01. The front page
A welcome policy success. To date, the government policy response to the COVID-19 pandemic has been more than successful. The wage subsidy, benefit increases (incl. winter energy payment), business loan support, targeted sector support have underpinned spending and employment. Job losses are significant (50,000), but are nowhere near as dire as was originally feared. Meanwhile, the rapid return to level 1 (alongside a buy local sentiment) has seen a quick rebound in retail spending (incl. domestic tourism).
Unfortunately, despite many business, industry, policy, and community leaders and advocates behaving as if the recovery back to ‘normal’ will be a sprint, it is clear it will be more of a marathon. With the ‘normal’ at the finish line likely to be unfamiliar to many.
The relatively positive scene described above cannot avoid the inevitable sombre outlook. With global economic (not to mention, social) turmoil continuing, the prospects for New Zealand will be difficult to say the least. The difference between a sprint and a marathon cannot be stressed too much. At Olympic level the longest sprint distance (400m) takes less than one minute to complete. A marathon takes more than two hours. Clearly, training, preparation, and expectations for a marathon are starkly different than for a sprint. The sooner our business, industry, policy, and community leaders recognise the difference, and re-orient their (and our) behaviour and expectations to the marathon task and goals the better for the wellbeing of all.
While export and import trade in goods seems to have held up well, the flows of people are where the dislocation and upheaval will continue to be most pronounced. New Zealanders know well our reliance on international tourism, but the impact on international education is set to be similarly disruptive. Similar to that for many tourism entities, the business model for many educational institutions are now severely undermined and will require significant revisions.
Organisations must use the buffer and time provided by the government’s policy response to re-orient their businesses to more sustainable, resilient, long-term foci. However, the scramble by some for a rapid return to ‘business as usual’ is unhelpful. Such a clear misunderstanding of the scale of the upheaval and misreading of the future challenges will only make future adjustments even more difficult.
Moreover, a potentially larger upheaval arises from the dislocation to global labour market flows. Many New Zealand sectors rely heavily on migrants and their skills to supplement their workforce. Professions in health, education, research and science, support services, engineering and design require migrants to replace New Zealand-trained personnel who are inevitably attracted offshore. Whether sectors can adjust to these flows being severely disrupted may well determine a sector’s prospects over the coming months (if not years).
Similarly, but with a noticeable difference, are sectors that rely heavily on migrant workers to support their low-wage business model. Some entities within community care, hospitality, horticulture, film, may be successful in re-designing their business models to be less reliant on such labour. Others may not. Again, though, the persistent calls by some industry organisations and representatives for a rapid ‘return to normal’ risks wasting precious time for such a re-design or re-set.
Globally, without wishing to be overly dramatic, the outlook is bleak. Both the Organisation for Economic Co-operation and Development (OECD) and the International Monetary Fund (IMF) have issued projections that remain couched in worryingly tentative language.
The OECD’s June Economic Outlook is headlined “After the lockdown, a tightrope walk to recovery”. Signalling that a return to any sense of normality is some time away, the OECD warns “as long as no vaccine or treatment is widely available, policymakers around the world will continue to walk on a tightrope.” The OECD presents two possible scenarios, with the bleaker picture to capture the possibility of “a second wave of rapid contagion erupting later in 2020”. That scenario sees unemployment peaking at an OECD-wide average of 12.5 percent. However, the more favourable scenario is not much more palatable, with average OECD unemployment still peaking at close to 11.5 percent. The OECD recognises the need for “extraordinary” policies, noting the breakdown in confidence and global co-operation, as well as the disproportionate impact on the vulnerable.
In turn, the IMF’s June World Economic Outlook is headlined “A crisis like no other, an uncertain recovery”. According to the IMF the immediate downturn is worsening in many areas with a synchronised and deep downturn. “There is a broad-based aggregate demand shock, compounding near-term supply disruptions due to lockdowns”. The loss in employment in the June quarter is reportedly the equivalent of 300 million full-time jobs. The darkness of the language being used by international agencies is unavoidable.
Interestingly though, both agencies forecast a relatively rapid recovery following the first (or second) wave of infection(s). The quick bounce in activity and employment illustrated in their forecast documents appear to understate the damage and harm done to businesses, communities, supply chains, and trust and confidence in prospects. Although, all the agencies are united in their reliance on governments to step up and lead the recovery.
