, any attempts by China to be able to get their economy back into a better shape.
08.52 – 10.48
Craig: Let's talk about the Australian situation, the lockdown that we've seen sitting in Australia. And indeed, it has been quite remarkable in terms of some of the figures that have been coming out.
The fall in business conditions, the fall in car sales, the fall in tourists arrivals. If we look at business confidence, it fell from a rating of minus 2 point to minus 65 points before improving recently to round about minus 45 points, but that's a dramatic change in a short space of time.
Consumers have clearly got a degree of concern when this crisis broke. Consumer confidence had the biggest monthly fall on record. And then in the latest reading that we've had for the month of May, we've had the biggest rise in consumer confidence. So it has been quite remarkable in terms of the volatility that we’re seeing. Not just in the share market which we were probably familiar with but in terms of our economy.
The volatility that we're seeing in terms of the retail spending as well, just an amazing eight and a half percent increase in terms of retail spending for the month of March. As we all went out there and stocked up on things like toilet paper and tissue paper and the like. So what we are likely to see, and the latest figures coming out for April is the degree of correction in terms of their retail spending.
We had a super normal growth in terms of spending in in the month of March, we probably saw some degree of correction you happening in the month of April. But the expectation, you know, sort of from here is that provided we can come out and lockdowns, we can restores some stability to the overall, keep flattening the curve, then we can start to see some improvement, or a more stable improvement, in terms of our economy.
10.49 – 12.06
Craig: Moving forward, everyone likes a good forecast, and there's plenty of forecasts that have been probably a forecast that have been branded around for the COVID situation. Our belief is that we’ll get the economy falling in the first half of 2020 by the order of 9%. The Reserve Bank’s view is that will probably see a 10% fall in terms of national output before we start to see a rebound.
Well one thing that we do share across the forecasts is whether it’s ourselves at the Commonwealth Bank or whether it's the reserve bankers, we do believe it will be a V shape recovery. We went into lockdown, we've controlled the spread of the virus, we’ve seen a flattening of the curve and now we're starting to come out of lockdowns and we’ll start to see some normalcy coming through.
Clearly a lot is dependent on how well we do this transition period. Certainly the expectation is that provided we maintain the good progress that we've had in terms of flattening the COVID curve, we’ll see a V shape recovery in terms of our economy. The expectation in terms of the job market is that unemployment rate to be around about 10% in June.
12.07 – 14.20
Craig: We think it's going to be a little bit lower than that. So I’ll explain why a little bit further down. A lot of you have been asking about scenarios. If we if we don't get the right approach coming through in terms of restarting our economy and if there are setbacks, what is the risk in terms of the economy.
These charts show you the downside risk for the economy and the upside risk, as well as the baseline feature. One factor which is common in both these charts is the unemployment rate. We’re even on the worst case and best case scenario which is still expected to 10% according to the Reserve Bank.
In terms of the loss into output, it’s expected to be 10% first the first half of the year. That according to the Reserve Bank is baked in the cake, but where we go from there is just how successful we are in terms of opening up our economy.
Certainly the federal treasury has had to go in terms of estimating how we're likely to gain once we move out of the lockdowns in our economy. It believes that $9.4 billion per month in terms of benefits to the Australian economy, if we are successful with the three stages of approach that has been mapped out by the Prime Minister, and by the government, more generally.
Most of the strength in terms of the economy coming through are the extra boost to economic activity. If I asked getting out of our homes and spending generally in terms of the retail sector that contributes $2.9 billion to output. Not far behind is clubs and pubs. Once they open up, it provides $2.4 billion in terms of the economy. The opening up the schools provides around about $2.2 billion, then we got local government and travel combined providing something in the order of $2 billion.
There is a lot riding on us getting this one right and if we fall to get it right, what federal treasury warn is that if the restrictions are reimposed it could cost us in the region of $4 billion a week. So certainly, it is important to be able to get this one right.
14.21 – 15.27
Craig: Let's have a look at the Australian economy over time. As you can see this chart go way back and we haven't stopped short, in terms of providing long term economic information. This goes back to 1900 in terms of economic growth here in Australia.
You can see what is expected in terms of this year and next year is unprecedented. When we've seen recessions in the past, we might have seen a fall of one or two percentage points and then we get back in into growth the next year.
