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Ben Kingsley Blog post by Ben Kingsley

RBA Cash Rate April 2020: The Coronavirus Lockdown, An Australian Recession And What This Will Mean For The World Economy

Governor Lowe and the Reserve Board met today and they kept the cash rate on hold.

But we all know that, right? Because the cash rate is going to remain at 0.25 until such time as we reach unemployment levels of 4.5% and also inflation within that 2 – 3 bandwidth.

Now, Governor Lowe and the board are basically saying this could take up to three years. So in terms of these updates, we’re going to take a little bit more of a deeper dive into some of the financials because we have seen an unprecedented world event here.

So we want to have a look at some of the data even though that data is lag data, but also some of the forward indicating data because we probably have tougher times ahead in the short term — but in the medium to longer term, things are looking pretty good.

The other big news that the Reserve Board was trying to do and achieve was with the bond rate. So, remember they had that initiative to try and get the three-year bond rate down to around that 0.25 —and so far they’ve been reasonably successful in buying billions of dollars’ worth of government bonds. And, as I come to air, that sort of sitting around the 0.27% mark. So they’re doing a good job in trying to keep that bond yield around that sort of 0.25 area. Sothere’s no doubt that the Reserve Board and the Governor are doing everything they can with monetary policy. I will talk a little bit more about the fiscal stimulus that’s been presented, but I also just wanted to have a look at the global story here and what’s happened around the world stock markets.

So, this will go down in history as certainly the most fascinating four to six weeks in our history; in terms of what’s happened around this COVID-19, aka the Coronavirus.

We did see during this time that there was an enormous amount of panic and upheaval. Now, what we’re seeing with the responses from the governments and also the Federal Reserves and and all of the central bankers is incredible stimulus and liquidity moves to perform, as they say, whatever it takes to hold up the economy as best they can in this new world where effectively people are locked down and they can’t produce — and they can’t certainly spend — at the levels that they want to if they’re all caught up at home. So we did see that as the big moves.

We also saw, in terms of the short term economic mess that COVID-19 is placing on the world economy and also our domestic economy, has been about this mobility of people movement and those productivity declines. And, obviously as a consequence of that, we’re seeing these severe short-term job losses — not just here in Australia, but also we’re starting to see the news happening in America and obviously what we’re seeing with our European friends — but we’re also going through some very difficult times. So these events have obviously led to global share market panicking where they’ve really struggled to be able to assess the value of this risk in this downturn. And that is basically saying the whole global economy is effectively being impacted by this medical crisis that we’re experiencing right now. When we take a look at some of the different marketplaces, the ones that we watch obviously are our two largest economies.

In terms of the US, we’ve definitely seen through the media reports, those horrible situations in the hospitals there in New York — where, basically, the demand cannot be met by the beds that they have. And, obviously the challenges around people’s lives and what they think the potential death rate of this virus will be. Which is incredibly sad news indeed when they’re forecasting, at the current standing, of between a 100,000 to, in their worst case, modelling at the moment is sitting at a 240,000. If we take a look at some of the data that’s then saw the Nonfarm Payrolls (NFP) plummet over 700,000 in March, which is the largest decline since 2009. Unemployment jumped 0.9 to a reading of 4.4, which is hovering around a 50-year — this was after, sorry, I should say — hovering around 50-year low.

So unemployment in America at the moment was basically sitting around 3.5% before this crisis hit. So we know that there’s going to be far more job losses. But the job losses that were showing up in those particular numbers at that time were really in leisure and hospitality on the back of the social distancing rules that they introduced over there. We do anticipate further and significant deterioration in the short term. We see record $10 million spike in initial job claims over the past couple of weeks, suggesting that this is going to show up in the data in the not too distant future. The other thing that was of interest is in around the ISM — the non-manufacturing index — had a surprising resilient result in March over there, falling from 57.3 in February to 52.5 in March. So that was still signing that their manufacturing index was in expansion stage. Now we’re obviously seeing that would have contracted significantly since that initial rating in March. And we’re now seeing businesses retool to accommodate and potentially support the requirements around medical and those types of things happening over there.

But certainly, a significant downturn is going to be experienced in the US as is across the globe.

China’s the other story that we just wanted to focus in on. The Caixin ‘Services PM Index rose to 43.0 in March —now, that was off the back of their February rating, which was 26.5. Remembering that they’re are about four to six weeks ahead of most other nations when it comes to the rise and potentially the control, or containment, of the COVID19 virus over there. So, what we’re basically seeing is they’re moving back to a more normal. Right now, that’s still not an expansion — remember, greater than 50 is an expansion — so only getting to 43 is now then a question of…

“Is this the new normal where we are still seeing a contraction, or are we just basically waiting for the April data to come out where if we go above 50% it basically means that the China is back in growth stage?”