Remarkably, the OECD finishes with an even stronger sentiment that
“Governments must seize this opportunity to engineer a fairer and more sustainable economy making competition and regulation smarter, modernising government taxes, spending and social protection.
For New Zealand, the incredible success in halting and then effectively eliminating the community spread of COVID-19 places us in an unenviable position. In addition, the prompt fiscal and monetary policy response has softened the immediate blow to income and cash positions. Some, perhaps many, New Zealanders appear reluctant to recognise just how fortunate our position is.
Nevertheless, this does not lessen the quantum and complexity of the marathon ahead. The importance of supporting small business will need to continue.
But job losses will continue to mount over the short term. Consequently, the future of the wage subsidy will need to be re-thought, as will the integration of the COVID-19 Income Relief Payment into the Jobseeker Support and other welfare benefit payments. The continuation of a two-tier support system would seem clunky, and further complicate an already complex (and, not to mention, inequitable) system. Any new administration would be foolish to not take the opportunity to refresh and simplify the social security safety net.
Policies, projects and programmes to provide additional jobs – whether in environmental restoration, social support, or trades and broader sectors – will need to continue. The administration of these programmes and projects will be tested as they expand. The role of Māori, community groups, and local government will be central to determining the success or otherwise of these efforts.
Again, any new administration would be foolish to not take the opportunity to revamp these areas of labour market training, workforce planning and associated support. These tasks will be more prominent over the coming decade as increased government involvement in the functioning of the labour market becomes inevitable. But, critically, government involvement will need to genuinely embrace the skills and resources of Māori, community groups, and local government. Otherwise, reversion to past models (which have repeatedly failed) will repeat past mistakes.
Any new administration will be faced with the challenge of turning a behavioural focus on short-term sprints to check-box targets, towards more concerted long-term marathon outcome goals.
However, any new administration would be foolish to not – in the OECD’s words - seize this opportunity.
02. The temperature
Fiscal and monetary policy
- Low and possibly negative interest rates here for the long haul
- Government is still struggling to get spending out the door
- New administration spending plans likely to be announced in October/November.
- Concerns of impact of second wave adds to uncertainty
- US elections may delay adequate fiscal response
- Tensions with China adds to instability.
Monetary policy stance
- Use of unconventional tools will broaden
- Large scale asset purchase programme retains considerable firepower
- Exchange rate stability may hinder future adjustment.
03. People resources
The bald facts are:
- Unemployment (March 2020, seasonally adjusted) at 4.2%; marginally up from 4.1% a year earlier.
- Underutilisation (March 2020) at 10.4%; down from 11.3% a year earlier.
- Employment growth (QES March 2020 on March 2019) at 1.9%; up from 1.1% a year earlier.
- Labour force participation rate (March 2020) at 70.7%; marginally up from 70.6% a year earlier.
- Growth in total weekly earnings (March 2020 quarter on March 2019 quarter) at 3.4%; up from 3.2% a year earlier.
- Net migration (12 months to April) at +76,550; up from +49,860 a year earlier.
Before the COVID-19 alert level 4 lockdown started to have much of an effect, the labour market in New Zealand looked reasonably strong. In the March 2020 quarter, which included the first week of the level 4 lockdown, the number of people in employment, measured by the Household Labour Force Survey (HLFS) increased by 0.7 percent. On an annual basis, this represented an increase of 1.6 percent. Alongside the HLFS, the Quarterly Employment Survey (QES) showed that the number of filled jobs fell by 0.2 percent on a quarterly basis, but grew by 1.9 percent on an annual basis.
It will be early August before the June quarter statistics are released, but the signs are that the Government’s wage subsidy scheme has helped to prevent the dramatic loss of jobs that was widely feared. The accompanying chart, based on Statistics New Zealand estimates using tax data, indicates that employment at the beginning of July was actually fractionally higher than it was at the end of March.
However, it is likely that the worst is yet to come. Employment has held up relatively well over the lockdown period largely as a result of the wage subsidy scheme. This scheme meant people were still technically employed, even if they actually had nothing to do. More than one million people are currently supported by the scheme. Some sectors are struggling, but the economy as a whole appears to be performing better than the more pessimistic scenarios have implied.
