ECONOMIC IMPACT OF THE CORONAVIRUS PANDEMIC

PRESENTATION TO AN ECONOMIC SOCIETY WEBINAR 22ND JULY 2020

C O R I N N A E C O NO M I C A D V I S O R Y P T Y L T D Agenda

❑ The virus

❑ The world economy

❑ The Australian economy

❑ The problem with Victoria

❑ The Australian policy response

❑ Some longer-term considerations

Note: nothing in what follows constitutes investment advice, nor should it be construed as such!

2 CORINNA ECONOMIC ADVISORY The virus

For more details… Globally, the virus is still ‘out of control’

Cumulative confirmed cases – New confirmed cases – New deaths – global total global total global total

25,000,000 - Cumulative 500,000 - Confirmed new 10,000 cases (7-day Confirmed new cases deaths (7-day 10,000,000 moving average, 100,000 log scale) moving average, log scale)

1,000 1,000,000 Deaths appear to have 10,000 stabilized even though new case numbers continue to rise – this may be due to (a) more cases among young people 100,000 1,000 100 (for whom the virus is less fatal); (b) health professionals are learning how to treat seriously ill people more 10,000 100 effectively; and/or (c) the virus itself may be becoming 10 less deadly (though no less infectious) 1,000 10

1 100 1

10 0 0 31- 31- 29- 31- 30- 31- 30- 31- 31- 31- 29- 31- 30- 31- 30- 31- 31- 31- 29- 31- 30- 31- 30- 31- Dec Jan Feb Mar Apr May Jun Jul Dec Jan Feb Mar Apr May Jun Jul Dec Jan Feb Mar Apr May Jun Jul

Note: Data up to 21st July. Source: University of Oxford, Our World in Data. 4 CORINNA ECONOMIC ADVISORY 8 countries with large populations have yet to ‘flatten their curves’ – although another 5 appear now to have done so

Daily new cases

10,000 7-day moving 100,000 7-day moving 7-day moving South Africa Brazil 10,000 average, log Indonesia average, log average, log scale Egypt 1,000 scale 10,000 scale India 1,000 1,000 United Turkey 100 Philippines States 100 100 10 10 10 1 1 1

0 0 0 31- 31- 29- 31- 30- 31- 30- 31- 31- 31- 29- 31- 30- 31- 30- 31- 31- 31- 29- 31- 30- 31- 30- 31- Dec Jan Feb Mar Apr May Jun Jul Dec Jan Feb Mar Apr May Jun Jul Dec Jan Feb Mar Apr May Jun Jul

7-day moving 10,000 10,000 Pakistan 7-day moving 500,000 - 7-day moving average, log average, log Mexico scale 100,000 average, log scale scale 1,000 Iran 1,000 10,000 Rest of Colombia the world 100 100 1,000

Bangladesh 100 10 10 13 countries shown 10 on this slide 1 1 1

0 0 0 31- 31- 29- 31- 30- 31- 30- 31- 31- 31- 29- 31- 30- 31- 30- 31- 31- 31- 29- 31- 30- 31- 30- 31- Dec Jan Feb Mar Apr May Jun Jul Dec Jan Feb Mar Apr May Jun Jul Dec Jan Feb Mar Apr May Jun Jul

Note: Data up to 21st July. Source: University of Oxford, Our World in Data; Corinna. 5 CORINNA ECONOMIC ADVISORY The number of new cases in Australia has risen rapidly since the end of June, when restrictions began to be eased in most states

Cases, recoveries and hospitalizations New cases

Number Number (log scale) Confirmed cases (cumulative) 500 % 35 10000 450 Recoveries 30 Active cases (cumulative) 400

350 25 1000 300 20 % change in 250 New cases (left scale) number of confirmed 15 200 cases (right scale) 100 150 Hospitalizations 10

100 5 50

10 0 0

29-May 14-Feb 21-Feb 28-Feb 06-Mar 13-Mar 20-Mar 27-Mar 03-Apr 10-Apr 17-Apr 24-Apr 01-May 08-May 15-May 22-May 05-Jun 12-Jun 19-Jun 26-Jun 03-Jul 10-Jul 17-Jul 24-Jul 31-Jul

14-Feb 26-Jun 21-Feb 28-Feb 06-Mar 13-Mar 20-Mar 27-Mar 03-Apr 10-Apr 17-Apr 24-Apr 01-May 08-May 15-May 22-May 29-May 05-Jun 12-Jun 19-Jun 03-Jul 10-Jul 17-Jul 24-Jul 31-Jul

Note: Data up to 20th July. Source: covid19data.com.au 6 CORINNA ECONOMIC ADVISORY 93% of the new cases in Australia since the middle of June have been in Victoria (and 6% in New South Wales)

Cumulative cases, by State New cases Cases per 100,000 population

100 Cases per 100,000 10,000 500 - New cases Cumulative cases population log scale) Vic (7-day Victoria moving 90 NSW average; log scale) 100 80 Qld 1,000 Rest of WA Australia 70

SA 60 Tas National 10 average ACT 100 50

40 NT

30 1 10 20

10

1 0.1 0 31-Jan 29-Feb 31-Mar 30-Apr 31-May 30-Jun 31-Jul 31-Jan 29-Feb 31-Mar 30-Apr 31-May 30-Jun 31-Jul NSW Vic Qld SA WA Tas NT ACT

Note: Data up to 20h July. Source: covid19data.com.au 7 CORINNA ECONOMIC ADVISORY Despite the recent upsurge in cases, Australia’s infection and fatality rates remain low by international standards …

Apparent infection rate Apparent death rate Deaths per mn population

10,000 Cases per mn population 20 Deaths per 100 cases 700 Deaths per mn population

9,000 18 600 8,000 16

7,000 14 500

6,000 12 400

5,000 10

300 4,000 8

3,000 6 200

2,000 4 100 1,000 2

0 0

Russia Indonesia Brazil Singapore Sweden Spain Ireland UK SouthAfrica Italy Switzerland Netherlands Canada France Turkey Germany Denmark Norway India Philippines Australia Malaysia Korea NZ HongKong Japan China Thailand Taiwan Vietnam

USA 0

Malaysia HongKong France UK Italy Netherlands Spain Canada Sweden Ireland China Switzerland Indonesia Japan Denmark Germany USA Brazil Norway India Philippines Turkey Korea NZ Thailand SouthAfrica Taiwan Russia Australia Singapore Vietnam

Australia UK Spain Italy Sweden France USA Netherlands Ireland Brazil Canada Switzerland Germany Denmark Russia Turkey SouthAfrica Norway India Indonesia Philippines Japan Korea NZ Singapore Malaysia China HongKong Thailand Taiwan Vietnam

Note: Data up 17th July (except for Spain, 16th July). Source: University of Oxford, Our World in Data; Corinna. 8 CORINNA ECONOMIC ADVISORY … despite Australia’s restrictions being, on average, less stringent than in most other ‘advanced’ economies, or other economies in our region

Highest level of restrictions Number of days restrictions Number of days restrictions imposed at highest level above 70 on Oxford index

100 80 140

90 70 120 80 60 70 100

50 60 80 50 40 60 40 30

30 40 20 20 10 20 10

0 0 0

Switzerland Korea Sweden China France UK Germany Ireland Netherlands Philippines Brazil SouthAfrica Spain NZ HongKong Japan Singapore Denmark India Norway Taiwan Italy Malaysia Vietnam USA Thailand Indonesia Australia Russia Turkey Canada

Philippines UK Brazil Singapore NZ Sweden India NZ Vietnam Italy France Ireland SouthAfrica Russia Singapore Spain Korea Thailand China Brazil Indonesia Netherlands Turkey Switzerland Australia Norway Malaysia USA Canada Germany Denmark HongKong Japan Sweden Taiwan China Philippines India SouthAfrica Russia Canada Ireland USA France UK Spain Turkey Malaysia Thailand Australia Italy Indonesia Netherlands Germany Switzerland Vietnam Norway Korea Denmark HongKong Japan Taiwan

The Oxford COVID-19 Government Response Tracker collects publicly available information on 11 indicators of government response including school and workplace closures, public events cancellations, restrictions on public gatherings, stay at home requirements, public transport closures, domestic and international travel th th 9 restrictions, public information campaigns, testing and contact tracing. Source: Blavatnik School of Government, Oxford University. Data up to 6 -15 July. CORINNA ECONOMIC ADVISORY The world

For more details… The world economy experienced its sharpest year-on-year contraction for at least 40 years in Q1 this year – with worse to come in Q2

World and OECD area real GDP growth

8 % change from year earlier

6

World 4

2

0

-2

-4 OECD area

-6 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20

Note: Estimates of global GDP growth compiled by Corinna using data for 95 countries accounting for 90% of 2018 world GDP as measured by the IMF; excludes constituents of the former USSR before 1993, the former Czechoslovakia before 1995, and the former Yugoslavia before 1998. Sources: national statistical agencies and central banks; Eurostat; OECD; IMF. 11 CORINNA ECONOMIC ADVISORY All of the major international economic forecasting institutions expect 2020 to be the worst year for global growth since the 1930s

Major global institutions’ growth forecasts for 2020 and 2021 compared

Actual IMF World Bank OECD* 2019 2020 2021 2020 2021 2020 2021

US 2.3 -8.0 4.5 -6.1 4.0 -7.3 4.1 China 6.1 1.0 8.2 1.0 6.9 -2.6 6.8 Euro area 1.2 -8.0 4.5 -9.1 4.5 -9.1 6.5 India 4.2 -4.5 6.0 -3.2 3.1 -3.7 7.9 Japan 0.7 -5.8 2.4 -6.1 2.5 -6.0 2.1 UK 1.4 -10.2 6.3 na na -11.5 9.0 Australia 1.8 -4.5 4.0 na na -5.0 4.1 New Zealand 2.2 -7.2† 5.9† na na -8.9 6.6 World 2.9 -4.9 5.4 -5.2 4.2 -6.0 5.2 World trade 0.9 -11.9 8.0 -13.4 5.3 -9.5 6.0

* OECD forecasts are their ‘single hit’ scenario to be consistent with the assumptions of the other institutions. † The IMF did not publish revised forecasts for New Zealand in its latest WEO publication. Source : International Monetary Fund (IMF), World Economic Outlook, 24th June 2020; The World Bank, Global Economic Prospects, 8th June 2020; Organization for Economic Co-operation & Development (OECD), Economic Outlook, Volume 2020 Issue 1, 10th June 2020. 12 CORINNA ECONOMIC ADVISORY The OECD forecasts a 6% decline in world GDP this year, followed by a 5.2% rebound in 2021 – or -7.2% followed by +2.8% if there’s a ‘second wave’

Annual growth in global real GDP, 1961-2021 Quarterly growth and forecasts, 2017-2021

8 % change from previous year 40 % change from year-earlier quarter

6 30

20 4 'Double hit'

10 2 Actual

0 0

-2 -10 Actual -4 'Single hit' -20 'Double hit' -6 -30 'Single hit' -8 -40

-10 -50 1971 1976 1981 1986 1991 1996 2001 2006 2011 2016 2021 2017 2018 2019 2020 2021

Note: The ‘double hit’ scenario assumes a ‘second wave’ of Covid-19 infections and deaths “in all economies towards the end of this year”, while the ‘single hit’ scenario assumes this ‘second wave is avoided’. The OECD regards each scenario as “equally likely”. Source: OECD, Economic Outlook, No. 107, Volume 2020 13 Issue 1, 10th June 2020. CORINNA ECONOMIC ADVISORY The World Bank forecasts a 5.2% decline in world GDP this year, with a 4.2% increase in 2021- the 4th worst global downturn in 150 years

Growth in global real GDP, 1871-2001 Cumulative decline in real per capita GDP during global recessions

10 % 0

8 -2

6 -4 4 -6 2 -8 0 -10 -2 -12 -4 -14 -6 (f) -16 -8

-10 -18

% change -12 -20 1871 1881 1891 1901 1911 1921 1931 1941 1951 1961 1971 1981 1991 2001 2011 2021 1876 1885 1893 1908 1914 1917-1930- 1938 1945- 1975 1982 1991 2009 2020 21 32 46

Source: The World Bank, Global Economic Prospects, 8th June 2020. 14 CORINNA ECONOMIC ADVISORY Governments around the world are doing more by way of fiscal stimulus than they did during the global financial crisis

United States Euro area Canada Australia 0 120 0 85 2 45 4 % of GDP % of GDP 40 -2 0 2 110 -1 80 40 30 -4 -2 -2 0 100 75 -6 35 90 -3 -4 -2 20 -8 70 80 -4 -6 30 -4 -10 65 10 70 -5 -8 -6 -12 25 60 -6 -10 -8 -14 60 0 55 20 -16 50 -7 -12 -10 % of GDP % of GDP % of GDP % of GDP -18 % of GDP % of GDP 40 -8 50 -14 15 -12 -10 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 Japan United Kingdom China New Zealand

0 180 0 90 2 % of GDP % of GDP 75 4 % of GDP % of GDP 50 170 70 2 -2 0 -2 80 0 40 160 65 -2 -2 -4 -4 70 60 150 -4 30 -4 55 -6 140 -6 60 -6 -6 50 130 -8 20 -8 -8 50 45 -8 -10 120 40 -12 10 -10 -10 40 110 -10 35 -14 -12 % of GDP % of GDP 100 -12 % of GDP % of GDP 30 -12 30 -16 0 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21

General government overall fiscal balance (left scale) General government net debt (right scale)

Note: UK data does not include the measures announced by the Chancellor on 8th July; China debt is gross debt, not net; Australian data are for the federal government only and are for fiscal years ended 30th June; NZ data are for fiscal years ended 31st March. Sources: International Monetary Fund, Fiscal Monitor, April 2020, and World Economic Outlook, June 2020; Australian Parliamentary Budget Office, Medium-term fiscal projections: impact of Covid-19 pandemic and response, June 2020; New 15 Zealand Treasury, Budget Economic & Fiscal Update, May 2020. CORINNA ECONOMIC ADVISORY Major central banks have cut interest rates to record lows, and done more ‘quantitative easing’ than during the global financial crisis

