Labour market a key to recovery
Australian Market Strategist, Saxo
Summary: In the Aussie trade, it was all about the ongoing earnings reports and labour market data for July which highlights the long road to recovery for both the economy and the workforce, even though the headline unemployment rate beat economist's estimates. Despite the ASX 200 having gained a whopper 34% off the March lows in a matter of months, outside of the stock market things are very different. With many Australian's still suffering the devastating impact of COVID-19 on the economy, business, and the labour force, particularly with the reintroduction of restrictions in Greater Melbourne from 8 July. As the recovery trajectory plateaus it is fair to assume the gains in 2H will be harder to come by. Investors will have to become more selective with respect to active stock picking as the patchy recovery and post-pandemic changes shape new investment paradigms.
The July labour market data delivered a beat on most economist’s estimates, with headline unemployment rising to 7.5% from 7.4% last month, vs. the estimated 7.8%. Employment rose by a solid 114,700 people in July (almost 4x the forecast 30,000), following gains of 228,400 people in June, as restrictions have eased across most of the country but is still 531,600 people below its February peak. Indicating almost 2 in every 5 jobs have been recovered. The recovery has begun, but conditions remain tough, particularly as virus outbreaks and community transmission remains. The nascent economic recovery is hampered by the realisation that living with the virus is the new normal, which works to depress confidence and heightens the fragility of the recovery. Thus, weighing on both the speed and shape of the rebound, consistent with stalling consumer confidence that has prevailed as Melbourne has moved into lockdown again and NSW works to suppress smaller outbreaks.
Under these conditions’ consumer demand will face a difficult recovery, especially as government stimulus measures begin to scale back in October and the one off boost of the early access to superannuation, a real wild card in gauging discretionary consumption patterns, fades. According to the ABS, "The average weekly ordinary time earnings for full-time adults in Australia in May 2020 was $1,714 (seasonally adjusted), up 3.3% from November 2019". Clearly as the government income support is tapered, household incomes will correct lower.
Come October JobKeeper payments will be reduced from $1500 to $1200 ($750 part-time) a fortnight and JobSeeker will be reduced from $1100 to $815 a fortnight. Demand faces difficulty most notably for face to face services where people are fearful of infection, but also across the broader economy whilst confidence is dampened by rolling restrictions and lockdowns, prolonged distancing measures and job insecurities/reduced hours worked. This dynamic on the demand side is going to continue to create a lot of problems for businesses, hiring/ongoing layoffs, and bankruptcies or continued restructuring plans into the second half of the year.
A feature which has already become evident on the microeconomic level as earnings season has kicked off, with Network Ten, Sydney Airport, NAB and Virgin all announcing ongoing restructuring plans and/or job cuts. The emerging trend, developing on a more macro level as larger companies scale up restructuring plans, cost cutting and white-collar job losses, an ongoing concern which will have a more permanent impact on the labour market and consumer demand. Confidence among businesses and consumers is critical in upholding investment and spending and preventing further labour market dislocations down the track, which would weigh on consumption and the trajectory of the economic recovery given labour market outcomes play a large role in determining the recovery. Reflective of the need for ongoing and targeted fiscal support measures in order to avoid the “double dip recession” and re-assert a self-sustaining trajectory for economic growth.
The participation rate, which refers to the size of the workforce as percentage of the working-age population rose to 64.7% in July as workers returned to labour market with the easing of restrictions. Just as introducing distancing measures and lockdowns had an immediate (negative) impact on the economy, the easing of restrictions has consequently seen a positive impact on job numbers. However, despite strong jobs growth in July signalling the labour market recovery is underway, the unemployment rate rose and is likely to continue to rise from here, as the size of the labour force rebounds faster than job creation. And as the impact of Victoria’s move to stage 4 lockdowns and nightly curfews becomes visible in the data collection periods coming, with further job losses stalling the nascent recovery and creating divergent economic fortunes for states that have had more success in suppressing the virus. This month’s survey reference period dates to 11 July, with the stage 3 restriction reimposed in Melbourne on July 8, meaning some jobs lost or stood down are unlikely to be reflected in this month’s data. The move to Stage 4 restrictions on August 5th will also continue to trickle into the September labour market data.
Although the increase in unemployment from June to July was less than expected, the official number of unemployed Australians, available and actively looking for work, is now north of 1mn people, for the first time ever. Again, highlighting that although the road to recovery has begun, there is a long way to go yet and the labour market continues to suffer the painful blowback of the COVID-19 induced hit.
The underemployment rate (which refers the number of people who are employed but who want to work more hours) fell to 11.2%. Underutilisation, another measure of labour market slack fell to 18.7%, that is 2.5mn people who are either unemployed or looking for more hours of work. Signalling labour market slack is improving month to month, however, remains extremely elevated.
As we have previously noted, the JobKeeper subsidy continues to suppress the headline unemployment rate. The ABS has said “people who are paid through the JobKeeper scheme will be classified as employed, regardless of the hours they work (e.g. even if they are stood down).” Prior to COVID-19 a member of the workforce had to work at least one hour to be considered employed. That is why we look to hours worked and underemployment in order to gauge the real impact of COVID-19 on the Australian labour market.
Adding those that are working zero hours for economic reasons and those that have fallen out of the labour market all together, to the headline unemployment rate sees the true labour market 'dislocation' around 9%.