But it is unclear how many will be unemployed when the wage subsidy scheme comes to an end at the beginning of September.
Unsurprisingly though, the wage subsidy scheme has not totally insulated New Zealanders from job losses. Numbers receiving the Jobseeker Support benefit in early July were 47,000 higher than mid-March. That suggests about a 1.5 percentage points increase in the unemployment rate, taking it to just under six percent. We would expect this to rise further once the wage subsidy scheme comes to an end.
Further, latest results from ANZ’s Business Outlook survey confirm that the employment outlook does not look good. The survey for June showed that a net 37 percent of businesses expected to reduce employment in the coming three months.
The best-case Treasury scenarios for unemployment are of a rapid climb to nine percent later this year and then an equally rapid reversal to four percent. Given global disarray, we expect the reversal to be more of a five year as opposed to a five month scenario. This will see unemployment remaining uncomfortably high over the short if not medium term. Such a scenario will test the incoming government and its policy response.
Provisional estimates from Statistics New Zealand indicate that net migration into New Zealand in the year to April 2020 was 76,600, although the figure for the month of April 2020 itself was virtually zero. Net migration of New Zealand citizens in the year to April 2020 was an estimated 11,100.
What exactly will happen to overall net migration in the coming months is unpredictable, although there are several indications that the number will remain relatively large. 16,500 people in New Zealand on temporary work visas that expire before the end of the year have been granted a six month extension, and this is likely to depress the number of permanent and long term departures. At the same time, there still appears to be large numbers of Kiwis intending to come home. Many of them are, effectively, in a queue for airline seats because of capacity constraints in the quarantine system for arrivals.
04. Capital resources
The bald facts are:
- TWI NZ$ exchange rate (June average) at 71.6; down from 72.5 a year earlier.
- Government 10-year bond rate (June average) at 0.90%; down from 1.63% a year earlier.
- SME business overdraft rate (June average) at 8.33%; down from 9.35% a year earlier.
- Growth in credit to non-agriculture business (May 2020 on May 2019) at 5.4%; up marginally from 5.3% a year earlier.
- Growth in number of residential building consents (3 months to May 2020 on 3 months to May 2019) at -9.3%; down from 4.9% a year earlier.
- Growth in area of non-residential building consents (3 months to May 2020 on 3 months to May 2019) at -40.2%; down from 14.4% a year earlier.
Investment and building activity
The value of investment in non-residential building is down across the board. This matches the story told by business confidence indicators, which were showing net negative sentiments of 60 percent or more for March and April. The Performance of Manufacturing Index along with the Performance of Services Index tell a similar story, though not as drastic. Clearly, businesses are at best entering cautious mode.
Globally, many countries are considerably worse territory, but New Zealand has managed to start operating as close to normal as possible. We would suggest that an overly pessimistic investment outlook is unwarranted.
The kaupapa of projects/programmes delivering value for future generations will need to be maintained, in both the public and private sectors. The current low interest rate environment will be reality for the foreseeable future and this will undoubtedly assist investment activity. A low interest environment means that projects need not be discounted so heavily. Consequently, projects delivering benefits further in future are now more viable. Similarly, availability of credit for viable projects is unlikely to be constrained.
Residential building work put in place is set to continue the strong trajectory of recent times. There was a reduction recorded for the March quarter, but this was due to the containment measures of COVID-19. New Zealand entered into alert level 4 on Wednesday 24 March. During alert level 4 period residential construction was not permitted as one of the essential activities.
We observe this effect will be temporary, with data for May 2020 showing 3,554 residential building consents issued – not far short of the 3,724 recorded in May 2019.
Residential building continues to be an important driver of employment and wellbeing. The outlook remains strong with the government’s social housing programme set to underpin further expansion in construction activity in this sector.
Money and credit
“Whatever it takes” has been the monetary policy message around the world, including New Zealand. Despite having little room to move on interest rates, monetary policy has become a critical policy area as a response to COVID-19 and its economic impact. Central banks have been forced to further explore unconventional policy options, with negative interest rates and direct asset purchases – as well as other forms of quantitative easing – now in play.