Major central bank policy interest rates Major central bank balance sheets

7.0 % pa 60 120 % of GDP % of GDP

6.0 Bank of Japan Bank of 50 (right scale) 100 England 5.0

40 80 4.0 European Central Bank of US Federal Bank 3.0 30 England 60 Reserve

2.0 20 40 Bank of Canada Bank of US Federal 1.0 Japan Reserve

10 20 0.0 Bank of Canada

European Central Bank -1.0 0 0 07 08 09 10 11 12 13 14 15 16 17 18 19 20 07 08 09 10 11 12 13 14 15 16 17 18 19 20

Sources: US Federal Reserve; European Central Bank; Bank of Japan; Bank of England; Bank of Canada. 16 CORINNA ECONOMIC ADVISORY Bank Indonesia is pursuing a mixture of quantitative easing and ‘modern monetary theory’ (MMT)

Indonesia budget deficit BI monetary policy rates ❑ Last week the Indonesian Government and Bank Indonesia agreed on a ‘burden sharing’ 0 14 % pa scheme under which BI will directly purchase -1 12 BI rate from the Government almost Rp400 trn of bonds 7-day reverse -2 10 repo rate (SBNs) – equivalent to about ¼ of this year’s -3 8 deficit financing requirement – at its benchmark reverse repo rate, and return the interest -4 6 Outcomes received to the Government -5 4 Revised forecast for 2020 − up to this week BI has purchased Rp36.7 trn of BI 1-day deposit rate -6 Original budget forecast for 2020 2 SBNs (although this isn’t clear from B I’s weekly -7 % of GDP 0 balance sheet) 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 − prior to this BI had also purchased at least Rp166trn of SBNs in the secondary market Bank reserve requirement ratio BI claims on central government ❑ BI will also subsidise the interest on another 250 Rp trn 9 % pa Rp177trn of bonds issued to fund loans to micro, 200 8 small and medium-sized businesses 150 7 ❑ This follows BI’s decision in mid-April to cut 100 6 banks’ reserve requirement ratio by 200bp, 50 5 coupled with a requirement that banks use the 0 4 funds thus ‘freed up’ to purchase SBNs -50 3 -100 2 ❑ BI calls all this ‘synergic monetary expansion’ -150 1 ❑ BI is also doing conventional monetary policy: -200 0 at its monetary policy meeting this Thursday, it 16 17 18 19 20 08 09 10 11 12 13 14 15 16 17 18 19 20 cut its policy indicator rates by 25bp

Sources: Indonesia Ministry of Finance (Kementarian Keuangan); Bank Indonesia. ` 17 CORINNA ECONOMIC ADVISORY ‘Quantitative easing’ has prompted a more rapid acceleration in money supply growth than it did during the global financial crisis …

M2 money supply growth 30 % change from year earlier 14 % change from year earlier US 25 12 10 Euro area 20 Fastest yoy growth in M2 on record back to January 1960, cf. previous record of 13.8% over the 12 months to February 1976 8 15 6 10 4 5 2 0 0 07 08 09 10 11 12 13 14 15 16 17 18 19 20 07 08 09 10 11 12 13 14 15 16 17 18 19 20

8 % change from year earlier 10 % change from year earlier Japan UK 7 9 Fastest since January1991 8 6 7 5 6 4 5 4 3 3 2 2 1 1 0 0 07 08 09 10 11 12 13 14 15 16 17 18 19 20 07 08 09 10 11 12 13 14 15 16 17 18 19 20

Note: Japan is M2+CDs; UK is M4. Sources: US Federal Reserve; European Central Bank; Bank of Japan; Bank of England. 18 CORINNA ECONOMIC ADVISORY …but so far at least, inflation has been falling rather than rising, even discounting the impact of lower oil prices

‘Headline’ and ‘core’ inflation - US ‘Headline’ and ‘core’ inflation – Euro area 6 % change from year earlier 5 % change from year earlier 5 4 4

3 ‘Core’ 3 Headline 2 2 1 Core 0 1 -1 'Headline' -2 0

-3 -1 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 ‘Headline’ and ‘core’ inflation - Japan ‘Headline’ and ‘core’ inflation – UK 5 % change from year earlier 6 % change from year earlier 4 5 3 'Headline' ‘Headline’ 4 2 1 3 0 2 'Core' ‘Core’ -1 1

-2 0 -3 -1 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20

Note: ‘Core’ inflation is the CPI excluding food & energy in the US; excluding food, energy, alcohol & tobacco in the euro area; and excluding energy & seasonal foods in the UK. The ‘core’ inflation measure for Japan is the weighted median CPI calculated by the Bank of Japan. Sources: US Bureau of Labor Statistics; Eurostat; 19 Statistics Bureau of Japan; Bank of Japan; UK Office for National Statistics. CORINNA ECONOMIC ADVISORY Central banks now hold significant proportions of total government debt in a growing number of countries

Central bank holdings of central government bonds

50 % of total bonds outstanding

45

40 Mar 2017 Apr 2020

35

30

25

20

15

10

5

0

Germany Italy Japan Netherlands UK Finland Sweden Spain Austria Portugal France Belgium Canada NZ IUS Australia

Sources: Surprisingly, the RBA does not disclose its holdings of Australian Government bonds in its weekly balance sheet statement (see RBA Statistical Table A1. Hence the figure shown here for Australia at March 2017 was derived from ABS Finance and Wealth, and that for April 2020 by adding to RBA holdings as per the December 2019 issue of Finance and Wealth, disclosed RBA purchases of Australian Government bonds up to end-April, divided by the amount of Australian Government securities outstanding disclosed in the Government’s Monthly Financial Statement. The figures for RBNZ holdings of NZ government securities are published in Table r1 on the RBNZ’s website while figures for total NZ government securities outstanding are in Table D30. All others are from OECD, Economic Outlook No. 107 (June 2020) and 20 No. 104 (June 2017). CORINNA ECONOMIC ADVISORY Purchasing managers’ indices (PMIs) point to a rebound in manufacturing and services in major economies since May

US Euro area China Brazil 70 70 60 65 % % % % 55 60 60 60 50 55 50 50 45 50 40 40 45 40 35 30 40 30 30 20 35 25 20 30 10 20 15 16 17 18 19 20 15 16 17 18 19 20 15 16 17 18 19 20 15 16 17 18 19 20 Japan UK ASEAN Russia 60 70 % 70 % 60 % % 55 55 60 60 50 50 50 50 45 45 40 40 40 40 35 30 30 35 30 20 30 20 25 20 10 25 10 15 16 17 18 19 20 15 16 17 18 19 20 15 16 17 18 19 20 15 16 17 18 19 20

Manufacturing Services

Note: Purchasing Managers’ Indexes (PMIs) are derived from surveys of senior executives, who are asked to report whether various dimensions of business activity recorded an increase, decrease or no change compared with the previous month. A reading of 50 indicates an overall increase cf. the previous month, and a 21 reading of less than 50 indicates a decrease. Latest data are for June. See also PMIs for other Asia-Pacific economies on slide 35. Sources: US Institute of Supply Management; INH Markit; Caixin; Refinitiv Datastream. CORINNA ECONOMIC ADVISORY Global flight numbers are steadily improving (though still ~36% below pre-pandemic levels), but in the US traffic appears to have stalled

Daily commercial flights worldwide Daily US TSA security checks

3,000 120 '000s '000s

2019 100 2,500

80 2,000

7-day centred moving average 60 1,500

40 1,000

2020 20 500

0 0 31 Dec 31 Jan 29 Feb 31 Mar 30 Apr 31 May 30 Jun 31 Jul 29 Feb 31 Mar 30 Apr 31 May 30 Jun 31 Jul

Note: Commercial flights include commercial passenger flights, cargo flights, charter flights, and some business jet flights. Data up to 17th July. Sources: Flightradar24.com; US Transport Safety Administration (at last, something useful produced by aviation ‘security’!!!) 22 CORINNA ECONOMIC ADVISORY Mobility data suggest that much of Asia is continuing to return toward more normal levels of activity, but people in the US are becoming more cautious

Time spent driving Time spent in work places 30 7-day moving average 160 7-day moving average (January 13 = 100) 20 (deviation from 14 February) Taiwan 140 10 Japan Taiwan 120 0 Korea NZ -10 Japan 100 Australia -20 Australia 80 Singapore -30 Korea -40 60 Singapore -50 40 -60 NZ 20 -70 -80 0 1031 Jan7-day moving29 Feb average 31 Mar 30 Apr 31 May 30 Jun 31 Jul 25031 Dec7-day31 moving Jan average29 Feb (January31 Mar13 = 100)30 Apr 31 May 30 Jun 31 Jul (deviation from 14 February) Sweden 0 225 Germany -10 200 Canada Sweden 175 Germany -20 Italy 150 -30 US 125 US -40 UK 100 UK -50 75 -60 50 Canada Italy -70 25 -80 0 31 Jan 29 Feb 31 Mar 30 Apr 31 May 30 Jun 31 Jul 31 Dec 31 Jan 29 Feb 31 Mar 30 Apr 31 May 30 Jun 31 Jul

Sources: Apple Mobility Trends Reports (data up to 14th July); Google Covid-19 Community Mobility Reports (data up to 12th July). 23 CORINNA ECONOMIC ADVISORY China’s economy rebounded strongly in Q2 from what had been the worst downturn in almost 60 years in Q1

Real GDP growth, from year earlier, 1961-2020 Quarterly real GDP growth, 2010-2020

30 15 % change from previous quarter % change from (not annualized) previous year Death of Deng +11.5% Mao Xiaoping Tiananmen reforms Square 20 Zedong 10 begin massacre

10 5

0 0 Global Covid-19 financial pandemic crisis -10 -5 ‘Great Proletarian Cultural Revolution’ -10 -20 begins ‘Great Leap Forward’ -30 -15 60 65 70 75 80 85 90 95 00 05 10 15 20 10 11 12 13 14 15 16 17 18 19 20

Note: In the left-hand chart, GDP growth rates are annual averages up to the December quarter of 1991, and then quarter-on-corresponding-quarter-of- 24 previous-year thereafter. Sources: China National Bureau of Statistics. CORINNA ECONOMIC ADVISORY The production side of the Chinese economy rebounded strongly in the June quarter

Industrial production Freight traffic volumes Merchandise trade 6 100 25 % change from year earlier '000 ton kms % change from year earlier 20 5 75 15 10 4 50 Imports 5 3 0 25 -5 2 -10 0 1 -15 Exports -20 0 -25 10 11 12 13 14 15 16 17 18 19 20 10 11 12 13 14 15 16 17 18 19 20 10 11 12 13 14 15 16 17 18 19 20 Motor vehicle production Primary electricity production Merchandise trade balance 5 700 Mns 80 TWh US$bn (12-mth moving total) 600 4 70 500 60 3 400 50 2 300 40 200 1 30 100

0 20 0 10 11 12 13 14 15 16 17 18 19 20 10 11 12 13 14 15 16 17 18 19 20 10 11 12 13 14 15 16 17 18 19 20

Sources: China National Bureau of Statistics; China Association of Automobile Manufacturers; China General Administration of Customs. 25 CORINNA ECONOMIC ADVISORY However the ‘demand’ side of the Chinese economy – both household and business – is recovering rather more gradually

Consumer sentiment Motor vehicle sales Real estate investment 50 Cumulative % change from year earlier 130 % 3.5 Mns 40 125 3.0 30 120 2.5 Residential 20 115 2.0 10 110 1.5 0 1.0 105 -10 100 0.5 -20 Commercial 95 0.0 -30 10 11 12 13 14 15 16 17 18 19 20 10 11 12 13 14 15 16 17 18 19 20 10 11 12 13 14 15 16 17 18 19 20 Retail sales volume Passenger traffic volumes Residential real estate prices

20 25 % change from year earlier Real % change from year earlier 400 Bn person-kms 15 Soufun / CIA index 350 20 10 5 300 15 NBS index 0 250 10 -5 200 -10 5 150 -15 0 -20 100 -5 -25 50 -30 0 -10 10 11 12 13 14 15 16 17 18 19 20 10 11 12 13 14 15 16 17 18 19 20 10 11 12 13 14 15 16 17 18 19 20

Sources: China National Bureau of Statistics; China Association of Automobile Manufacturers; China Index Academy. 26 CORINNA ECONOMIC ADVISORY The PBoC has been more cautious about stimulus than it was in 2008-09 or 2015-16, perhaps because it’s still concerned about financial stability

PBoC policy interest rates Market interest rates Depository corporation assets

8.0 % pa 8.0 % pa 350 Trn yuan Trn yuan 35 7.0 7.0 300 30 NBFIs 6.0 6.0 Rediscount 10-year 3-mth 250 (right scale) 25 5.0 rate 7-day reverse 5.0 bond yield SHIBOR repo rate 200 20 4.0 4.0 150 Households 15 3.0 3.0 & corporates 100 10 2.0 2.0 (left scale) 50 Governments 5 1.0 Repo rate 1.0 Repo rate (right scale) 0.0 0.0 0 0 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 Bank reserve requirement ratios Credit growth Depository corporation liabilities

25 % 40 % change from year earlier 350 Trn yuan Trn yuan 35

35 300 30 20 Bonds Large banks 30 Domestic 250 (right scale) 25 credit 15 25 200 20 20 10 150 15 15 Deposits Small banks 10 100 (left scale) 10 5 Bank 5 lending 50 5 0 0 0 0 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20

Sources: Refintiv Datastream; People’s Bank of China. 27 CORINNA ECONOMIC ADVISORY The yuan has risen by 2% against the US$ since the end of May, mainly reflecting US$ weakness – but the FX regime depends on capital controls

Chinese yuan vs US$ and trade-weighted index FX reserves and domestic credit

6.20 Yuan per US$ 102 9 35 31 Dec 2014 = 100 US$trn US$trn

6.30 Yuan vs US$ 8 (left scale) 30 100 Domestic credit Thousands 6.40 7 (right scale)

6.50 25 98 6 This ‘gap’ is compatible with a ‘managed’ FX regime 6.60 CFETS only because of very tight RMB index 5 controls on capital outflows 20 (right scale) 6.70 96

4 15 6.80

94 3 6.90 FX reserves 10 2 (left scale) 7.00 92 5 7.10 1

7.20 90 0 0 Dec-15 Dec-16 Dec-17 Dec-18 Dec-19 Dec-20 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20