Certainly it was different after the Second World War and different in terms of the Depression, they will weather the periods of time, which is probably very similar in terms of the extent of contraction in terms of one year, but the contraction was enabled for a number of years, not just one year. What we're talking about is a one year fall and then a step back in the next year.
As I say, there's a lot dependent in terms of us doing the right thing, that's the general expectation. That's the Reserve Banks view and that’s our view as well. There’s a bit of information in what's happened in terms of past recessions that you can work on.
15.27 – 17.02
Craig: Stimulus to the economy well it has been unprecedented, something in the order $340 billion dollars. What we’re talking about here is not just the federal stimulus, but it's also states and territories with something like 17% of GDP being thrown at this situation. We're not going to die wondering, we're making sure that you're providing enough support. And on an almost daily basis, we’re seeing states and territories coming up with even more packages, things like the infrastructure package which came out from the Victorian Government today to make sure that in this recovery phase, there's plenty of work that we can go on with.
The aim is to get people and keep people employed. That was the aim of job keeper package and the job seeker package, the aim is to keep businesses in business. And from what we know so far, slowly but surely the evidence is that we are going to work our way out of this, but we're going to have to tread, very, very carefully. There's other measures put in place, allowing people to get access to superannuation, and providing a degree of support for casual staff as well as a sole traders.
It is going to a cost to the economy, in terms of the budget deficit, we could see a rise to the order of $140 or $150 billion dollars, somewhere around about 8% of GDP. But given the fact that we started from balance we are in good shape and given the fact that our debt levels are very low, we are in good shape to be able to provide the dollars that are necessary and not leave ourselves settled with significant debts for the future.
17.03 – 19.29
Craig: Some more forecasts and this time it's a bit of a focus in terms of the job market. Really when we're thinking about the economic impact in terms of the world, the impact of COVID on the economy. What we have a very much in mind is what’s happened in terms of the job figure that have
come out. And what we saw in terms of those job figures, is that while employment fell by 600,000, Job keep, job seeker, people staying in homes, not having effectively worked one hour during the previous week, employment fell by something around about 600,000. But those 600,000 didn't join the dole queue courtesy of job keeper. They basically remained in employment and rather they are categorised as not in the labour force, so they've left the labour force.
The bottom line of all this, instead of seeing the jobless rate right up around about 10% very, very quickly, what we're seeing is a rise to just in the order of 6.2%. The hope is that the job keeper and job seeker will be able to be successful in keeping that unemployment rate down because we do know that the longer people are unemployed, the longer it takes to see an improvement in terms of the economy. The longer that people stay on unemployed, the longer they are likely to stay on that dole queue.
What we’ve seen in the past, is that the average is something like seven years to be able to go from a period of contraction and the economy, the rise in the jobless rate and we don't get back to those normal jobless figures in the order of seven years. So what is usually seen in terms of the job market is we go up through the escalator and down through the stairs. Hopefully you know so job keeper and job seeker are the game changer. Hopefully, you know, so they will prevent the unemployment rate to rising in the levels that we've seen in the past, in past recessions and depressions in the order of 10% in the region of the 1982 and the 1991- 92 recessions we saw unemployment rate rise to the order of 10%. Certainly in the Great Depression, we saw a rise to 20% and hopefully we can avoid getting anywhere near that this time around.
19.30 – 21.15
Craig: In terms of the housing market, I think people will be pleasantly surprised, what happens in terms of housing. A lot will depend on the unemployment rate and how long people stay unemployed for and how long they don't have access to a normal income.
And certainly we've got to watch the job market. We've also got to watch the population growth as well because we're not getting the inflow of migrants coming through. That's going to restrain growth in terms of the housing market as well.
Our worst case scenario at Commonwealth Bank is something like a 30% fall. But what we're talking about is a very small chance of that happening and our base case is that the house prices could fall around about up to 10%. And indeed in a more optimistic scenario, what we may see if only a very modest fall in terms of home prices before they start to rise again.
The early evidence is that people are back in terms of the housing market, that the auction clearance rates over the past weekend have been quite successful. And what we’ve seen in terms of Sydney home prices, if that’s any guide, during the month of May they’ve risen a smidgen rather than fallen. I don't think we should be too depressed in terms of the housing market, interest rates are super low and the fundamentals in terms of housing market are very good.
What we're going to have to watch is the impact in terms of the lack of migrants coming through. I'm going to continue to watch in terms of the job market. If we do have the unemployment rate rise much higher and stays higher for longer, that will be the biggest risk in terms of the housing market.