The New Zealand situation is no exception. Interest rates were already historically low, with the Official Cash Rate (OCR) at one percent from mid-2019. The Reserve Bank of New Zealand (RBNZ) reduced the OCR in March to the ultra-low rate of 0.25 percent, signalling at least 12 months at this rate. The RBNZ has ruled out negative interest rates in 2020, although this is reportedly due to significant challenges for banks whose IT systems are not prepared for negative rates. Consequently, asset purchases and other credit availability schemes have been ramped up to ensure monetary policy plays its part. At present, the RBNZ’s programme will purchase up to $60 billion of assets ($750 million per week), which are currently limited to New Zealand central and local government bonds.
Globally, and in New Zealand, low interest rates are expected to be here for a long time. In late June, Austria issued two billion euro of 100-year bonds at a yield of 0.88 percent. This suggests many believe the low interest rates will prevail for decades at least.
There are many other unconventional monetary options available to the central banks and to governments. For example, direct payments to individuals or households has been seen recently in the United States and Australia.
Interestingly, foreign exchange markets have remained relatively stable. In times of recession, a lower exchange rate provides a buffer for New Zealand exporters. This year the NZ$ has had a bumpy ride, falling significantly in early March against the US$, and a weighted index of New Zealand’s trade partners, before returning to pre-COVID levels in June. Any further increases in the NZ$ will be challenging for exporters, though demand for exports should remain high given the supply chains are functioning effectively. The absence of an exchange rate response in the form of a lower NZ$ will push even more of the burden of recovery onto fiscal policy (i.e. government spending) and unconventional monetary policy options.
05. Home base
The bald facts are:
- Growth in value of electronic transactions (three months to May 2020 on three months to May 2019) at -23.3%; down from 3.5% a year earlier.
- Growth in domestic tourist spending (3 months to May 2020 on 3 months to May 2019) at -51.2%; down from 0.4% a year earlier.
- Growth in core retail sales values (March 2020 quarter on March 2019 quarter) at 5.3%; up from 4.2% a year earlier.
- Core retail price inflation (March 2020 quarter on March 2020 quarter) at 1.3%; up from 0.3% a year earlier.
- Consumer price inflation (March 2020) at 2.5% per annum; up from 1.5% a year earlier.
- Core Crown tax revenue (ten months July 2019 to April 2020) totalled $72.5bn; up 1.9% on the same period of the previous year.
Annual inflation in the three months to March reached 2.5 percent, the highest rate since September 2011 and the first time above the two percent target since a brief period in 2017. However, the June quarter recorded negative inflation of 0.5 percent, taking the annual inflation rate to 1.5 percent in year to June. This is as expected in periods with high uncertainty or expected recession; as demand falters, lower inflation results.
Food prices rose by an annual 3.3 percent in the March quarter and by 3.7 percent in the June quarter, both ahead of the overall CPI rate. These figures are consistent with supermarkets cancelling all sales during the lockdown period, along with a significant spike in fruit and vegetable prices.
Fuel costs rose only gently, as the price of petrol came down following the oil price slump which occurred earlier this year. The petrol price decline through the June quarter was particularly large. This was countered by another round of annual excise tax increases on fuel. Excise tax increases also drove a surge in cigarette and tobacco prices.
Looking ahead, the overall inflation picture is uncertain as we wait to see how demand recovers from the economic shock, especially if the wage subsidy scheme is not extended beyond September. But further negative quarters would be unsurprising, as we expect demand to remain fundamentally weak. In addition, downward influences on prices may result from specific policy measures. For example, costs to consumers in the education sector are set to fall as free trades training and limited free university schemes are rolled out.
Possible inflationary pressures may emerge if supply restrictions due to reduced air freight are magnified. As the Government fiscal stimulus continues with a particular concentration in infrastructure development, construction sector costs may be another source of inflationary pressure.
Retail took a huge hit over the COVID-19 lockdown period. As illustrated, a significant proportion of retail literally stopped over the lockdown period. This resulted in a significant decrease of 23 percent in electronic transaction values for the three months to June, compared to the previous year. Unsurprisingly, the only category to have growth was consumables.
However, decreased demand is not the only challenge that retail is facing. COVID-19 is also creating struggles for retail on the supply side. According to the Retail New Zealand Survey, 40 percent of retailers are having difficulty getting the stock they need.