Sources: Refinitiv Datastream; China Foreign Exchange Trading System; People’s Bank of China. 28 CORINNA ECONOMIC ADVISORY Japan entered its fourth recession since 2000 after hiking its GST rate last October, and the pandemic has worsened it

Real GDP Consumer confidence Unemployment 6.0 3 % change from previous quarter 55 50 + net balance % of labour force April & May would 2 5.5 have been 4% 50 if participation rate 1 5.0 had remained at 45 March level 0 4.5 -1 40 4.0 -2 35 3.5 -3 30 3.0 -4 June consumer 25 confidence still 2.5 -5 below GFC trough -6 20 2.0 08 09 10 11 12 13 14 15 16 17 18 19 20 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 Business conditions – large firms Passenger vehicle sales Merchandise exports

40 Net balance 5.5 Mns (annual rate) 60 % change from year earlier Non-manufacturing 30 5.0 20 40 10 4.5 20 0 -10 4.0 0 -20 3.5 -30 -20 -40 Small improvement 3.0 -50 In Q2 Tankan survey Manufacturing 2.5 -40 -60 2.0 -70 -60 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20

Sources: Japan Cabinet Office; Bank of Japan; Japan Automobile Dealers’ Association; Ministry of Health, Labour & Welfare. The first estimate of Q2 GDP will be 29 released on 17th August. CORINNA ECONOMIC ADVISORY Most other Asian economies experienced a slowdown during the first quarter of 2020, with worse to come in the second quarter

Real GDP growth – Asia-Pacific economies 12 % change from year earlier 15 % change from year earlier 9 % change from year earlier 10 8 Taiwan 10 7 8 6 5 5 6 4 Indonesia Korea 4 0 3 2 2 India -5 1 Philippines Vietnam 0 0 -10 -1 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20

20 % change from year earlier 20 % change from year earlier 7 % change from year earlier 6 15 15 Singapore 5 New Zealand 10 10 4 Malaysia 3 5 5 2 0 0 1 Australia 0 -5 Hong Kong -5 Thailand -1 -10 Singapore’s economy contracted by 13% -10 -2 in Q2 according to preliminary estimates -15 -15 -3 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20

Sources: Bank of Korea; Taiwan Directorate-General of Budget, Accounting & Statistics; Hong Kong Census & Statistics Department; Singapore Ministry of Trade and Industry; Department of Statistics Malaysia; Office of the National Economic & Social Development Council of Thailand; Statistics Indonesia; Philippine Statistics Authority; General Statistics Office of Viet Nam; India Ministry of Statistics & Programme Implementation; Australian Bureau of Statistics; Statistics New Zealand; . 30 CORINNA ECONOMIC ADVISORY Purchasing managers’ indices suggest activity in Asia-Pacific economies started to recover in May and improved further in June

Korea Hong Kong Indonesia Thailand Vietnam Australia 60 % 65 % 65 % 65 65 65 % % % 55 60 60 60 60 60 50 55 55 55 55 55 50 50 45 50 50 50 45 45 45 40 45 45 40 40 40 40 40 35 35 35 35 35 35 30 30 30 30 30 30 25 25 25 25 25 25 15 16 17 18 19 20 15 16 17 18 19 20 15 16 17 18 19 20 15 16 17 18 19 20 15 16 17 18 19 20 15 16 17 18 19 20 Taiwan Singapore Philippines Malaysia India New Zealand 60 65 65 % 70 65 % % % 65 % % 60 60 55 60 60 60 55 55 50 55 55 50 50 50 50 50 45 40 45 45 45 45 40 30 40 40 40 40 35 35 20 35 35 35 30 10 30 30 30 30 25 25 25 25 25 0 20 15 16 17 18 19 20 15 16 17 18 19 20 15 16 17 18 19 20 15 16 17 18 19 20 15 16 17 18 19 20 15 16 17 18 19 20

Manufacturing Services Whole economy Note: Purchasing Managers’ Indexes (PMIs) are derived from surveys of senior executives, who are asked to report whether various dimensions of business activity recorded an increase, decrease or no change compared with the previous month. A reading of 50 indicates an overall increase cf. the previous month, and a reading of less than 50 indicates a decrease. Latest data are for June, except for New Zealand, which are May. 31 Sources: IHS Markit; Singapore Institute of Purchasing & Materials Management; Australian Industry Group; Business NZ; Refinitiv Datastream. CORINNA ECONOMIC ADVISORY The world’s worst recession is probably in Macau

Macau – real GDP Visitor arrivals

60 % change from year earlier

40

Down 99.6% since January 20

0 Gambling revenue

-20

-40 Down 92.0% since January

-60 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20

Source: Macau Statistics and Census Service. 32 CORINNA ECONOMIC ADVISORY New Zealand has paid a high economic price for its success in (nearly) eradicating the Covid-19 virus

Real GDP Consumer confidence NZ government budget balance 2.0 % change from previous quarter 125 Ratio of optimists to pessimists 6 % of GDP 1.5 120 4 Forecasts 1.0 115 2 110 0 0.5 105 -2 0.0 100 -4 -0.5 95 -6 -1.0 Down 1.6% in Q1 (largest 90 -8 -1.5 decline since Q1 1991) 85 -10 -2.0 80 -12 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

Unemployment rate Business confidence NZ ‘core Crown debt’ 80 8.0 % of the labour force Net balance of optimists to pessimists (%) 60 % of GDP Forecasts 7.5 RBNZ expects 60 7.0 unemployment 40 50 6.5 to reach 7.4% in 20 6.0 Q1 2021 40 5.5 0 30 5.0 -20 4.5 -40 20 4.0 Business confidence has never -60 10 3.5 really recovered from the -80 unexpected 2017 election outcome 3.0 0 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

Note: New Zealand uses GDP(P) as its preferred measure of GDP. Unemployment rates are quarterly. The measure of the NZ Government budget balance is ‘OBEGAL’, operating balance excluding gains and losses (an accrual accounting measure). Net ‘core Crown debt’ excludes assets of the NZ Super Fund, student loans and other advances, and financial assets held for public policy purposes. Fiscal data (the two right-hand charts) are for fiscal years ended 30th June. 33 Sources: Statistics NZ; Westpac-McDermott Miller; ANZ Bank; NZ Treasury Budget Economic and Fiscal Update 2020. Q2 GDP estimates will be released on 17th September. CORINNA ECONOMIC ADVISORY The US economy has experienced its sharpest contraction since the 1930s, but there are increasing signs that a rebound began in May

Real GDP Consumer sentiment Retail sales 20 % change from previous qtr (annual rate) 120 20 Mar qtr 1966 = 100 Sentiment fell Change from previous mth (%) Retail sales back to pre- 15 110 back in early July 15 pandemic levels after increases of 17.1% in May 10 100 10 and 6.4% in June 90 5 5 80 0 0 70 -5 -5 60 April -14.7%, largest monthly -10 Real GDP shrank by 1.3% (an annual rate of 5.0%) -10 decline on record in the Mar qtr – the sixth largest decline since 1950; 50 -15 Jun qtr will likely break all previous records 40 -15 50 60 70 80 90 00 10 20 50 60 70 80 90 00 10 20 50 60 70 80 90 00 10 20

NY Fed weekly economic index Housing starts Industrial production 10 2.50 % change from previous month Up 7% over May-June 6 Mn units (annual rate) % change from year earlier 2.25 but still 11% below 4 2.00 5 pre-pandemic level 2 1.75 0 1.50 0 -2 1.25 -4 The WEI is an index of ten daily and weekly indicators of real economic activity, scaled 1.00 -5 -6 0.75 to align with the four-quarter GDP growth April -12.5%, -8 rate. The 13 readings over Q2 are consistent 0.50 -10 largest monthly decline -10 with a y-o-y decline of 9.6%, and a Q2/Q1 0.25 since end of WW II -12 decline of 32.6% annualized 0.00 -14 -0.25 -15 07 08 09 10 11 12 13 14 15 16 17 18 19 20 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 50 60 70 80 90 00 10 20

Sources: US Bureau of Economic Analysis; Federal Reserve Bank of New York; Michigan University Survey Research Center; US Commerce Department; Board of 34 Governors of the Federal Reserve System. The first estimate of Q2 GDP will be released on 30th July. CORINNA ECONOMIC ADVISORY The impact on the US labour market has been particularly severe – although employment rose, and unemployment fell, in May and June

Unemployment benefit claims Non-farm payroll employment Labour force participation rate 68 7000 10 Change from previous month ('000) % of civilian population '000s 67 aged 15 & over 51.3mn people (equivalent to 31.2% 5 6000 of the labour force) have filed initial 66 5000 claims for unemployment benefits 0 65 since the 3rd week of March, 64 4000 although the rate of new claims -5 has slowed substantially since late April Non-farm payroll employment rose 4.8mn 63 3000 -10 (3.6%) in June cf. 2.7mn in May and -21mn 62 in April. 44% of the job gains in June were April was lowest since 2000 -15 in leisure & hospitality. Total employment is 61 March 1972; June’s still 9.6% below its pre-pandemic peak. 60 figure is still the lowest 1000 -20 since June 1976 (apart 59 from April and May) 0 -25 58 07 08 09 10 11 12 13 14 15 16 17 18 19 20 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 45 50 55 60 65 70 75 80 85 90 95 00 05 10 15 20 Unemployment rate Layoff announcements Employment to population ratio 66 % of civilian population 30 % of labour force 800 '000s aged 15 & over 64 700 25 The unemployment rate fell to 11.1% in 62 600 June from 13.3% in May & 14.7% in April. 20 If the participation rate had remained 60 Thousands 500 at its February level the unemployment rate in June would have been 14.5% 400 15 58 (cf. 19.09% in April) 56 300 10 At 54.6% in June, still the 200 54 5 lowest in the post-War era 100 52 apart from April & May 0 0 50 92 96 00 04 08 12 16 20 30 35 40 45 50 55 60 65 70 75 80 85 90 95 00 05 10 15 20 45 50 55 60 65 70 75 80 85 90 95 00 05 10 15 20

Sources: US Department of Labor; Challenger, Gray & Christmas; US Bureau of Labor Statistics; National Bureau of Economic Research Macro History database. July 35 employment and other labour force data will be released on 7th August. CORINNA ECONOMIC ADVISORY The US budget deficit has blown out dramatically since the end of March, reaching 16% of GDP in the 12 months ended June

US Federal budget deficit US gross Federal debt ❑ The US federal budget deficit widened from US$582bn (3.3% of GDP) in 2016 % of GDP (12-mth moving total) 4 160 % of GDP (12-mth moving total) (Obama’s last year in office) to US$1 trn 2 (5.4% of GDP) in 2019, while gross federal 140 debt rose from US$20.4 trn (115%of GDP) 0 to $24.1trn (126% of GDP) 120 -2 ❑ In March, the Congressional Budget Office forecast the deficit would remain above -4 100 U$1trn every year over the next decade,

-6 reaching US$1.7 trn (5.6% of GDP) by 2030 80 ❑ The budget deficit for April, May and June -8 amounted to US$2.0trn (reflecting the -10 60 impact of Covid-19 related measures), bringing the 12-month moving total to -12 40 US$3.0 trn (16.0% of GDP), cf. a peak of

-14 9.7% of GDP during the GFC (and the 20 largest since 20.8% of GDP in FY 1945) -16 ❑ Gross federal debt increased by US$727 -18 0 bn to US$28.7 trn (154% of GDP) 75 80 85 90 95 00 05 10 15 20 75 80 85 90 95 00 05 10 15 20

Note: The measure of US gross federal debt is at market value. Sources: US Treasury Department; Federal Reserve Bank of Dallas; US Bureau of Economic Analysis; US Congressional Budget Office; Corinna. July budget data are released on 12th August. 36 CORINNA ECONOMIC ADVISORY Europe is also experiencing a sharp downturn although unemployment probably won’t rise as much as it has in the US

Euro area real GDP UK monthly GDP Retail sales volume

2 % change from previous quarter 10 % change from year earlier 15 % change from year earlier 1 5 10 0 5 0 -5 0 -1 -10 -5 Euro area Rose 1.8% in May after a 20.4% fall in April; -10 -2 -15 together, April-May down 24.6% on a year -20 earlier (the previous record annual decline -15 -3 (according to the BoE’s database) -25 was 15.3% in 1706; the largest decline -20 UK -4 -30 since 1900 was 9.7% in 1921) -25 08 09 10 11 12 13 14 15 16 17 18 19 20 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 March quarter GDP by country Consumer confidence Unemployment

1 % change from previous quarter 2 Standard deviations from average since 2000 13 % of labour force Euro area Euro area 12 0 1 11 -1 0 10 -2 9 UK -1 8 -3 7 -2 -4 UK 6 -5 -3 5 4 -6 -4 3 DE FR IT ES NL BG GR SW UK 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20

Sources: Eurostat; UK Office for National Statistics; Confederation of British Industry. The UK unemployment rate is published as a 3-month moving average; the most recent observation (for May) is derived by adding to the ‘claimant count’ unemployment rate the average margin between that rate and the conventionally defined 37 unemployment rate over the preceding 12 months. Preliminary estimates of Q2 GDP for the UK and euro area will be released on 12th and 14th August respectively. CORINNA ECONOMIC ADVISORY Australia

For more details… In Australia GDP declined in Q1 for the first time in 9 years, reflecting the impact of bushfires and ‘social distancing’ restrictions on private demand

Quarterly change in real GDP Household disposable income Business investment expenditure 1.6 % change from previous qtr 4 % point contribution to change in real household 15 % point contribution to change in real business 1.4 disposable income from previous quarter investment from previous quarter 3 1.2 10 1.0 2 0.8 5 1 0.6 0.4 0 0 0.2 -1 0.0 Wages & salaries -5 -0.2 -2 Social security benefits Income tax payments Mining investment Non-mining investment -0.4 -3 Other -10 10 11 12 13 14 15 16 17 18 19 20 10 11 12 13 14 15 16 17 18 19 20 10 11 12 13 14 15 16 17 18 19 20 Household consumption expenditure Household saving rate Public expenditure % pt contribution to change in real public final demand 2.0 Pc point contribution to change in private final 11 4 consumption spending from previous quarter % of household disposable income from previous quarter Public fixed capital expenditure 1.5 10 3 Government consumption 1.0 9 2 Tax cuts/ 0.5 8 refunds were 1 0.0 7 largely saved 6 0 -0.5 5 -1 -1.0 'Discretionary' 'Essential' Gov’t spending has accounted 4 for 52% of the growth in real -1.5 -2 3 GDP over the past 5 years -2.0 2 -3 10 11 12 13 14 15 16 17 18 19 20 10 11 12 13 14 15 16 17 18 19 20 10 11 12 13 14 15 16 17 18 19 20