So, early days to predict that, but that’s obviously what we want to be monitoring in terms of the productivity that’s happening out of China as their economy opens up and then people start to get that mobility back and return to work.

In terms of Europe, we saw an interesting result in February. So o we are going back a long way there, but we did say retail sales jumped by 0.9, which was higher than expected, with only a 0.1% increase.

Now, the theory behind the possible increases due to stockpiling of essential goods. We both saw Germany and France both had increases in retail sales; in excess of 1% of February, which is a very, very big number. On the downside, we did see the service sector have a dire reading. So their Markit index had a reading of 26.4. The final estimate for March, which is down from 52.4. So effectively, obviously with these lockdown requirements, these economies are going into hibernation — is what our Prime Minisher will call it — where they’re in a free state until they get in control and contain the virus that’s going around.

Now, coming back home.

In terms of what we see in Australia, we’re going to experience a recession where we’re going to see negative two quarters.

Those two quarters…  that will be a lock — will certainly be March and June. What isn’t so sure at the moment, considering that we are getting a little bit more in control of the containment — touch wood with early signs of us doing the right thing and how we can all help each other by staying at home and  and not interacting socially with anyone — is the September quarter might still be negative.

But, like most economists, I’m on also believing that the December quarter — if we are able to regain mobility and we see the likes of our restaurants and bars and coffee shops and just basically being able to return to a more normal level of life — that we should see us returning back to a growth for the for the December quarter, which technically means we’ll have a pretty shortly recession.

Which is my prediction at the moment.

In terms of when we do see these economic upheavals, the first market that shows up is obviously the stock market. So we did say the ASX 200 record at 21.4% fall in March quarter. That compares to a 23.2% fall in the Dow Jones  so all of the gains that we’ve got in January and February are eaten up by the falls we saw in March and meant that overall we were down. So, in terms of from the peak of the market down to the bottom of the market, we’ve experienced, if we look at the overall ASX index, we are actually talking about 49%, which is incredible and it just goes to show that the markets still remain very volatile. And it’s not a place for the faint hearted at the moment as we moved into a bear market during the March and we’ve given up all of those gains.

So the share market particularly will continue to have these big fluctuations on a daily basis as we marry up good news with more bad news regarding the Coronavirus and how it plays out both in the markets and also in the media outlets. In terms of that information. We always look at the Australian dollar during these times as a bit of a cushioning… and that’s what it’s doing right now. So there has been a flight towards US dollars. So we have seen over the same period of the March quarter that the Australian dollar has declined by over 12% and it’s hovering around that 59 – 61 cent range against the greenback. And that is the currency of choice when we see these types of events occur. So there’s been a flight towards the greenback.

So the Australian dollar is potentially going to do a fair bit of the cushioning in the coming months for our economy as we start to bottom out and then we start to show signs of life again.

In terms of how that shows up for us, its obviously means domestically. We may travel and have a real spike in domestic tourism if we are able to travel again, which will always be great. And I suspect there’ll be big campaigns about getting us up into the tourism markets of Australia and spending our money locally because our money won’t stretch that far when we talk about internationally. It’s also a bonanza for our exports and also for our companies that get paid in US dollars and bring those profits back into Australian dollars as well. So that’s a good news story in terms of how the Australian dollar will apply as a positive note for us.

The other one I’m going to spend a fair bit of time and talking about is the unemployment rate.

This is the one that’s really going to shape what type of recovery that we see — but I also want to make sure that we’re not just getting too caught up in the headlines.

So it’s really important to understand what has been done by governments in this particular space and how that’s going to affect the data over the course of the next couple of months. So, we definitely need to be looking at this indicator as one of our primary indicators. The government has made a move from a fiscal point of view to introduce the Job Keeper package, which is a winner in terms of keeping the unemployment rate lower because effectively to gain access to that, the job keeper payment will paid by employers to their employees as a means to keeping that money coming through. So they’re going to pick up a percentage of the salary and that’s effectively going to keep people on the books and not in the dole cues; in terms of lining up for the Job Seeker package that was also announced.

 So along with a lot of other economists in terms of what they’re forecasting, I tend to agree that we will see the unemployment rate peaking out around that 9 – 10 % range — that’s on the back of the Job Keeper program that we saw.