The outlook for retail may not be as bleak though, with domestic activity rebounding sharply in recent weeks. The track of unemployment – along with the government response at the completion of the wage subsidy programme – will heavily influence the outlook for retail over the coming 12 months.
Prudent financial strategies by recent administrations resulting in considerable financial surpluses had left government debt at low levels prior to the onset of COVID-19. This enviable position means the government could spend considerable sums (and can continue to do so) to help New Zealanders get through the ensuing economic downturn.
The Government’s COVID-19 response has seen core crown expenses increase by $16.5 billion in the year to April 2020 to $87 billion. The majority of this growth is due to the Wage Subsidy Scheme ($10.5 billion), increased superannuation payments and spending decisions made in Budget 2019, where the expenditure was not scheduled to begin until 2019/20 in health, education and law and order.
The Interim Financial Statements of the Government of New Zealand for the ten months ended 30 April 2020 show that the operating balance before gains and losses (OBEGAL) with a deficit of $12.8 billion. This figure compares to a surplus of $5.3 billion recorded over the same period of the previous year. The $18 billion turnaround is driven by the huge $16.5 billion rise in expenses.
The net core crown operating cash flows were $14.3 billion higher than the same time last year, mainly owing to COVID-19 related payments. However, the impact of COVID-19 on OBEGAL looks to be less than the $28 billion deficit projected in the Budget 2020 documents. Tax revenue was $200 million greater than forecast. The main cause of this was GST revenue being $1.1 billion above forecast. However, this was offset due to lower than expected corporate tax revenue, even when accounting for the COVID-19 impact. A lower than expected take up of the Business Finance Guarantee scheme resulted in core crown expenses being $426 million below the Budget 2020 forecast.
The government intervention to support the economy during the COVID-19 pandemic will inevitably see large budget deficits and increases in the government debt as a ratio of GDP.
Net core crown debt as at April 2020 had already risen to 25.3 percent of GDP. This is already above the Budget 2019 announced intention to keep net debt between 15 and 25 percent of GDP from 2021/22. For context, Treasury December 2019 documents (just prior to COVID-19) had forecast an OBEGAL deficit of $900 million for the June 2020 year. That would have been consistent with net core crown debt at 19.6 percent of GDP.
The challenge over the next few months (and years) will be managing the growing financial deficits and debt. Critically, this management will need to be balanced with the need to address (or minimise) the deficits in wellbeing and community infrastructure that also risk ballooning in the post-COVID-19, pre-vaccine, world.
06. Abroad and beyond
The bald facts are:
- Growth in merchandise export receipts (3 months to May 2020 on 3 months to May 2019) at -1.9%; down from 11.3% a year earlier.
- Growth in merchandise import payments (3 months to May 2020 on 3 months to May 2019) at -14.8%; down from 4.0% a year earlier.
- Growth in international tourist spending (3 months to May 2020 on 3 months to May 2019) at -60.0%; down from 4.1% a year earlier.
- Growth in India GDP (March 2020 quarter on March 2019 quarter) at 3.1%; down from 5.8% a year earlier.
- Growth in China GDP (March 2020 quarter on March 2010 quarter) at -6.8%; down from 6.4% a year earlier.
- Growth in Australia GDP (March 2020 quarter on March 2019 quarter) at 1.4%; down from 1.7% a year earlier.
Exports, including tourism
As a result of on COVID-19 measures, international tourism has largely halted, and will completely stop once temporary work visas finish. As such, domestic tourism is the focus for the foreseeable future. However, due to the lockdown restrictions and COVID-19 more widely, domestic tourism was also closed for a while. Domestic tourist spending in the three months to May was more than 50 percent down on the same period a year ago. This has resulted in spending over the year to be an average 11 percent down on the previous year. As such, New Zealanders need to play catch up by exploring their country.
In annual terms, the West Coast has seen the largest decrease in domestic tourist spending to May 2020 (down 18 percent), while the Hawke’s Bay has seen the least (down 6.5 percent). The regions that are less accessible for our largest cities could well suffer the most through less domestic tourism.