Note: ‘Essential’ household consumption expenditure comprises food; rent & other dwelling services; electricity, gas & other fuel; operation of vehicles; rail, bus & taxi services; communications; health; education; and insurance & other financial services. Components of household disposable income are deflated by the implicit price 39 deflator of household final consumption expenditure. Source: ABS. June quarter national accounts released on 2nd September. CORINNA ECONOMIC ADVISORY Australia’s record-breaking run of almost 30 years without a recession has come to an end

Quarterly growth in Australian real GDP, 1960-2020

6 % change from previous quarter 28½ years between recessions

4 (f)

(f) 2

0

-2

-4

-6

-8 (f) -10 60 65 70 75 80 85 90 95 00 05 10 15 20

Note: Shaded areas denote recessions. Source: ABS. 40 CORINNA ECONOMIC ADVISORY Real GDP is likely to have shrunk by 8-9% in the June quarter but should increase in the September quarter – some risks in the December quarter

Projected peak-to-trough decline in output, ❑ GDP forecasts have been constructed using estimates of notional by sector monthly changes in gross value added by industry, rather than the Accomodation & food services conventional approach of quarterly changes in the major Arts & recreation Other services expenditure components of GDP (consumption, housing & business Transport, postal & warehousing investment, government spending, net exports etc) Retail trade Construction Wholesale trade ❑ When the lock-down began, governments were indicating that Education & training restrictions would likely remain in force until the end of September Manufacturing Rental, hiring & real estate Professional, scientific & tech svces ❑ On that basis, real GDP seemed likely to decline by at least 12 % Administration & support services Financial & insurance services between Dec qtr 2019 and the probable trough in Sep qtr 2020 Information, media & telcoms Utilities ❑ However with restrictions being eased (gradually) from mid-May Mining Health care & social assistance % onwards, the peak-to-trough decline in GDP may be 9% or less, with -80 -70 -60 -50 -40 -30 -20 -10 0 10 positive growth resuming in the Sep qtr Projected quarterly real GDP profile ❑ The renewed lockdown in Greater Melbourne will likely detract 1-1¼ pc pts from national GDP growth in the Sep qtr – not enough to turn it 4 % change from Revised down because of Vic lockdown rd previous quarter into a 3 consecutive negative quarter – but there will presumably 2 be some mechanical boost to Dec qtr growth 0 ❑ Assuming the end-September ‘fiscal cliff’ is tempered, the forecast -2 Less than now envisages year-average growth of about -¾% for FY 2019-20 current -4 Downside risk in Q4 If all Treasury/RBA Level of GDP still and -2% for FY 2020-21; or -4½% for CY2020 and +3¼% for CY 2021 fiscal & regulatory -6 forecast of 0.6% below supports allowed to -10% Dec qtr 2019 ❑ Even with an earlier easing of restrictions, a ‘V-shaped’ recovery -8 expire at end-September (as currently scheduled) looks unlikely – and some additional fiscal stimulus is likely to be -10 required to support the recovery that will occur Sep-19 Dec-19 Mar-20 Jun-20 Sep-20 Dec-20 Mar-21 Jun-21 Sep-21 Dec-21

Source: ABS; Corinna. 41 CORINNA ECONOMIC ADVISORY The contraction in real GDP in 2020 will still be the largest since the Great Depression

Australian real GDP growth since 1901

15 % change

10

5 (f)

0

-5 (f)

-10

-15 1901 1911 1921 1931 1941 1951 1961 1971 1981 1991 2001 2011 2021

Note: From 1901 to 1960 data are for years ended 30th June; from 1961 onwards data are for years ended 31st December. Sources: ANU Source Papers in Economic 42 History; ABS; Corinna. CORINNA ECONOMIC ADVISORY All of the components of the NAB monthly survey improved substantially in June, following an initial bounce in May, but they remain negative

Trading conditions Forward orders Employee hiring intentions 40 Net balance (%) 30 Net balance (%) 30 Net balance (%) 30 20 20 20 10 10 10 0 0 0 -10 -10 -10 -20 -20 -20 -30 -30 -30 -40 -40 -40 -50 -50 90 95 00 05 10 15 20 90 95 00 05 10 15 20 90 95 00 05 10 15 20 Profitability Capacity utilization Capital expenditure intentions 60 Net balance (%) 30 Net balance (%) 86 % 50 20 84 40 10 82 30 0 80 20 -10 78 10 -20 0 76 -30 -10 74 -20 -40 72 -30 -50 70 -40 90 95 00 05 10 15 20 90 95 00 05 10 15 20 90 95 00 05 10 15 20

Note: Quarterly data up to March 1987 (May 2002 for capex intentions), monthly thereafter (latest data June 2020). Source: National Australia Bank (July survey results 43 will be released on 12th August). CORINNA ECONOMIC ADVISORY The RBA’s most recent Monetary Policy Statement presented three alternative scenarios

GDP Unemployment ❑ The RBA’s ‘baseline’ scenario assumes that most ‘social distancing’ restrictions are lifted by the end of the September quarter, apart from those on large public gatherings and events, and international borders (which aren’t opened until early 2021) ❑ In this scenario real GDP declines by 5% in 2020 but rebounds by 4% in 2021, while unemployment peaks at around 10% in the current (June quarter) and declines to 6½% by Dec qtr 2021 ❑ The RBA’s ‘upside’ scenario assumes most restrictions are phased out over coming months (which is more in Employment ‘Underlying’ inflation line with the Government’s “Three Step Plan” announced on 9thMay ❑ Under this scenario most of the initial decline in real GDP is reversed by mid-2021, while unemployment could be back to 5¼% by mid-2022 ❑ The ‘downside’ scenario assumes restrictions are retained for longer or need to be reimposed ❑ In this scenario GDP would remain close to its trough through end-2020, and unemployment would remain close to 10% until ‘well into 2021’

Source: Reserve Bank of Australia, Statement on Monetary Policy, 8th May 2020. The next SoMP will be published on 7th August. 44 CORINNA ECONOMIC ADVISORY The path out of the current downturn will be more gradual than the path into it was

❑ ‘Social distancing’ requirements will be relaxed gradually rather than ‘all at once’ − new health and safety regulations will likely limit the number of employees and customers who can be ‘on premises’ (which may make it uneconomic for some businesses to re-open until restrictions are relaxed − and many people may remain wary of exercising all of their newly-regained ‘freedoms’

45 CORINNA ECONOMIC ADVISORY Australians seem likely to continue to be wary of travel and large gatherings, at least until a vaccine for Covid-19 is developed

Proportion of adults feeling ‘uncomfortable’ with Actions that would improve people’s comfort selected activities as restrictions are eased with activities as restrictions are eased

70 80 % of persons % of persons aged 18 and over aged 18 and over 70 60

60 50

50 40

40 30 30 20 20

10 10

0 0 Attending Sending Seeing Using Travelling Attending Attending Attending More More Better Less Lower Lower Higher Avail- Devel- usual children a health public by a social an indoor large appro- wide- under- pressure daily daily testing abilty opment work to school profes- transport plane gathering gathering public priate & spread standing on the infec- death rates of of a place or sional of > 10 of > 100 events timely use of of the health tion rates effec- vaccine child in people people infor- the virus system rates tive care person mation Covid- trea- 19 app tments

Source: ABS, Household Impacts of Covid-19 Survey, 26th-29th May (published 15th June). 46 CORINNA ECONOMIC ADVISORY The path out of the current downturn will be more gradual than the path into it was

❑ ‘Social distancing’ requirements will be relaxed gradually rather than ‘all at once’ − new health and safety regulations will likely limit the number of employees and customers who can be ‘on premises’ (which may make it uneconomic for some businesses to re-open until restrictions are relaxed − and many people may remain wary of exercising all of their newly-regained ‘freedoms’ ❑ ‘At least some businesses won’t have survived the shutdown period, and many of those which do will not immediately return to pre-outbreak levels of employment − so employment will remain below pre-outbreak levels for some time rather than ‘snapping back’ quickly − and those returning to work may work reduced hours (compared with pre-outbreak) for some time ❑ The recovery in household spending is likely to be gradual, rather than rapid − if the recovery in employment is only gradual, so too will be the recovery in household disposable income − most households will have run down discretionary savings to at least some extent, as well as having their superannuation balances depleted by market movements and/or withdrawals – and so will likely want to rebuild savings − households with mortgages who have deferred repayments will face higher or longer mortgage repayments, constraining their spending capacity to some extent − household spending may also be affected by ‘negative wealth effects’ from lower property prices ❑ There is some risk of a ‘setback’ when government support programs come to an end (nearly all of them at the end of September), or if restrictions on the movement or gathering of people have to be re-imposed ❑ International borders (except perhaps with NZ) will likely remain closed until a vaccine is widely available – which is in turn likely to be at least 12 months away − implying that there will be no near-term recovery in international tourism or international education ❑ Businesses are likely to be very hesitant about investment spending for an extended period

47 (with some exceptions) CORINNA ECONOMIC ADVISORY Three-quarters of businesses are still operating under ‘modified conditions’ – with fewer large business operating as ‘normal’ than small ones

Proportion of ‘trading businesses’ which are Proportion of ‘trading businesses’ which are operating ‘as normal’ – by industry operating ‘as normal’ – by size

30 % of trading Mining businesses Manufacturing Electricity, gas & water supply 25 Mid-May Construction Mid-June Wholesale trade 20 Retail trade Mid-May Accomodation & food services Mid-June Transport, postal & warehousing 15 Information, media & telecoms Finance & insurance 10 Rental, hiring & real estate Professional, scientific & tech svces Administration & support services 5 Education & training Health care & social assistance 0 Art & recreation % of trading Small Medium Large Total Other services businesses (<20 (20-199 (≥ 200 employees) employees) employees) 0 10 20 30 40 50

Source: ABS Business Indicators, Business Impacts of COVID-19, May 2020 (based on survey conducted between 13th and 22nd May) and June 2020 (based on survey 48 conducted between 10th and 17th June). CORINNA ECONOMIC ADVISORY Two-thirds of all businesses reported lower revenue in June compared with June last year – and 30% of them reported declines of more than 50%

Proportion of businesses reporting decreases or increases in Businesses with revenue decreases of revenue in June 2020 cf. June last year, by industry 50% or more in June cf. June last year, as a pc of businesses with lower revenue Decreases Increases Mining Mining Manufacturing Manufacturing Electricity, gas & water supply Electricity, gas & water supply Construction Construction Wholesale trade Wholesale trade Retail trade Retail trade Accomodation & food services Accomodation & food services Transport, postal & warehousing Transport, postal & warehousing Information, media & telecoms Information, media & telecoms Finance & insurance Finance & insurance Rental, hiring & real estate Rental, hiring & real estate Professional, scientific & tech svces Professional, scientific & tech svces Administration & support services Administration & support services Education & training Education & training Health care & social assistance Health care & social assistance Art & recreation Art & recreation % of Other services % of Other services % of businesses Total businesses Total businesses

100 80 60 40 20 0 0 5 10 15 20 25 0 10 20 30 40 50 60 70

Source: ABS Business Indicators, Business Impacts of COVID-19, June 2020 (based on survey conducted between 10th and 17th June). 49 CORINNA ECONOMIC ADVISORY 211,000 (24%) of those who lost their jobs in March-April are now back at work, while another 70,000 started looking for work

Employment Unemployment rate ‘Under-utilization’ rate 14 % of the labour force Unemployment rate 25 Unemployed and under-employed 3 % change from previous month would have been 10.2% as % of the labour force 2 12 in June (down from 20 19.1% in June, down 11.7% in May) if from 20.2% in May 1 10 participation had 0 stayed at its March 15 8 level -1 6 10 -2 Employment rose by 211K (1.7%) in June, after falling a total of 872K (6.7%) in April 4 -3 & May, to be 5.1% below the pre- Measured unemployment rate rose 0.3 pc pts to 5 pandemic peak in February 2 7.4% in June, as more people who had previously -4 left the labour force started looking for work 0 -5 0 76 80 84 88 92 96 00 04 08 12 16 20 76 80 84 88 92 96 00 04 08 12 16 20 70 75 80 85 90 95 00 05 10 15 20 Labour force participation rate Under-employment ratio Total hours worked 2000 Million hours 67 % of 15+ civilian population who 16 People working part-time who would like to are employed or unemployed 14 work more hours as % of total employment 66 1750 12 12.6% in June, down from 65 14.1% in May & 14.7% in April 10 1500 64 8 1250 63 6 Rose 4.0% in June, after 62 The participation rate rose 1.3 4 1000 falling 10.4% over April- May, to be 6.8% below 61 pc pts in June, partly reversing a 2 fall of 3.3 pc pts over April & May March level 750 60 0 76 80 84 88 92 96 00 04 08 12 16 20 70 75 80 85 90 95 00 05 10 15 20 76 80 84 88 92 96 00 04 08 12 16 20

Note: The ABS classifies people on JobKeeper who worked zero hours in the survey week as ‘employed’. Had it not done so, the unemployment rate in May would have been 9.5% (down from 11.7% in April). The ‘under-employment ratio’ is the percentage of employed persons who are working fewer hours than they are willing and able 50 to work. The ‘under-utilization rate’ is the proportion of the labour force who are unemployed or underemployed. Source: ABS. July data will be released on 13th August. CORINNA ECONOMIC ADVISORY The June unemployment rate would have been 11½% if people working zero hours and those who dropped out of the labour force were counted