21:16 – 22.25
Craig: Let's turn to the Australian dollar interest rates and we're getting pretty close to a wrap up of this presentation. Our currency strategists believe that there are downside risk for the Australian dollar. Now hopefully those downside risk won't be realized to the extent that they currently being forecast. Our currency strategists are expecting the Australian dollar to bottom out at 57 US cents before climbing back to around about the mid 60 cent level where we are at the moment.
On the current indications that doesn't look as though it's going to happen, but it’s going to depend on how successful we are in terms of COVID, flattening the curve, moving out of the lockdown situation and how successful our economy is in terms of responding to the recoveries across the rest of the globe. Responding to the low Australian dollar by continuing to export. A lot of that is going to depend on China as well and making sure that they continue to buy goods.
In terms of interest rates, well it’s pretty clear interest rates aren't going to go anywhere for quite some time.
22.26 – 23.33
Craig: The share market, there’s certainly been an amazing performance in terms of the Australian share market through this situation with COVID. For an early part of the period, once we went through January and February, the share market was basically shaking its head and saying, “Look, I don't know what everyone's concerned about. Looks as though, it's just going to be a modest blip in terms of the economy.” Certainly through the share market was wrong and the correction was quite savage.
Right the way across the globe, including here in Australia, we saw the share markets fall in the order of 35 or 40% and in a very short space of time. In the order of 20 days, our share market fell 36 and a half percent.
Now clearly, there's a case of throwing the baby out with the bathwater, we probably fell too far. In the period from the lows that we've seen in the low point in mid-March, the23rd of March, we're seeing the Australian share market rebound by the order of almost 19%. Certainly what we have seen is amazing, you know, sort of sharp falls and the degree of correction, but from here the question is how successful. It gets down to that fundamental question that we've been constantly talking about how successful are we going to be and how quickly are we able to move out of the lockdown situation and get more normalcy happening in terms of our economy?
We know there's plenty of stimulus out there. We know that the government's going to make sure that we do recover very significantly but it’s contingent on us doing the right things.
Certainly one of the big impact in terms of investors has been the deferral of dividends that's been, you know, some significant factor. And I think we're just going see a lot of companies taking their time in terms of returning to a normal payout in terms of dividends. They want to make sure that the business is super strong before they start going down that route of paying out dividends at the normal sort of rate.
23.34 – 25.25
Craig: What's happened in the past in terms of sheer markets? This shows you that it's been quite remarkable, this time around, compared with other economies, other circumstances, other experiences, seen in past recessions, like the 1981 through to 1983 recession, the recession in the 1990s, and of course the 1987 share market crash, you can put it all in degree of perspective.
Part of the volatility, part of the uncertainty that we've got, you know, in terms of the share market, is fear of the unknown. Because we have never been through something or other like that. We should be valuing companies in this sort of the environment, slowly but surely, but the share market is responding to the situation and the degree of stability is starting to return.
25.26 – 26.42
Craig: We've reached the last slide, which is always encouraging for everyone I think when you're hearing from an economist.
We are seeing a massive contraction in the economy. Do you call it a recession? Usually we talk about recession in terms of two consecutive quarters of negative growth. We're seeing a significant contraction, particularly in the June quarter of this year here in Australia, but
we may bounce back quite significantly.
So we'll just have to wait and see whether we end up calling it at the end of the day, a recession, or whether we just call this a contraction.
Massive stimulus being applied, super low interest rates. In terms of debt, I think the Federal Reserve Chairman said it best. He said “We can worry about debt later on. We need to get economies recovering before we worry about the price that we're going to have to pay in terms of the debt load and paying that debt off in the future.”
Looking ahead, it’s all about the easing of the lockdown situation. As we look towards the end of the year, and some of the challenges, some of the new issues that we may need to be focusing on is the US/China trade situation which continues to be an evolving beast. And of course there is the small matter of the US election as well.
26.43 – 27.21
Craig: Thank you for your time today. Thank you for having me on board to be able to present the economic information and I might just leave it there. And thank you very much.
Todd: Thank you, Craig. That's fantastic, and I'm sure all of our viewers and listeners will be really grateful for your perspective, from a historical note and from the present state. And of course, the projections, they’re really helpful for all of us following this and we’re really grateful for your time and contributions. Have a great day and thanks again.
Craig: Not a problem at all. Thank you very much.