Tourism, though, remains a carbon-intensive activity. Without major technology and infrastructure advancements, the pre-CIOVID-19 business model of the tourism sector is not sustainable. However, the much-needed reset of this sector may be hindered further by the short-term encouragement of domestic tourism as part of the COVID-19 recovery packages. Either way, the future tourism sector will look very different to the one we had just 12 months ago.
Goods (merchandise) exports
Exports of goods have done very well despite the lockdowns, travel restrictions and global uncertainty. Exports for the year to May totalled $58 billion, two percent greater than the year to May 2019. Looking at the key export destinations, the international supply chains appear to be functioning well, with exports continuing to all the key export markets.
Horticulture and viticulture have been leading the way. The peak of the kiwifruit season has passed, and the exports have been at an all-time high of just over $2.5 billion for the year, despite the lockdowns arriving at peak season in March. Kiwifruit exports typically continue until August. Wine has also done well, with an annual total of $1.9 billion, up $110 million on the previous year.
Avocados are the next fruit to come into harvesting season, with similar challenges to kiwifruit in requiring workers available to pick pack and process the harvest for 2020. The harvesting typically starts to ramp up in August, to peak export volumes in September through to January.
Other horticulture exports have also been recording solid returns. Apples for instance, are at an all-time high of $900 million in export receipts for the year to May, with prices averaging $2.20 per kilogram. Considered a ‘sunset industry’ just a decade ago, continued innovation in the apple industry has shown that the industry has well and truly recovered and continue to be one of New Zealand’s key horticultural exports.
Forestry has been among the most affected exports, with annual exports down $1 billion from the peak, with annual exports of $3.5 billion. With China reopening, the harvesting of logs in New Zealand has started to pick up. In May, 2020, $370 million of logs were exported, the largest monthly exports since June 2019, though still 12 percent less than May 2019.
Trade and payments balances
As of the year ending May 2020, New Zealand was experiencing continued strong growth in goods export receipts. Our merchandise trade balance has continued to improve over the last 18 months, after hitting an annual deficit of $6.7 billion in the year to February 2019. For the year to May 2020, the merchandise trade balance was just $1.3 billion in the red. If this improving trend continues for the rest of 2020, then New Zealand could see our merchandise trade balance record a surplus by the end of 2020.
The strong improvement in the merchandise trade balance has also come from a decline in the annual growth of imports. In April 2019 growth in the annual import bill finally dropped below 10 percent. Since then this trend has continued, with imports in the year to March 2020, actually declined one percent.
The slowing growth in the import bill has, in turn, come from a slowing imports of motor vehicles, plant and transport equipment. Further denting New Zealand’s import bill was a very strong decrease in crude oil imports ($3.8 billion for the year to March 2020) helped by soft oil prices. Further, reduced fuel usage during the lockdown saw just $47 million of crude oil imported in April and $118 million in May 2020.
In contrast, trade in services (including education and tourism export revenue) remained in solid surplus for the year to March 2020. Overall tourism contributed the largest share of our service export revenue, with $12.9 billion in earnings, while education earned a further $5.0 billion. While the full impact of coronavirus has not yet been reflected in the available quarterly data, we do know that over 100,000 international students were enrolled with New Zealand education providers. Current border closures will prevent any students currently out of the country from entering New Zealand and resuming their studies. The June 2020 quarter data will certainly record a sharp decline in the value of New Zealand’s services exports.
Australia’s recovery has been set back by the recent outbreak in Melbourne, following a largely successful lockdown in halting widespread community transmission. Most of the current economic restrictions are planned to be unwound in the next few months, as long as outbreaks like the one in Melbourne are controlled and do not escalate.
The earlier period saw the Australia Federal Government undertake a massive macroeconomic support policy, including temporary wage subsidies, cash-flow assistance to firms, and doubling of the value of unemployment benefits with expanded eligibility to limit the economic shock. Direct fiscal support between March and May by federal and state governments amounted to around eight percent of GDP. Other announcements have included increased health spending, loan guarantees for small businesses, moratoriums on evictions and easier access to retirement savings.
As of July 2020, the Federal Government is considering further options for fiscal stimulus. One option is to bring forward AUD$5 billion in tax cuts, currently proposed for 2022-23, to begin in July 2021.