❑ The Government’s JobKeeper program pays eligible employers Alternative measures of unemployment a subsidy of $1500 per fortnight for each eligible employee kept on the payroll between 30 March and 27 September 16 % of labour force People who would have ❑ Eligible employers are those with been 'unemployed' if 14 the participation rate − annual turnover of <$1bn whose turnover has fallen by >30% had remained at its March level − annual turnover of >$1bn (other than major banks) whose turnover 12 has fallen by >$1bn 'Employed' people − Registered charities whose turnover has fallen by >15% who worked zero hours 10 because they had 'no ❑ Eligible employees are Australian citizens who are (or were at 1 work' or 'not enough March) permanent full- or part-time employees, or casuals work available' 8 who had at least 12 months ‘regular employment’ People classified as 'employed’ but who ❑ For labour force survey purposes the ABS classifies people 6 worked zero hours being paid through JobKeeper as ‘employed’ – even if they because they were 'stood down' have been stood down, or worked no hours during the survey 4 Unemployed (people week who worked 1 paid − in the US and Canada, such people are classified as unemployed 2 hour or less, were willing & able to work, ❑ If these people, and those who’ve dropped out of the labour and 'actively looked' for force since March, were counted as unemployed, then the 0 work Mar-20 Apr-20 May-20 Jun-20 unemployment rate in June would have been 11.5% - down from 14.0% in May and 14.9% in April

Source: ABS; Corinna. 51 CORINNA ECONOMIC ADVISORY Tasmania, Queensland & NSW had the strongest recoveries in employment in June, while the NT has continued to shed jobs

Employment Labour force participation rate Under-employment ratio

0 0 16 % of total employed Change March-June -1 14 March -2 -1 12 -3 10 -4 -2 -5 8 -6 -3 6 -7 4 -8 -4 2 -9 Change at lowest point Net change, March-June -10 % change -5 % pt change March to June 0 NSW Vic Qld SA WA Tas NT ACT Aus NSW Vic Qld SA WA Tas NT ACT Aus NSW Vic Qld SA WA Tas NT ACT Aus Total hours worked ‘Under-utilization’ rate Unemployment rate Unemployment rates 2 in June if participation Unemployment rates if labour 14 % 25 % of labour force Change March-June 0 rates had remained at March levels March 12 -2 20 -4 10 15 -6 8 -8 6 10 -10 -12 Change at 4 lowest point 5 -14 Net change, 2 % change 0 -16 March-June 0 NSW Vic Qld SA WA Tas NT ACT Aus NSW Vic Qld SA WA Tas NT ACT Aus NSW Vic Qld SA WA Tas NT ACT Aus

Note: The ‘under-employment ratio’ is the percentage of employed persons who are working fewer hours than they are willing and able to work. The ‘under-utilization 52 rate’ is the proportion of the labour force who are unemployed or underemployed. Source: ABS (July data will be released this Thursday, 13th August). CORINNA ECONOMIC ADVISORY The measured unemployment rate is understating the ‘true’ extent of job losses

Number of people receiving or seeking Newstart/ Alternative measures of the ‘unemployment JobSeeker or Youth Allowance payments rate’ 13 1,800 '000s % of the labour force These numbers have 1,600 Unprocessed claims been provided by the 12 Measure based on monthly number of Newstart/ Recipients Dep’t of Social JobSeeker & Youth Allowance 1,400 Security to Senate 11 Economics payment recipients Committee hearings. 1,200 The Government 10 should be publishing 1,000 them weekly(like the 9 US initial claims for unemployment 800 8 benefits series –there’s no reason why they 600 should be a ‘state 7 secret’ 400 6

200 5 'Official' (ABS Labour

0 Force Survey) measure

20-Mar 08-May 06-Mar 13-Mar 27-Mar 03-Apr 10-Apr 17-Apr 24-Apr 01-May 15-May 22-May 29-May 05-Jun 28-Feb 4

3 Week ended 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20

Sources: Department of Social Security; ABS. Note: Youth Allowance recipients excludes full-time students. Number of Newstart/JobSeeker and Youth Allowance recipients is not seasonally adjusted. 53 CORINNA ECONOMIC ADVISORY 58% of total job losses between February & May were in accommodation & food services, education & training, and arts & recreation

Change in employment between February and Proportion of change in total employment between March 2020, by industry February and March 2020, by industry

Agriculture, forestry & fishing Mining Manufacturing Electricity, gas & water supply Construction Wholesale trade Retail trade Accomodation & food services Transport, postal & warehousing Information, media & telecoms Finance & insurance Rental, hiring & real estate Professional, scientific & tech svces Administration & support services Public administration & saferty Education & training Health care & social assistance Art & recreation % change Other services % of total

-40 -30 -20 -10 0 10 20 30 -10 0 10 20 30 40

Note: The accommodation & food services, education & training, and arts & recreation services sectors accounted for 15% of total employment in February. Source: ABS, Detailed quarterly labour force data, May 2020. August data will be released on 24th September. 54 CORINNA ECONOMIC ADVISORY Community & personal service workers, sales workers and labourers have accounted for 75% of job losses since February

Change in employment between February and Proportion of change in total employment between March 2020, by occupation February and March 2020, by occupation

0 40 % of total jobs lost, February-May 35 -5 30

-10 25

20

-15 15

10 -20 5 % change, Feb-May -25 0 Man- Profes- Tech- Commu- Cler- Sales Mach- Labour- Total Man- Profes- Tech- Commu- Cler- Sales Mach- Labour- agers sionals nicians nity & ical & workers inery ers agers sionals nicians nity & ical & workers inery ers & pers- admin oper- & pers- admin oper- trade onal workers ators & trade onal workers ators & workers service drivers workers service drivers workers workers

Source: ABS, Detailed quarterly labour force data, May 2020. August data will be released on 24th September.

55 CORINNA ECONOMIC ADVISORY Women have borne 53% of the job losses since February, partly because they tend to work in occupations or industries which have been hardest hit

Women’s share of jobs in February, and of job Women’s share of jobs in February, and of job losses since February, by occupation losses since February, by industry

Agriculture, forestry & fishing Managers Mining Manufacturing Professionals Electricity, gas & water supply

Construction nm Technicians & trade workers Wholesale trade nm Retail trade Community & personal services Accomodation & food services workers Transport, postal & warehousing Information, media & telecoms Clerical & administrative workers Finance & insurance nm Rental, hiring & real estate Sales workers Professional, scientific & tech svces Administration & support services

Machinery operators & drivers Public administration & saferty nm Education & training Labourers Health care & social assistance Art & recreation Other services All occupations % All industries %

-25 0 25 50 75 100 0 20 40 60 80 100 120

Women as a % of total jobs, February 2020 Women as a % of total jobs, February 2020 Women as a % of job losers between February & May Women as a % of job losers between February & May

Note: Data depicted in these charts are not seasonally adjust. “nm” = “not meaningful”, because employment of women in the industry thus marked either increased between February and May 2020; or fell despite total employment in that industry rising between February and May. 56 Source: ABS, Detailed quarterly labour force data, May 2020. August data will be released on 24th September. CORINNA ECONOMIC ADVISORY People aged 15-24 accounted for 15% of total pre-pandemic employment but have experienced 38% of the jobs lost since March

Change in employment, March-May 2020, by Share of total job losses between March and May 2020 age range and share of total employment in March, by age group 0 40 %

-2 35 % of total employment, March 2020 % of total decline in employment. March-May 2020 -4 30

-6 25 Average across all ages -8 20 -10

15 -12

10 -14

-16 5

% -18 0 15-24 25-34 35-44 45-54 55-59 60-64 65+ 15-24 25-34 35-44 45-54 55-59 60-64 65+ Age range Age range

Source: ABS detailed monthly labour force data, May 2020; Corinna. August data will be released on 24th September. 57 CORINNA ECONOMIC ADVISORY The recovery in payroll employment stalled and went into reverse in the second half of June – and not just because of Victoria

Weekly change in number Change in payroll jobs by age & Change in payroll jobs by State & of payroll jobs gender Territory 0 0 1.5 % change from previous week

1.0 -1

0.5 -5 -2

0.0 -3 Teenagers are -0.5 no longer the -10 age group -4 hardest hit by -1.0 The ‘job loss job losses – that’s Vic -1.3%; gender gap’ now people in -5 but also is narrowing their 20s -1.5 WA -3.0% & NT -2.5& -15 -6 -2.0 -7 -2.5 -20 -3.0 -8 Change at trough

-3.5 Net change since 14th March -9

07-Mar 14-Mar 21-Mar 28-Mar 04-Apr 11-Apr 18-Apr 25-Apr 02-May 09-May 16-May 23-May 30-May 06-Jun 13-Jun 20-Jun 27-Jun Net change at trough % change since 14th March -25 % -10 Net change since 14 March M F < 20 20- 30- 40- 50- 60- ≥ 70 NSW Vic Qld SA WA Tas NT ACT Aus Week ended 29 39 49 59 69

Source: ABS. Data refers to the number of payroll jobs at businesses participating in the Australian Taxation Office’s Singe Touch Payroll system, which covers 99% of employers with 20 or more employees and about 71% of smaller employees. People with two or more jobs (about 6% of the total) are counted more than once. Data are not seasonally adjusted. Data for weeks up to week ended 11th July will be released on 28th July. 58 CORINNA ECONOMIC ADVISORY Australians are starting to get out and about again as restrictions ease, but many people are avoiding public transport

Time spent driving, walking and in transit Time spent working, at home, shopping & playing

140 7-day moving average 30 7-day moving average (January 13 = 100) (deviation from 14 February) Driving (back to pre- 20 120 pandemic level, except in Victoria, At home Tasmania & ACT) 10

100 0 Walking Shopping & recreation 80 -10

-20 60 At workplaces -30 (Victoria now 40 Transit noticeably lower than other states (still less than half pre-pandemic -40 level, Melbourne 20 much lower than other cities) -50

0 -60 17 Jan 14 Feb 13 Mar 10 Apr 08 May 05 Jun 03 Jul 31 Jul 14 Feb 13 Mar 10 Apr 08 May 05 Jun 03 Jul 31 Jul

Note: ‘transit’ means using public transport. Sources: Apple Mobility Trends Reports (data up to 17th July); Google Covid-19 Community Mobility Reports (data 59 up to 14th July). For state-level data see slide 91. CORINNA ECONOMIC ADVISORY Retail sales rose another 2.3% in June after a 17% rebound in May; while vehicle sales surged in June (though still well below year-earlier levels)

Retail sales Motor vehicle sales

10 +16.9% in May (largest monthly increase 110 % change from on record back to 1962) boosted by '000 units (seasonally adjusted) previous month surges in spending on clothing, footwear & household goods 100 5 +8.5% in March, Thousands driven by ‘panic buying’ +2.4% ahead of the shutdown in June (p) 90 0

80

-5 70

-10 60 Motor vehicle sales rose 38% in June, spurred by sales of commercial vehicles (probably induced by the -15 -17.7% in April, Government’s ‘instant asset write off’ largest monthly decline 50 and end-of-financial-year ‘deals’ on record

-20 40 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20

Sources: ABS; Federal Chamber of Automotive Industries VFACTS (seasonal adjustment of FCAI data by Corinna). Final (and detailed) retail sales data for June will be released on 4th August. 60 CORINNA ECONOMIC ADVISORY The pandemic and lockdown has accelerated changes in the way Australians shop, and make payments

Growth in online retail sales ATM cash withdrawals Credit card cash advances

80 % change from year earlier 10 % change (by value) from year earlier 20 % change (by value)from year earlier 5 70 10 0 60 -5 0 50 -10 -10 40 -15 -20 -20 30 -25 20 -30 -30 10 -35 -40 -40 0 -45 -50 15 16 17 18 19 20 Online retail ‘market share’ Debit card cash-outs Direct entry payments 12 Online sales as a 20 % change (by value)from year earlier 5.5 Average value ($000) % of total retail sales 10 10 5.0 0 4.5

8 -10 Thousands -20 4.0 6 -30 Series 3.5 break 4 -40 3.0 -50 2 -60 2.5 0 -70 2.0 15 16 17 18 19 20

Sources: ABS; RBA. Latest data are for June: online retails sales data for July will be released on 4th August and payments system data on 10th August. 61 CORINNA ECONOMIC ADVISORY Residential building activity will turn down over the next few months and longer-term will be adversely affected by sharply lower immigration

Housing finance commitments Large builders’ new home sales Dwellings under construction 160 180 16 A$bn per month '000s (annual rate) '000s 14 Owner- 160 140 occupiers 12 140 March, April & May 120 Other 10 figures the 2nd, 3rd and 120 Investors 4th lowest on record, 8 100 behind only March 100 Detached 1987 6 80 houses 80 4 60 May the lowest 60 Latest data 2 40 since November 2002 Dec qtr 2019 0 40 20 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 Refinancings as pc of total Residential building approvals ‘Pipeline’ of work yet to be done 50 % of total 300 '000s (annual rate) 40 '000s (by value) 45 Refinancings at a record high 280 35 reflecting lower interest rates 260 Other 40 and competition among lenders 240 30 35 220 25 30 200 25 180 20 160 Detached 20 15 140 16.4% decline in houses 15 120 May to lowest level 10 since January 2013 100 10 5 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 20 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20

Note: ‘New home sales’ are of detached dwellings only and exclude small-scale builders. Sources: ABS; Housing Industry Association. Dwellings under construction and 62 ‘pipeline’ data for March quarter will be released on 15th July; June building approvals on 30th July; June housing finance on 7th August. CORINNA ECONOMIC ADVISORY Businesses have cut back their capital expenditure intentions for 2020-21, which is unusual for this time of year

Capital expenditure intentions - mining Capital expenditure intentions – non-mining

70 $bn 100 $bn

90 60 80

50 70

60 40 50 30 40

20 30

20 10 10

0 0 2008-09 2015-16 2016-17 2017-18 2018-19 2019-20 2020-21 2008-09 2015-16 2016-17 2017-18 2018-19 2019-20 2020-21

1st 2nd 3rd 4th 5th 6th Outcome 1st 2nd 3rd 4th 5th 6th Outcome ABS capex intentions survey ABS capex intentions survey

Note: The ABS conducts six surveys of business’ capital expenditure intentions in respect of each financial year. The first is conducted in January & February prior to the commencement of the financial year, the second in May & June, the third in July & August of the financial year, the fourth in October & November, the fifth in January & February of the financial year, and the sixth in May & June. The outcome (actual capital expenditure in the financial year) is determined from the survey taken in July & August after the end of the financial year. The survey excludes businesses in the agriculture, forestry & fishing; and public administration and safety sectors, and also superannuation funds. The education & training, and health care & social assistance sectors have been included in the surveys since 63 December 2019 but are not included in the above charts (to assist in comparisons). Source: ABS (next update 27th August). CORINNA ECONOMIC ADVISORY Resources and energy prices have continued to strengthen in recent weeks, but agricultural commodities have been trending down

