Econosights: The impact of Covid-19 on the Australian labour market
The spread of the coronavirus in Australia is causing shutdowns of businesses across numerous industries. Many jobs are being terminated or stood down. Employees are being asked to take paid or unpaid leave, reducing work hours or taking pay cuts. Not surprisingly, consumer unemployment expectations have risen significantly (see chart below) and are likely to go higher which will dent consumer spending, home price growth and wage expectations.
One big positive is the Federal government’s wage subsidy JobKeeper scheme which will help to cushion the rise in the unemployment rate. In this Econosights we estimate how far the unemployment rate will rise in 2020/21 and look at the specific industries impacted by the coronavirus disruption.
Which industries are most impacted?
Most industries (~79%) will feel some negative impact from the coronavirus disruption (see chart below) via reduced hours, wage cuts, temporary absences or permanent staff reductions. Around 21% of jobs are likely to get a boost (in healthcare, public administration and communications).
We have also looked specifically into the types of jobs within industries to better estimate the impact on unemployment (see table below). On these estimates, the jobs that are at low risk of being lost or terminated include essential jobs (30% of total jobs), jobs that can be done from home (21% of jobs) and a baseline level of jobs (9%) that are needed for basic industries to function (for example in agriculture, manufacturing, mining and construction).
This means that 41% of all jobs or just over 5 million jobs are at high risk of seeing a reduction in work hours, being stood down or completely terminated. This does not mean that all of these people will become unemployed. Some employees may take leave, they may start another job and the majority of these employees should receive the government’s JobKeeper wage program which is scheduled to go for six months (for now), with payments starting from 1 May.
There have been a lot of questions around how stood down workers (for example those workers in the airlines, retail and hospitality industries) will be treated in the employment data, as they are not working, but haven’t been let go. The Australian Bureau of Statistics will classify these people as unemployed if they have been away from work for more than a month from the week of the survey, they have no pay in that period, they do not think they have a job to go back to, they have actively started looking for work and are available to start work. But most stood down workers should receive the government’s JobKeeper payment and will not be classified as unemployed as they would have received some wage payments and still have some attachment to their job. The JobKeeper program has been cleverly designed to keep employees attached to their jobs which will cap the increase in the unemployment rate.
US definitions are a little different. Furloughed workers are still counted as unemployed, even if they are “recalled” back to work. While there is no specific wage subsidy program in the US (yet) the Payroll Protection Program gives small business cheap funding (that is forgivable) to pay their staff wages. However, this program isn’t as broad as a wage subsidy scheme as it only covers some small businesses and the program has already been over-subscribed, so funding needs to be increased.
In Australia, we expect the unemployment rate to peak at around 10% in the June quarter (see the chart below). This would be lower than the 1991 recession high of around 11% and well below the ~20% unemployment rate during the Great Depression. Without the government’s JobKeeper subsidy the unemployment rate would probably shoot up to 20%. Travel restrictions and social distancing requirements will keep employment in some industries under pressure for all of 2020 as it is unclear when things can get back to completely normal (i.e. the same numbers of people in restaurants, bars, theatres, etc). It is difficult to see a big lift in new hiring while corporate profit growth is negative. We expect the unemployment rate to end the year at around 8.5%. The US unemployment rate is expected to spike up to 20% in comparison.
In times of large falls in employment, the participation rate also tends to decline as people become discouraged from looking for a job. A falling participation rate cushions the rise in the unemployment rate. We expect the particiaption rate to fall to around 63% from its current rate of 66%.
Further out in 2021, the continuing easing of social restrictions and the opening of international borders (hopefully) should see a resumption back to stronger levels of economy activity, supported by the very low interest rate environment. But some “hangover” from the coronavirus pandemic via the hit to profits is unlikely to see the unemployment rate decline back to its pre coronavirus levels (at just over 5%) until after 2022.
Hours worked are expected to tumble which will lead to a rise in underemployment and increase labour market underutilisation (unemployment plus underemployment) which is already at 14% of the labour force. It will be difficult for wages growth to rise while labour underutilisation is high.
Implications for investors
A rising unemployment means will hit consumer spending, home prices and wages growth. The savings rate (currently at just under 4%) is expected to more than double in 2020. Wages growth is expected to be flat to slightly negative over the year to December. Low wages growth mean that inflation will also be lower than expected and we expect underlying inflation to be around 1% (over the year) by the end of the year.
This backdrop is sobering for consumer spending and non discretionary consumer profits over 2020. Our base case is a 10% fall in home prices over the near-term. Bank “mortgage holidays” should keep a lid on mortgage delinquencies and forced selling and will keep home prices fall falling too far. Restrictions on inspections and auctions mean that many households will choose to wait for restrictions to ease before buying or selling which means a fall in housing turnover.
The Australian labour market is expected to fare better compared to other countries because of the wage subsidy program and a faster drop in infection rates (so far). Our lockdown measures have also been less severe than some of those in Europe and the US.
While the near-term economic outlook in Australia and globally is challenging, recent policy announcements by the government and Reserve Bank of Australia show that policy makers are willing to do whatever is necessary to keep the economy from spiralling into a depression. Financial markets have already braced themselves for huge falls in economic activity in the next six months. Of course, the actual outcome could be worse than expected.
But, Australian and global sharemarkets have been rallying recently on news around huge fiscal and monetary stimulus, a peak in infections and expectations of an easing in lockdown measures. Any news of broad-based antibody testing (which can give a sign of any herd immunity in the community), availability of anti viral drugs or a vaccination will boost market sentiment. Shares have rallied hard in the past few weeks on optimism around some of these factors and are vulnerable to a pull-back for now. But beyond near-term uncertainties, shares still offer good value given the pull-back from pre-Covid peaks and will be supported by a pick up in economic activity and coordinated monetary and fiscal stimulus.
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Originally published: https://www.ampcapital.com