Brace for impact, Australia warned

Australia’s economy will contract 2 per cent quarter on quarter in March, according to ANZ Banking Group, as economists weigh up the impact of the COVID-19 pandemic.

That would be the equal largest single-quarter drop in GDP in the Australian Bureau of Statistics’ records, with the last such contraction in June 1974, ANZ said.

But the pain could be largely concentrated in March, with the bank forecasting GDP will be down 1.9 per cent across 2020.

And unemployment will rise to 7.8 per cent, ANZ said, up from 5.2 per cent in January 2020.

“Policy stimulus will help, but it won’t be able to offset the demand loss that will come from social distancing and widespread closures,” the bank’s report said. 

“We expect further policy announcements in coming days.

“The outlook is more uncertain than usual. 

“Our forecasts assume economic shutdown, but only for parts of the economy, and only for a matter of weeks.

“Longer or wider-spread disruption will result in a deeper drop in activity and a sharper rise in unemployment.”

The federal government has already announced a $17.6 billion stimulus package intended to boost private sector demand.

More is thought to be on the way.

Just last week, CommSec said the package was a good first step, but added it was unclear if the country would avoid recession.

Earlier in March, Westpac had called a technical recession, forecasting a 0.6 per cent contraction in the first half of the year.

The 1.9 per cent contraction over the year predicted by ANZ Banking Group would still be far from the most difficult economic circumstances Australia has ever faced.

For example, a recession in 1982-83 lasted five quarters, with GDP falling 2.9 per cent.

One east coast newspaper recently reported that the economic impact could be worse than the Great Depression, but the ANZ projections indicate that will be far from the case.

Also today, the federal Department of Education, Skills and Employment released its March 2020 monthly leading indicator of employment.

The index fell 0.44 points, to a level indicating employment growth will be about one standard deviation below trend.

Global

Ratings agency Standard & Poor's has also called a global recession, with annualised growth to be around 1 per cent.

China’s economy will expand between 2.7 per cent and 3.2 per cent, but the Eurozone will contract between 0.5 per cent and 1 per cent.

“For the US, the effects of social distancing on consumer spending activity and a knockdown effect on business investment, together with the oil-price hit on capital investments in energy infrastructure and expanded travel bans, likely means a -1.0 per cent GDP reading in the first quarter and a large contraction of 6.0 per cent for GDP growth in the second,” the ratings agency said. 

“In other words, the US is already in recession.

“Combined with the collapse in oil prices and extreme capital markets volatility, this will likely mean a surge in defaults among borrowers.

“The sudden economic reversal will bring intense credit pressure as a cash flow slump and much tighter financing conditions, as well as the simultaneous oil price shock, will hurt creditworthiness. 

“These factors will likely result in a surge in defaults, with a default rate on non-financial corporates in the U.S that may rise above 10 per cent and into the high single digits in Europe in the next 12 months.”

S&P’s reporting today could also give one cause for concern to Western Australians.

Steel inventories in China are up to 25 million tonnes, at least 6mt higher than this time last year.

“Inventories typically peak and start to draw down around two weeks after new year as workers return to the cities and China’s factories and building sites return to life,” the ratings agency said. 

“This year the coronavirus outbreak has disrupted this cycle.

“Inventories should peak and start to draw down over the next few weeks as mills cut production to balance supply and demand.”

Iron ore prices have nonetheless held up well, at $US89.95 per tonne overnight.

Money managers bearish

The Bank of America’s latest fund managers survey showed the single largest monthly drop in sentiment since the index began in 1994.

A net 49 per cent of investors expect global growth to deteriorate in the next 12 months, with 23 per cent expecting it will be stronger and 72 per cent weaker.

“Markets stop panicking when policymakers start panicking … net 62 per cent of Fund Manager Survey investors believe fiscal policy is restrictive, a record high,” the bank said.

“Governments are likely to need to do more than the $1.9 trillion spending currently committed to tackle the economic fallout from the current health crisis.

“One of the chief concerns of investors is the rising risk of a credit event … net 53 per cent of Fund Manager Survey investors believe corporate balance sheets are currently overleveraged, another record high.

“In comparison with extremes of 2008-2009 Global Financial Crisis, (the March survey) shows investors close to prior extremes on cash level and concerns about corporate leverage, but far from true capitulation on growth/recession expectations as well as equity and bank asset allocations.”