80 US$ per barrel 225 US$ per tonne 90 US¢ per pound 325 US¢ per pound

70 200 85 300 60 175 80 275 50 Crude oil 150 Aluminium US import beef 75 Metallurgical 40 125 250 coal 70 30 100 225 20 75 65

10 50 60 200 Jun-19 Sep-19 Dec-19 Mar-20 Jun-20 Sep-20 Jun-19 Sep-19 Dec-19Mar-20 Jun-20 Sep-20 Jun-19 Sep-19 Dec-19 Mar-20 Jun-20 Sep-20 Jun-19 Sep-19 Dec-19 Mar-20 Jun-20 Sep-20

130 US$ per tonne 70 US$ per tonne 1900 US$ per ounce 2000 A¢ per kg Gold 65 1800 120 1800 60 1700 110 Thermal 55 1600 coal 1600 100 50 Wool 1500 1400 45 90 Iron ore 40 1400 1200 80 35 1300

70 30 1200 1000 Jun-19 Sep-19 Dec-19 Mar-20 Jun-20 Sep-20 Jun-19 Sep-19 Dec-19 Mar-20 Jun-20 Sep-20 Jun-19 Sep-19Dec-19Mar-20Jun-20 Sep-20 Jun-19 Sep-19Dec-19Mar-20 Jun-20 Sep-20

Sources: Refintiv Datastream; Meat & Livestock Australia; Australian Wool Innovation. Data up to 17th July. 64 CORINNA ECONOMIC ADVISORY The resilience of iron ore prices stems from strong Chinese demand, declining Chinese production and constraints on Brazilian exports

Iron ore exports, 2018 Australia & Brazil iron ore exports ❑ The global seaborne iron ore trade is India Chile Sweden 800 Mn tonnes (12-month dominated by shipments from Netherlands Other moving total) Middle East 700 Australia & Brazil to China (which Canada Australia 600 accounts for 53% of global steel South Africa production and 51% of steel use) 500 CIS ❑ Chinese iron ore production has 400 Australia fallen by more than 34% since 2017, 300 Brazil Brazil largely because of rapidly declining 200 quality – forcing Chinese steel mills 100 to become more dependent on 10 11 12 13 14 15 16 17 18 19 20 imports in response to increased Iron ore imports, 2018 China iron ore production & imports demand driven by stimulus measures Other Asia 1750 Korea Mn tonnes (12-month Japan Germany moving total Middle East ❑ Meanwhile Brazilian production and France 1500 exports have been curtailed by a India Production Turkey series of tailing dam collapses over 1250 Canada the past five years, and more Other Imports recently by Covid-19 outbreaks at 1000 four large mine sites

China 750 ❑ China is seeking to develop other sources especially in West Africa but 500 this is a slow process 10 11 12 13 14 15 16 17 18 19 20

Note: Export volume data for Australia and Brazil derived by dividing export values (in US$) from ABS and IGBE by the average US$ price of Chinese iron ore imports. 65 Sources: World Steel Association; China National Bureau of Statistics; China General Administration of Customs; Refinitiv Datastream; ABS; IGBE; Corinna. CORINNA ECONOMIC ADVISORY Exports of most items except iron ore have fallen since March, but that’s been offset by big falls in imports, especially services & consumer goods

Iron ore and coal exports Merchandise exports and imports Tourism-related services trade 40 10 A$bn A$bn 7 A$bn Iron ore Exports Credits 9 35 6 8 7 30 5 6 25 4 5 20 Imports 4 3 Coal 3 15 2 2 10 1 1 Debits 0 5 0 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 LNG and gold exports Merchandise trade balance Tourism services trade balance 5.0 A$bn LNG 12 A$bn 4.0 A$bn 4.5 10 3.5 4.0 8 3.0 3.5 6 2.5 3.0 2.0 4 2.5 1.5 2.0 2 1.0 1.5 0 0.5 1.0 -2 0.0 0.5 Gold -4 -0.5 0.0 -6 -1.0 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20

Source: ABS. Latest data are for May; June data will be released on 4th August. 66 CORINNA ECONOMIC ADVISORY The A$ plunged during the market turmoil of late March, but has recouped most of those losses helped by higher iron ore prices

A$-US$ and spot iron ore A$-US$ and US$ trade-weighted A$-US$ and US equity market prices index volatility

0.75 US$ per A$ US$ per tonne 130 0.75 94 0.75 0 US$ per A$ March 1973 = 100 US$ per A$ %

95 10 120

A$ vs US$ A$ vs US$ 96 (left scale) 20 0.70 (left scale) 0.70 0.70 110 97 30

98 100 40 0.65 0.65 99 0.65 A$ vs US$ (left scale) 50 Iron ore 90 price 100 (right scale) 60 80 101 0.60 0.60 0.60 VIX index (right scale, 70 102 US$ DXY inverted) 70 (right scale, inverted) 103 80

0.55 60 0.55 104 0.55 90 Jun-19 Sep-19 Dec-19 Mar-20 Jun-20 Sep-20 Jun-19 Sep-19 Dec-19 Mar-20 Jun-20 Sep-20 Jun-19 Sep-19 Dec-19 Mar-20 Jun-20 Sep-20

Note: The VIX index is a measure of the implied volatility of S&P500 options and is widely interpreted as an indicator of investor risk appetite or aversion. th 67 Source: Refinitiv Datastream. Data up to 10 July. CORINNA ECONOMIC ADVISORY Inflation will turn negative, temporarily, in Q2 and likely remain below the RBA’s target until at least the second half of 2021

Consumer prices Retail petrol prices ❑ The RBA has undershot its 2-3% target for 6 % change from year earlier 160 ¢ / l ‘underlying’ inflation for four years in a 5 150 row RBA target range 140 4 ❑ Q2 inflation will likely be negative (both 130 qoq and yoy) as a result of lower petrol 3 120 prices (down 21% on average in the 2 quarter) and the Government’s 110 provision of free child care during the 1 'Headline' 100 'Underlying' shutdown 0 90 ❑ Conversely the removal of free child 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 30 Jun 19 30 Sep 19 31 Dec 19 31 Mar 20 30 Jun 20 30 Sep 20 care from 12th July and the rebound in Housing costs in the CPI Wage price index petrol prices will boost the CPI in Q3 8 % change from year earlier 5.0 % change from year earlier ❑ Freezes on utilities charges in some 7 4.5 states will detract from inflation in Q3 6 4.0 ❑ House prices and rents will continue to 5 3.5 exert downward pressure on inflation 4 Housing 3.0 Public sector over at least the next 6-12 months 3 2.5 ❑ Wages haven’t been a source of price 2 All groups 2.0 pressure for the past six years, and are exc. housing 1 1.5 Private sector unlikely to be in the next 1-2 years 0 1.0 either 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20

Note: ‘Underlying’ inflation is the average of the weighted median and trimmed mean CPIs. Wage price indices exclude bouses. 68 Sources: ABS (June quarter CPI will be released on 29th July); Australian Institute of Petroleum. CORINNA ECONOMIC ADVISORY The problem with Victoria

For more details… Victoria has always been more vigilant in fining its citizens than other states – but that authoritarian approach hasn’t helped it fight Covid-19

Revenue from fines per head of Fines for breaches of lockdown Infection rates, states and population, 2014-15 to 2018-19 regulations, per head territories, as at 20th July 2020

100 100 Cases per 100,000 140 $ per head $ per 100,000 population per annum people 90 90 120 80 80

100 National 70 70 average

60 60 80 National 50 50 average National 60 average 40 40

30 30 40

20 20

20 10 10

0 0 0 NSW Vic Qld SA WA Tas NT ACT NSW Vic Qld SA WA Tas NT ACT NSW Vic Qld SA WA Tas NT ACT

Note: fines for breaches of Covid-19 regulations are for the period between when ‘stage 3’ lockdowns started in late March to the last week of May. th 70 Sources: State and Territory annual financial reports and 2019-20 Mid-Year Budget Reviews; The Age, 28 May 2020; covid-19.com.au. CORINNA ECONOMIC ADVISORY Victoria has been lagging the rest of Australia in emerging from lockdown – this divergence will widen over the next six weeks

Time spent driving Time spent in work places Time spent In parks

120 7-day moving average (January 13 = 100) 20 7-day moving average 40 7-day moving average 110 (deviation from 14 February) Australia 10 (deviation from 14 February) 100 20 0 90 -10 Australia 0 80 Victoria -20 70 Australia -30 -20 60 Victoria 50 -40 -40 Victoria 40 -50 30 -60 -60 15 Jan 15 Feb 15 Mar 15 Apr 15 May 15 Jun 15 Jul 14 Feb 14 Mar 14 Apr 14 May 14 Jun 14 Jul 14 Feb 14 Mar 14 Apr 14 May 14 Jun 14 Jul Time spent in transit Time spent shopping Time spent at home

30 7-day moving average 140 7-day moving average (January 13 = 100) 10 7-day moving average (deviation from 14 February) (deviation from 14 February) 25 120 0 20 100 -10 Australia Victoria 15 80 5 largest -20 capital cities 10 60 -30 Victoria 5 Australia 40 -40 0 20 Melbourne -50 -5 0 -60 14 Feb 14 Mar 14 Apr 14 May 14 Jun 14 Jul 15 Jan 15 Feb 15 Mar 15 Apr 15 May 15 Jun 15 Jul 14 Feb 14 Mar 14 Apr 14 May 14 Jun 14 Jul

th Note: ‘transit’ means using public transport. Sources: Apple (data up to 18th May), two left-hand charts h 71 Note: ‘transit’ means using public transport. Sources: Apple (data up to 17 July), two left-hand charts; Google (data up to 14 July), four remaining charts. CORINNA ECONOMIC ADVISORY Victoria’s recovery in both employment and spending has lagged that of the rest of Australia

Payroll jobs, Victoria and Australia Retail sales, Victoria and the rest of Australia

110 Dec 2019 =100 110 Week ended Jan 4 = 100 108 Rest of Australia 106 108 104

102 106 Victoria 100

98 104 96 Australia 94 102 92

90 Victoria 100 88

86

98

04-Jul 18-Jan 01-Feb 15-Feb 29-Feb 14-Mar 28-Mar 11-Apr 25-Apr 09-May 23-May 06-Jun 20-Jun 04-Jan 84 Dec Jan Feb Mar Apr May

Sources: ABS; Corinna.

72 CORINNA ECONOMIC ADVISORY Over the past decade Victoria’s economy has become increasingly dependent on population growth, through immigration …

Population growth – Victoria Sources of Victoria’s Per capita economic growth – vs national average population growth Victoria vs national average 3.5 3.0 % change from year earlier 100 '000s (4-qtr moving total) Real % change from previous year

90 Overseas 3.0 Victoria immigration 2.5 80 2.5 Australia 70 2.0 2.0 60 1.5 50 Natural 1.0 1.5 increase 40 Australia 0.5 30 1.0 0.0 20 Interstate migration -0.5 Victoria 10 0.5 -1.0 0

-1.5 0.0 -10 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 Financial years ended 30 June

Note: 2019-20 economic growth estimates are forecasts provided in the Victorian and Australian Government mid-year budget reviews published in December 2019. 73 Source: ABS; Victorian and Australian Governments. CORINNA ECONOMIC ADVISORY … as a result of which, it has become much more vulnerable to a downturn in housing activity than the rest of Australia

Dwelling construction as a Residential building approvals ‘Pipeline’ of residential building pc of gross product work yet to be done

8.0 % of gross state / 100 275 domestic product '000s (3-mth moving '000s (3-mth moving 20 $bn $bn 65 average, annual rate) average, annual rate) Victoria 7.5 18 60

90 250 Thousands 7.0 Australia 55 (right scale) 16

80 225 50 6.5 14 Australia 45 6.0 (right scale) 70 200 12 Victoria 40 (left scale) 5.5 Australia 10 60 175 35

5.0 8 30 50 150 Victoria 4.5 6 25 (left scale)

4.0 40 125 4 20 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 10 11 12 13 14 15 16 17 18 19 20 10 11 12 13 14 15 16 17 18 19 20 Financial years ended 30 June

Source: ABS. 74 CORINNA ECONOMIC ADVISORY Victoria is also more dependent on foreign tourists and students than any other state or territory

Travel services exports as a pc of International students as a pc of Chinese students as a pc of total gross state product, 2018-19 population, 2019 international students, 2019

% of gross state product, % of population, 4.5 5.0 60 % of total number of 2018-19 2019 international students, 2019 4.0 Education-related Other 4.5 50 4.0 3.5

3.5 3.0 40 3.0 2.5 2.5 30 2.0 2.0 1.5 20 1.5

1.0 1.0 10 0.5 0.5

0.0 0.0 0 NSW Vic Qld SA WA Tas NT ACT Total NSW Vic Qld SA WA Tas NT ACT Total NSW Vic Qld SA WA Tas NT ACT Total

Sources: ABS; Australian Department of Education, Skills and Employment.