For the year to March 2020, Australian GDP growth dropped to 1.4 percent. This is down from 2.2 percent for the year to December 2019, and the 1.8 percent growth for the year to September 2019.
The impact of the COVID-19 pandemic is seen in Australian unemployment numbers, which rose sharply to be 7.1 percent as of May 2020.
China’s economy is well and truly past the heady days of double-digit GDP growth, even according to official statistics. Before COVID-19, even official GDP growth was showing a gentle slope to more modest growth rates of just over six percent.
The lockdowns in China have had a predictable effect, with March quarter official GDP statistics showing China’s GDP shrinking by 6.8 percent. As for elsewhere, the future outlook depends on the extent of any new COVID-19 outbreaks and how quickly they are controlled.
Nevertheless, demand from China for food and wood has recovered and bodes well for exporters. However, the ongoing trade dispute with the United States remains unresolved and reflects the continued deterioration in global geo-political stability. These influences indicate an, at best, volatile economic outlook.
The COVID-19 outbreak and containment measures has brought the longest US economic expansion on record to a sudden halt. GDP contracted by 1.3 percent in the second quarter, and the unemployment rate has risen quickly.
Just over 20 million workers lost their jobs in April, much faster than during the Global Financial Crisis (2008) or even the Great Depression. The unemployment rate swelled to almost 14.7 percent in April before subduing slightly in May and June. The unemployment rate will remain high, even with the gradual lifting of various states shelter-in-place orders, as sectors such as hospitality and transportation might take much longer to recover.
The difference in impact across various communities has exacerbated existing inequality, while the lack of access to affordable health care has further undermined civil order. Massive monetary and fiscal responses has provided a buffer for some households and businesses to date. However, these remain haphazard and the glaring absence of leadership from the centre has hampered COVID-19 control efforts. As fiscal and monetary supports wrap up, refocus or disappear, more businesses will face liquidity and solvency issues, with non-financial corporate debt around 140 percent of GDP, leading to more bankruptcies and job losses.
Europe (incl. United Kingdom (UK))
The impact of COVID-19 has had a devastating impact on European (EU) countries with considerable uncertainty about the future outlook. Stringent lockdowns overturned economies, while also containing the virus. Borders are slowly opening and economic activity is increasing, but the fallout from the pandemic is not over with the International Monetary Fund (IMF) projecting a 10.2 percent decrease in GDP over 2020 for the EU.
A recovery package of support worth €750 billion (six percent of the EU’s GDP) has been proposed. The European Commission (the Commission) plans to raise the money on the financial markets, with the debt being repaid over the period to 2058. However, there are ongoing divisions among countries in the EU on how the funds should be spent. While Ursula von der Leyen, President of the Commission, said they agreed that “severity of this crisis justifies an ambitious common response", the countries had not agreed on the ratio of grants and loans for each member state. Four countries (Austria, Denmark, the Netherlands, and Sweden) want more restraint in spending, and are opposed to the idea of issuing common debt. Rather, they prefer loans be given to individual nations rather than the EU as a whole. Germany has also expressed doubts about the basis for which funds will be distributed to member states.
Short-term work schemes have limited the impact on labour markets, and it is likely unemployment rates will continue to fluctuate over 2020-21. Data is current to April 2020 and is unlikely to reflect the true effect on the workforce, particularly workers in low-income, low-skill, low-security employment.
In the UK unemployment is estimated to rise to 6.5 percent by mid-2021. The 3.8 unemployment rate (Q1 2020) was already said to be masking low productivity, low wage growth, and low incomes. The number of people receiving unemployment benefits was closing on three million in May, doubling since March, with wage subsidies covering 9.1 million jobs in the labour market. The wage subsidies end in October.
The BREXIT transition period is due to end in December 2020. Negotiations resumed 7 July, with EU negotiator Michel Barnier arriving for the first face-to-face talks since pandemic lockdowns hit Europe. The EU says their position needs to be "better understood and respected" by the UK if an agreement is to be found, with fishing rights a particular bone of contention. But the pressure is on, with the UK refusing to extend the deadline. The UK is forging its way forward in a post-BREXIT world, formally launching free trade talks in June with several trading partners, including New Zealand, Australia, the United States of America, and Japan.