Back to work

Back to work as restrictions lift

During the last two weeks there have been a considerable number of companies reporting which has been the focus of our attention, however I did want to provide a further update on COVID as the restrictions are now being lifted at various rates globally. Infection levels, as measured by health authorities are falling and if earlier patterns are followed then they will return to very low numbers in the not too distant future. Second bouts of infection have appeared but to date they have been very minor even in countries where restrictions have been lifted for a month or more.

The Chinese economy is recovering very fast, with manufacturing output back to levels seen prior to the shutdown in January. Demand in exports may however be inflated by back orders, so we may see some weakness yet to come (export sector is now about 15% of GDP and 10% of employment). Stockpiles of key commodities have fallen rapidly to more normal levels and there has been strength in iron ore prices as Vale has been suffering supply constraints. Air travel is 50% below prior levels but up from the 70% decline in March. Service sector still well down as is consumer demand but it is picking up at rapid rate particularly at the high end; luxury car sales are above previous period last year.

The Chinese Monetary Policy Committee meets late this week and is expected to approve substantial stimulus to be directed in equal portions into infrastructure and support for consumers. The picture is one of a rapid recovery to date.

The question remains how quickly will a recovery occur in other developed economies. Jerome Powell, Chair of the Federal Reserve, observed that US downturn has been unprecedented in severity and rapidity; in a period of two months the unemployment rate in the US went from the lowest in 50 years to levels near that of the Great Depression, much of it concentrated in low income groups. He quoted that 40% of those earning less than US$40,000 had lost their jobs. He confirmed that the Fed would take whatever monetary policy actions were required and commented on the unprecedented levels and speed of fiscal policy stimulus passed by Congress.

In Australia, the rise in unemployment is nowhere near that of the US and our economy tends to move more slowly in both increases and decreases in activity. We are neither expecting as severe a downturn nor recovery. One thing that might be observed in this episode is that everything has moved more quickly than it was expected to at the time. Essentially the determining factor in this situation is a behavioural one – to what degree will confidence (which was shattered to the point of hysteria) return and pent up demand result in sales. The east Asian experience would suggest possibly quite quickly.

The speed of recovery is important for a number of sectors, most importantly the banking sector. A rapid economic recovery would make the provisions made in March look a little conservative and the level of capital quite comforting. One indicative set of data will be housing prices and we will report on trends and movements in this area shortly. If prices don’t decline substantially then the average bank LVR of 65% will make the loan books look quite secure.

We are being quite circumspect about predictions of great changes in behaviour as a result of the virus. The predictions of changes in supply chains may prove a little too radical – they may offer some comfort, but that comes at a cost and loss of competitiveness which could be exploited by competitors. It is all very well to bring supply closer to home, but the cost may be prohibitive.


I trust that you are also looking forward to restrictions easing, with schools and businesses reopening.

Warm Regards
Hugh MacNally,