75 CORINNA ECONOMIC ADVISORY Victoria does have a strong pipeline of infrastructure construction work

Infrastructure construction work done ‘Pipeline’ of infrastructure construction work yet to be done

$bn 3.0 $bn $bn 9 13 $bn 23

21 Rest of Australia 8 11 (right scale) 2.5 19

7 9 17

2.0 Rest of Australia (right scale) 15 6 7 13 1.5 Victoria 5 5 11 Victoria (left scale) (left scale) 9 1.0 4 3 7

0.5 3 1 5 10 11 12 13 14 15 16 17 18 19 20 10 11 12 13 14 15 16 17 18 19 20

Note: ‘infrastructure construction’ is engineering construction work done by or for the public sector, excluding electricity and heavy industry. Source: ABS. 76 CORINNA ECONOMIC ADVISORY Victoria’s state public sector was in a slightly weaker financial position going into the pandemic than the average for all states and territories

Projected public non-financial sector Projected public non-financial sector cash balance, 2019-20 net debt, 30th June 2020

1.0 % of GSP 25 % of GSP

0.5

0.0 20 Average of -0.5 all states & territories -1.0 15

-1.5

-2.0 10 Average of all states & territories -2.5

-3.0 5

-3.5

-4.0 0 NSW Vic Qld SA WA Tas NT ACT NSW Vic Qld SA WA Tas NT ACT

Note: ‘Public non-financial sector’ encompasses ‘general government’ (departments and agencies funded primarily by taxation revenue or grants) and public non- 77 financial corporations. Source: State and territory Mid-Year Budget Reviews (December 2019, except Tasmania, February 2020); ABS; Corinna. CORINNA ECONOMIC ADVISORY The Australian policy response

For more details… The Australian Government’s policy measures have been large by historical and international standards

Fiscal policy responses to Covid-19 – selected ❑ Policy measures announced thus far by the Australian ‘advanced’ & Asia-Pacific economies Government total $180bn (allowing for the downward revision 25 % of gross domestic product (GDP) to the cost of JobKeeper), or about 9% of GDP – which is large by international standards (and double what was done during the GFC) 20 ❑ Principal objectives of policy measures have been to – 'Above the line' measures − maximize the ‘survival prospects’ of businesses affected by the 'Below-the-line' measures 15 shutdown − minimize the impact of the shutdown on employment − provide additional income support to those who lose their jobs 10 − strengthen the capacity of the health care system to cope with increased demand

5 ❑ Policy measures have been designed to be ‘simple’ to administer, and to make greatest use of existing systems rather than having to create new mechanisms

0 − which has resulted in some anomalies

Sweden NZ Singapore Germany UK Japan Australia Thailand US Canada China Italy France Spain Korea Indonesia Philippines India Vietnam ❑ Policy measures also designed to be readily ‘switched off’ once the need for them has passed − most of them scheduled to terminate at the end of September Note: ‘Above the line’ measures comprise additional or accelerated spending and − which poses the risk of a ‘setback’ at that time unless the deferred or foregone revenue. ‘Below the line’ measures comprise equity injections, loans, asset purchases and debt assumptions, but do not include loan guarantees or Government ‘tapers’ some programs other contingent liabilities. Source: IMF, Fiscal Monitor: Database of Country Fiscal Measures in Response to the COVID-19 Pandemic, 24th June 2020. 79 CORINNA ECONOMIC ADVISORY The Australian Government’s ‘bottom line’ has begun to deteriorate sharply, and …

Australian Government Australian Government Australian Government net debt revenue and expenses ‘underlying’ cash balance 30 30 550 % change from year earlier A$bn (12-mth moving total) A$bn

20 25 450 10 20 Expenses 0

15 350 -10

10 -20 250 -30 5

-40 0 150

Revenue -50 -5 -60 April’s and May’s 50 deficits of $17.6bn and -10 -70 $24.9bn (respectively) were the largest monthly deficits ever recorded -15 -80 -50 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 07 08 09 10 11 12 13 14 15 16 17 18 19 20

Note: Revenue and expenses are accrual accounting items. The ‘underlying’ cash balance is (cash) receipts minus payments, excluding transactions in financial assets for policy purposes and net earnings of the Future Fund. Net debt is total interest-bearing liabilities (government securities, deposits, loans and other borrowing) 80 minus cash and deposits, advances paid, and (interest-bearing) loans, placements and investments. Source: Department of Finance. CORINNA ECONOMIC ADVISORY … will blow out to over $60bn in 2019-20, around $185bn in 2020-21, and won’t return to surplus (on unchanged policies) until 2026-27 – but …

Australian Government receipts and Australian Government ‘underlying’ cash ‘underlying’ payments balance

36 % of GDP 100 $bn Dec 2019 MYEFO projections 34 June 2020 PBO projections 50 Dec 2019 MYEFO projections 32 0 30

28 -50 ‘Underlying’ payments 26 -100 Jun 2020 PBO 24 projections Receipts -150 22

20 -200 00 05 10 15 20 25 30 00 05 10 15 20 25 30

Financial year ended 30th June Financial year ended 30th June

Note: ‘Underlying’ payments excludes net investment in financial assets for policy purposes. The ‘underlying’ cash balance also excludes net earnings of the Future Fund prior to 2020-21. Sources: Australian Government, Mid-Year Economic and Fiscal Outlook (MYEFO), December 2019; Parliamentary Budget Office (PBO), Medium- term fiscal projections: impact of Covid-19 pandemic and response (5th June 2020). The PBO projections were compiled using the RBA’s ‘baseline’ scenario outlined in 81 its May 8th Statement on Monetary Policy for economic parameters. The Treasurer will give an update of fiscal and economic forecasts on 23rd July. CORINNA ECONOMIC ADVISORY … there’s no need for undue alarm at the level of debt which will be incurred by the Australian Government

Australian Government gross public debt General government net debt, 2021

70 % of GDP 180 % of GDP Estimated additional gross debt resulting from 160 60 Covid-19 policy measures and revenue losses due to 140 economic downturn 50 (based on PBO projections) 120

40 100

As forecast in December 80 30 2019 Mid-Year Economic and Fiscal Outlook 60

20 40

20 10

0

Australia Japan Italy France US Spain UK Germany Netherlands Canada NZ Korea Sweden 0 50 55 60 65 70 75 80 85 90 95 00 05 10 15 20 25 30 30 June

Note: Estimates of additional gross debt from 2019-20 onwards are derived by assuming that gross debt rises by the same dollar amount as net debt projected by the Parliamentary Budget Office in its ‘baseline’ scenario. Sources: Katrina Di Marco, Mitchell Pirie and Wilson Au-Yeung, A History of Public Debt in Australia (Australian Treasury, 2011); Australian Government, Mid-Year Economic and Fiscal Outlook (MYEFO), December 2019; Parliamentary Budget Office (PBO), Medium-term fiscal th 82 projections: impact of Covid-19 pandemic and response (5 June 2020); International Monetary Fund, Fiscal Monitor, April 2020. CORINNA ECONOMIC ADVISORY The Australian Government has so far had absolutely no difficulty financing its significantly higher deficits

Australian government bond issuance since March 2020 ❑ Since 30th March, the Australian Office of Financial Management 60 $ bn (which conducts the Government’s borrowing programs) has issued $112.6bn of Treasury bonds 50 Amount offered ❑ Based on the volume of bids Amount of bids received at bond tenders or for 40 syndicated issues, the AOFM could have borrowed $406bn (that is, 3.6 times as much as it actually 30 accepted) – with the highest yields on unsuccessful bids averaging 34bp above the highest accepted yields 20 ❑ This past Tuesday, AOFM received offers worth $50.7bn for $17bn of 4½ 10 year bonds carrying a coupon rate of 0.25% pa – the average yield on successful bids was 0.495%

0

08-Apr 20-May 01-Jul 03-Apr 06-Apr 07-Apr 15-Apr 17-Apr 20-Apr 22-Apr 24-Apr 28-Apr 01-May 04-May 06-May 08-May 13-May 15-May 18-May 22-May 25-May 27-May 29-May 02-Jun 03-Jun 05-Jun 09-Jun 10-Jun 17-Jun 19-Jun 22-Jun 24-Jun 26-Jun 03-Jul 08-Jul 10-Jul 14-Jul 17-Jul 30-Mar − 42% of the bonds were bought by banks, 27% by fund managers, 23% by hedge funds, and 8% by Date of tender or (for syndicated issues) pricing date (foreign) central banks

Source: Australian Office of Financial Management data hub.

83 CORINNA ECONOMIC ADVISORY The Treasurer has foreshadowed ‘bringing forward’ personal income tax cuts scheduled for 2022 and 2024 as a form of fiscal stimulus

Legislated personal income tax cuts ❑ Treasurer Josh Frydenberg has foreshadowed bringing forward the

Rates from 2017- New thresholds from New thresholds from personal income tax cuts currently legislated to come into effect 18 to 2023-24 2018-19 to 2021-22 2022-23 to 2023-24 on 1st July 2022, as a way to ‘boost aggregate demand, boost Nil Up to $18,200 pa Up to $18,200 pa consumption [and] put more money in people’s pockets’

19 % $18,201 - $37,000 $18,201 - $45,000 ❑ These were estimated to ‘cost’ $4½bn (in revenue foregone) in

32.5 % $37,001 - $90,000 $45,001 - $120,000 FY2022-23 and (together with the further cuts legislated to take effect from the beginning of FY2023-2024) $143bn over the ten 37 % $90,001 - $180,000 $120,001 - $180,000 years to 2029-30 45 % Above $180,000 Above $180,000 − bringing forward these tax cuts would likely provide a lift to demand and

Low & middle Up to $1,080 - activity – but, inevitably, at least some of the boost in after-tax incomes income tax would be saved and/or used to pay down debt (as happened with the offset enhanced tax refunds paid out in the Sep quarter of last year – slide 47) Low income tax Up to $445 Up to $700 − whereas the same dollar amount spent (eg) on infrastructure, or on cash offset handouts to low-income earners who don’t pay tax, would boost demand Rates from 2024-25 New thresholds from 2024-25 by a larger amount Nil Up to $18,200 pa ❑ This week the Government announced an extension of its wage 19 % $18,201 – $45,000 pa subsidy scheme for apprentices to end-March 2021 (from end- 30 % $45,001 – $200,000 pa September) and broadened the range of eligible employers, as 45 % Above $200,000 pa well as a $1bn boost for skills training programs Low income tax offset Up to $700 ❑ Details of changes to the JobKeeper and JobSeeker programs are likely to be announced in the Treasurer’s Updated Economic and Source: Australian Government, 2019-20 Budget Paper No. 1, Budget Strategy Fiscal Outlook Statement this coming Wednesday and Outlook, April 2019. 84 CORINNA ECONOMIC ADVISORY There’s been considerable difference in the size of state and territory governments’ fiscal responses to Covid-19

State & territory Covid-19 support and response Voter approval of state premiers’ handling of measures as a pc of gross state product Covid-19

3.5 % of forecast 100 % 2019-20 gross state product 90 Well Badly 3.0 80

2.5 70

Average of all 60 2.0 states & territories 50

1.5 40

30 1.0

20 0.5 10

0.0 0 NSW Vic Qld SA WA Tas NT ACT NSW Vic Qld SA WA Tas

Sources: National Australia Bank, State Economic Overview, April 2020); Newspoll in The Australian, 30th June 2020. 85 CORINNA ECONOMIC ADVISORY With official interest rates as low as they can go, the RBA has implemented a range of ‘quantitative’ monetary policy measures

Reserve Bank assets as a pc of GDP ❑ The RBA cut the cash rate to 0.25% in March and has kept it there − the RBA has committed to keeping it at this level ‘until progress is made 16 % of GDP 14 towards full employment’ and ‘it is confident inflation will be sustainably 12 within the 2-3% target band’ 10 − RBA has ‘no appetite’ for negative rates 8 ❑ RBA has committed to purchase bonds in the secondary market 6 with a view to keeping the 3-year yield at 0.25% 4 − to date RBA bond purchases amount to $50bn (~ 2½% of GDP) 2 − the RBA hasn’t purchased any bonds since 6th May (but is prepared to 0 ‘scale up’ these purchases again ‘if necessary’) 10 11 12 13 14 15 16 17 18 19 20 − RBA assets are now equivalent to 14% of GDP (cf. BoC 23%, US Fed 33%, Reserve Bank daily repo transactions BoE 36%, ECB 54%, BoJ 119% - see slide 24) and RBNZ 17.5% 9 A$bn per day ❑ RBA provided additional liquidity through ‘open market 8 7 operations’ to prevent disruption of credit markets in March 6 − RBA repo transactions averaged just over $1 bn a day since the beginning 5 of April (except for the last two three weeks of the 2019-20 financial year), 4 down from peak of almost $8½ bn a day in 3rd week of March 3 ❑ ‘Term Funding Facility’ to provide up to $90 bn at 0.25% pa to 2 1 lending institutions for increased lending, especially to businesses 0 with annual turnover of less than $50 mn 28-Jun-19 27-Sep-19 27-Dec-19 27-Mar-20 26-Jun-20 − to date $23.3 bn has been provided through this facility (of which $7.3 bn Week ended was drawn down last week, by far the largest so far)

Source: Reserve Bank of Australia. 86 CORINNA ECONOMIC ADVISORY The RBA is targeting the 3-year bond yield at 0.25% pa – and hasn’t needed to purchase bonds since 6th May in order to keep it there

RBA open market bond purchases Interest rates

6 $bn 2.50 % pa

5 2.00

4

Australian Government bonds 1.50 State & Territory Government bonds 3 10-year bond yield 1.00

2

0.50 3-year 1 bond yield

RBA cash rate 0 0.00 20-Mar 07-Apr 23-Apr 11-May 27-May 12-Jun 30-Jun 16-Jul Dec-18 Mar-19 Jun-19 Sep-19 Dec-19 Mar-20 Jun-20 Sep-20

Source: Reserve Bank of Australia. Data up to 17th July. 87 CORINNA ECONOMIC ADVISORY The RBNZ’s ‘QE’ program has been larger than the RBA’s, but less successful in stabilizing bond yields

RBNZ open market bond purchases New Zealand interest rates

800 $NZbn 3.00 % pa

700 NZ Government bonds 2.50 600 LGFA bonds 2.00 500

400 1.50 10-year bond 300 yield 1.00 200 5-year 0.50 100 bond yield RBNZ OCR target

0 0.00

2… 2… 2… 2… 2… 2… 2… 3… 3… 0… 0… 0… 0… 0… 0… 0… 1… 1… 1… 1… 1… 1… 2… 2… 2… 2… 2… 2… 2… 2… 3… 0… 0… 0… 0… 0… 0… 1… 1… 1… 1… 1… 1… 1… 2… 2… 2… 2… 2… 2… 2… 2… 0… 0… 0… 0… 0… 0… 0… 1… 1… 1… 1… 1… 1… 1… 1… 2… 2… 2… 2… 2… 2… 3… 0… 0… 0… 0… 0… 0… 0… 1… 1… 1… 1… 1… 1… 2… 2… 2… 2… 2… 2… 2… 3… 3… Dec-18 Mar-19 Jun-19 Sep-19 Dec-19 Mar-20 Jun-20 Sep-20 ❑ RBNZ has adopted an ECB-style QE program, establishing a Large Scale Asset Program initially set at $NZ33bn (10½% of GDP), since increased to $60bn (19% of GDP) ❑ Since 25th March RBNZ bond purchases have amounted to $NZ21.4 bn (6.9% of GDP) – but have been less successful than the RBA’s in stabilizing medium-term bond yields ❑ The RBNZ has asked banks to prepare operationally for the possibility of negative interest rates

Note: LGFA = Local Government Financing Authority. Source: Reserve Bank of New Zealand. Data up 20th July. 88 CORINNA ECONOMIC ADVISORY The RBA in effect more than absorbed the increase in Commonwealth and State debt, and sales by foreign investors, during the March quarter

Holders of Australian Nationality of Australian Holders of State and Territory Government bonds Government bond holders Government bonds 40 80 35 75 60 % of total 60 % of total % of total % of total % of total % of total Australia 35 30 70 50 50 70 30 Foreign 25 Banks investors (right scale) 60 40 40 25 65 Foreign Other 20 domestic investors investors (right scale) 20 50 30 30 Banks 15 60 15 Unidentified foreign RBA 40 20 20 (right scale) 10 10 Other domestic Asia investors 55 30 RBA 5 10 10 5 Europe US Other 0 20 0 50 0 0 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 10 11 12 13 14 15 16 17 18 19 20 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20

Sources: ABS (Finance & Wealth Accounts); Australian Office of Financial Management. June quarter data will be released on 24th September. 89 CORINNA ECONOMIC ADVISORY The RBA Governor has again ruled out negative interest rates - and the application of ‘modern monetary theory’

❑ Speaking yesterday, Governor Lowe said “negative interest rates in Australia are extraordinarily unlikely” − “They can cause stresses in the financial system that are unhelpful for the supply of credit. They can also encourage people to save more, rather than spend more, so they can be counter-productive from that perspective too” ❑ Governor Lowe also dissed ‘modern monetary theory’ (MMT) – though without referring to it by name − “For some, this idea is seen as a way of avoiding financing constraints – it is seen as holding out the offer of a free lunch of sorts” − “The reality, though, is there is no free lunch. The tab always has to be paid and it is paid out of taxes and government revenues in one form or another” ❑ How ‘the tab is paid for’ depends, according to Governor Lowe, on ‘the arrangements in place’ − if money-financed government spending was “successful in stimulating the economy” and started to push inflation up, and interest rates weren’t raised to counter that, the tab would be paid “through the inflation tax that the community pays” − if the government were to pay the IOU issued to the central bank along with any accumulated interest at some point, “this repayment would need to be funded by future taxes” − if the IOU was not interest-bearing and wasn’t repaid, “the central bank would start accumulating losses as the interest rate it paid on its deposit liabilities increased and there was no offsetting income” which “would lead to a decline in dividends to the government and possibly a future recapitalization of the central bank” both of which “have to be funded through tax revenue” − or, if the general level of interest rates were raised to counter inflation, but the low rate on deposits at the central bank maintained, that “would effectively amount to a tax on the banking system” ❑ Governor Lowe also addressed the proposal by Stanley Fischer et al that monetary financing of budget deficits could be ‘welfare enhancing’ when governments are unable to borrow ‘on reasonable terms’ and conventional monetary policy options have been exhausted, provided that the central bank (rather than the government) determined the amount of monetary financing and the conditions under which it is provided − “there are likely to be very significant challenges in maintaining this type of safeguard over time” − and in any case this “is not relevant to the situation we face in Australia”

st 90 Source: Phillip Lowe, ‘Covid-19, the Labour Market and Public Sector Balance Sheets’, Address to the Anika Foundation, 21 July 2020, available here. CORINNA ECONOMIC ADVISORY For now at least, banks are ‘part of the solution’, not ‘part of the problem’

Changes in interest rates since June 2019 ❑ Banks have cut interest rates on small business loans by more than the official cash rate since June last year (when the RBA 0.00 -0.25 started cutting rates again) -0.50 ❑ Banks have extended ‘repayment holidays’ of up to six months to -0.75 -1.00 business and home mortgage borrowers who request it (about -1.25 13% of mortgages and 20% of SME loans) -1.50 − although it is important to note that under these arrangements interest -1.75 -2.00 Pc points payments are deferred and capitalized, not foregone Official Small Small Weighted Standard cash rate business business average variable ❑ These ‘repayment holidays’ are due to expire at end-September, term loan overdraft deposit mortge rate but banks this week announced that they would be extended for rate rate rate up to four months for those customers who were still experiencing Business credit outstanding difficulties but have good prospects of eventually repaying 3.5 % change from 3.0 previous month March’s 3.5% ❑ Major banks have cut or deferred dividends 2.5 increase was the 2.0 largest increase ❑ At end-2019, the Australian banking system had a Common since January 1988 … 1.5 Equity Tier 1 capital ratio of 11.3% of risk-weighted assets - well 1.0 above the 10.5% required for major banks since 2017 0.5 − APRA will allow banks CET1 ratios to drop below the 2017 requirements 0.0 -0.5 during the Covid-19 period provided they remain above other … while May’s 0.6% decline was -1.0 the largest since April 2011 minimum prudential capital requirements -1.5 ❑ Banks may be hit by increased loan impairment charges after 11 12 13 14 15 16 17 18 19 20 30th September Source: Reserve Bank of Australia. 91 CORINNA ECONOMIC ADVISORY Conclusion: Some longer-term considerations

For more details… The factors which helped us achieve almost 30 years of continuous economic growth may not be so helpful in the post-Covid environment

Australia’s record-breaking run of almost 30 years without two or more consecutive quarters of negative real GDP growth owed a lot to four factors - ❑ Population growth − Australia’s population grew at an average annual rate of 1.5% pa over the 19 years to 2019, compared with 0.6% pa for all ‘advanced’ economies − net immigration accounted for 58% of this growth – ie, in the absence of immigration Australia’s population would have grown by only 0.7% per annum, on average, and would have aged more rapidly ❑ Our unusual (for an ‘advanced’ economy) economic relationship with China − China’s rapid economic growth, industrialization and urbanization significantly boosted both the volumes and prices of many of our commodity exports, under-wrote the post-GFC mining investment boom, pushed down the prices of many of the things which we import, and contributed significantly to the growth of our tourism and education sectors − By contrast, China’s rapid economic growth undermined the competitiveness of manufacturing industries which account for a much larger share of most other ‘advanced’ economies, put downward pressure on the prices of their exports and put upward pressure on the prices of commodities which they import ❑ The ‘housing boom’ − Australia’s ‘housing boom’ started earlier (mid-1990s) and ended later (2017, rather than 2007-08) than in most other ‘advanced’ economies (some – such as Japan, Italy and France – didn’t have a housing boom at all) − the two-way interaction between rising house prices and rising household debt underwrote stronger growth in household consumption spending, for longer, than would have occurred otherwise ❑ (Mostly) good macro-economic policy – especially by comparison with other ‘advanced’ economies − although we haven’t done nearly as well as we once did on the micro-economic front (especially with regard to productivity) The first three of these are likely to be of less assistance from now on

93 CORINNA ECONOMIC ADVISORY Australia’s above-average economic growth over the past 20 years owes a lot to above-average population growth: that’s about to change

Australia and OECD population growth Australian GDP and per capita GDP growth 2.5 % change from year earlier 6 % change from year earlier 5 2.0 Australia 4 Real GDP 1.5 3 2 1.0 OECD 1 0.5 0 Real GDP per capita 0.0 -1 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 Sources of Australia’s population growth Australia and OECD per capita real GDP growth 350 '000s (4-qtr moving total) Net immigration 6 % change from year earlier 300 (likely to fall to less than 40,000 in 2020-21) 4 Australia 250 2 200 0 150 Natural increase -2 100 OECD

50 -4

0 -6 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20

Sources: ABS; OECD. 94 CORINNA ECONOMIC ADVISORY Australia has come to rely much more heavily on increased labour input to drive economic growth in recent years

Labour input and labour productivity contributions to Australian real GDP growth 6 % change from year earlier ❑ Over the past five years, 72%

5 of Australia’s real GDP growth has come from increased 4 labour input, and only 28% from labour productivity 3 growth

2 ❑ By contrast, between the end of the early 1990s recession 1 and the onset of the global financial crisis, 46% of 0 Australia’s real GDP growth came from increased labour -1 input and 54% from productivity growth -2

-3 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20

Labour productivity Hours worked Real GDP

Source: ABS. 95 CORINNA ECONOMIC ADVISORY Australia has benefited enormously from its economic relationship with China over the past 25 years, but will that continue to be the case?

Merchandise exports to China as Merchandise exports to China as Merchandise imports from China as a pc of total a pc of GDP a pc of total 45 18 % of GDP, 2018 35 % of total merchandise exports, 2019 % of total merchandise imports, 2019

40 16 30

35 14 25 30 12

25 10 20

20 8 15

15 6 10 10 4

5 5 2

0 0

US Canada Chile Peru Brazil Taiwan NZ Korea PNG Japan Indonesia Malaysia Vietnam Philippines Singapore Thailand SouthAfrica Germany UK France Italy Mexico Turkey

Australia 0

Italy Vietnam Taiwan Singapore Malaysia Korea Chile Australia Thailand Peru PNG NZ Brazil Japan Germany Indonesia Philippines SouthAfrica Canada UK France Mexico US Turkey

Chile Japan Indonesia Australia Vietnam Peru Philippines Korea Thailand Malaysia NZ Taiwan Brazil SouthAfrica Mexico US PNG Singapore Canada UK Turkey Italy Germany France

Sources: IMF, Direction of Trade Statistics; Taiwan Ministry of Economic Affairs, Bureau of Foreign Trade. 96 CORINNA ECONOMIC ADVISORY China’s threats against Australian exports of barley, beef, coal, tourism and education aren’t justified, but we aren’t complete innocents either

Number of anti-dumping Australian trade policy Countries adversely affected by measures imposed, 2015-19 measures since 2009 ‘harmful’ Australian trade actions Number of actions 180 Number of measures 25 Number of actions 60 (adjusted for lags) 160 50 Harmful 140 20

120 40

100 15 30 80

60 10 20

40 10 20 5 Liberalizing

0

Malaysia US Brazil China Australia Canada Pakistan Turkey Mexico Argentina EU Korea Ukraine Egypt Thailand Colombia Russia Indonesia Taiwan Morocco Japan

India 0

Vietnam China Korea Malaysia India Thailand US Indonesia Germany Singapore France Italy Japan UK

0 09 10 11 12 13 14 15 16 17 18 19 20

Sources: World Trade Organization; Global Trade Alert (data up to 20th July). 97 CORINNA ECONOMIC ADVISORY Rising property prices and household debt are unlikely to underpin Australian economic growth as they have done for most of the past 30 years

Australian housing wealth Household debt as a pc of Increase in residential property and household debt GDP, December 2019 prices, 1990-2019 200 600 800 % of annual household % of annual household 140 % of GDP % change 1990-2019 disposable income disposable income 700 550 120 175 600 100 500 500 150 80 400 Household 450 debt 300 125 60 (left scale) 400 200 40 100 100 350 20 Value of residential land 0 and housing owned by households (right scale)

75 0

Australia Denmark Norway Canada Netherlands NZ Sweden UK HongKong US Finland Portugal Belgium France Japan Spain Germany Greece Singapore Austria Israel Italy Ireland

Switzerland -100

Netherlands Switzeland NZ Norway Malaysia Australia Ireland Sweden Canada UK Belgium Spain US Thailand France France Singapore Italy Finland Korea Germany Denmark Japan 300 HongKong

50 250 90 95 00 05 10 15 20

Note: Singapore property price increase is from March quarter 1999. Sources: ABS; Bank for International Settlements. 98 CORINNA ECONOMIC ADVISORY Some other possible longer-term consequences of the pandemic

❑ An accelerated retreat from ‘globalization’ − prompted by mistrust of international supply chains and desire for greater self-sufficiency in ‘essential’ products − greater government control over movement of people and capital across international borders likely to persist ❑ Greater expectations of government − having done things previously considered ‘unthinkable’ during this downturn, governments may be expected to do more during future downturns − there may be heightened demand for hitherto unprecedented government intervention to address other issues (for example climate change) ❑ A reduced role for (conventional) monetary policy in managing economic cycles − implying a greater role for fiscal policy (or, alternatively, bigger and perhaps more frequent cycles) ❑ Changes in ways of working − at least some employers and employees are likely to maintain the option of (or preference for) ‘working from home’ − possible implications for demand for commercial office space ❑ Diminished use of mass transit ❑ Accelerated decline in the use of cash for transactions ❑ Re-think of relationships with China − especially challenging for Australia given our unusual (for an ‘advanced’ economy) economic relationship with China ❑ Erosion of respect for US leadership and competence − unless Trump loses the November election and Biden can reverse the damage done to perceptions of US credibility, competence and commitment

99 CORINNA ECONOMIC ADVISORY I will be doing two more webinars on Wednesday 29th and Friday 31st July at 4pm AEST

Go to www.bettercallsaul.com.au for details

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For more details… This document has been prepared by Saul Eslake on behalf of Corinna Economic Advisory Pty Ltd, ABN 165 668 058 69, whose registered office is located at Level 11, 114 William Street, Melbourne, Victoria 3000 Australia.

This document has been prepared for the use of the party or parties named on the first page hereof, and is not to be further circulated or distributed without permission.

This document does not purport to constitute investment advice. It should not be used or interpreted as an invitation or offer to engage in any kind of financial or other transaction, nor relied upon in order to undertake, or in the course of undertaking, any such transaction.

The information herein has been obtained from, and any opinions herein are based upon, sources believed reliable. The views expressed in this document accurately reflect the author’s personal views, including those about any and all financial instruments referred to herein. Neither Saul Eslake nor Corinna Economic Advisory Pty Ltd however makes any representation as to its accuracy or completeness and the information should not be relied upon as such. All opinions and estimates herein reflect the author’s judgement on the date of this document and are subject to change without notice. The author and Corinna Economic Advisory Pty Ltd expressly disclaim any responsibility, and shall not be liable, for any loss, damage, claim, liability, proceedings, cost or expense (“Liability”) arising directly or indirectly (and whether in tort (including negligence), contract, equity or otherwise) out of or in connection with the contents of and/or any omissions from this communication except where a Liability is made non-excludable by legislation.

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