Now, prior to that, most economists were forecasting that the that unemployment would go potentially between 12 and 15% if we didn’t have that payment announced and everyone had to apply for unemployment benefits to actually get any cashflow coming into their household. So, in terms of what I’m looking at and from a short term-point of view, from my point of view, it all really depends on where when we get let out of our homes and going back to some level of normality, right? So if we’re able to see some shops being able to be open and bars and restaurants being able to be open — come sort of June, July or later — that will definitely have an immediate positive impact in terms of people returning to work and, and businesses potentially rehiring during those periods. I don’t suspect you’re going to see everyone rocking out into the bars and night clubs and, partying hard until we basically see a little more satisfactory containment and also some updates in regards to how successful some of the treatments that are being trialled at the moment around the world are working in mitigating the fatality rates. Because we absolutely know, based on what the experts are telling us that we won’t be seeing a vaccine for the next 12, potentially 18, months.

If that is the case, we are obviously going to be reliant on containment as well as some of these treatment programs that will then see mobility picking up, or we might go through cycles of containment or lockdown and then cycles of open activities just to keep the curve down, as they say.

So, it’s very safe to assume that we will probably be in some form of lockdown throughout April and also into May to get that containment under control. And that obviously will probably then start to show up in again, a rise in the unemployment level. Now, when we do see that — it’s obviously interesting, right? — because when we did look at the February results for unemployment, we had a good number … the unemployment rated fall and from 5.3 down to 5.1 which was preceded C-V, right? So pre-coronavirus. So we had some momentum and it’s obviously frustrating to know that that momentum was building and it was also building in a lot of industries as well as the property market as well.

That said, the final point that I do want to make, which is what I was mentioning earlier, was just around the numbers that you’re going to see in the headlines in terms of the clickbait around what’s going to transpire in regards to the unemployment…

And what I’m highlighting is around the participation rates. So the other part of the fiscal relief that was being offered was doubling the unemployment rate. So you had what’s called a New start, and then you have the Jobb seeker payments… so that’s now $1,100 per fortnight. So in February we did see the participation rate — and it’s been at this sort of level for the last sort of three to four month — around 66% in February. So very, very high historical level. I suspect that that’s going to go up even further. So, by way of example, if a husband or a wife — the major breadwinner — has had some time, some reduced hours, and side of the wife or husband wasn’t working and where the primary care for the children they might as well put their hand up… and I suspect I will. So I do suspect that the participation rate is going to increase beyond levels that we’ve ever seen it before because there is a material amount of money being made available to claim that unemployment benefit.

And so when you do see the unemployment headline — and we potentially do get into double figures —just have a look at that participation rate. Because if that’s gone to say 75 or 80%, then the reality is that those people, if it was normal circumstances, wouldn’t necessarily be working. So they are in artificially inflating the unemployment rate. But the good news is that that money’s moving into those households and those households continue to keep paying their bills and also staying in their properties.

We move now onto consumer confidence and sentiment. This is one of those forward-looking indicators. And, yeah, as I said, the last couple of weeks — probably this last week and a half — has been a little bit more calmer than most. But prior to that, I mean the two weeks before that, day after day, and now it’s months after for the restraint on movement, further, further panic, further financial markets going into chaos, share markets dive bombing… all those types of things… was happening. So this consumer sentiment and confidence survey was released back in the 12th of March. So it’s sort of looking at the start of March. And what we saw there was the consumer confidence fell 3.8% to 91.9 to a five-year low. I suspect when we get the next reading, which is going to come out in the 15th of April, that the Westpac-MI Consumer Sentiment Survey will show a further deterioration in terms of our consumer sentiment and confidence as we battled through this mess that is this a virus that’s affecting us only temporarily, but still going to be a significant , hit in regards to the economic outputs for people there.

So, let’s move on from consumer confidence incentive and let’s have a look at business confidence in and the February NAB condition survey. So it fell 2 points to 0, the lowest since May 2014.

And then for confidence, we saw another fall of 3 points to a -4. Now, I suspect that’s because what we were seeing in February for business confidence was really around the time that we had this supply challenge. And so that was affecting business confidence in regards to those supply challenges. We obviously know that that’s now led to a productivity and now demand challenges in the economy. So it’s a fully blown sort of economic impact. And so that’s what we’re basically seeing. So again, those reports were based back in February. I do expect the business confidence and sentiment surveys will beat some of their lowest ratings ever when we see the next couple of months of data coming out.

That’s also really important to know that what we’re seeing now, interestingly enough, obviously those figures that I just reported to you… there were certainly historical lows, but they still weren’t as low as what they were pre the GFC or beyond the GFC readings that we saw there.

So as I said, I think overall,  not withstanding that, that this crisis is going to be a larger, is already larger than what we saw during the GFC because it’s affecting basically all populations on all different levels. And so we will see those readings, uh, start to drop further moving into the retail sales. So February retail sales. We did see a guy in an expansion of 0.5 over the month. And there was a significant increases in spending at supermarkets, pharmacies, takeaway outlets in February, and they were part of the, you know, the obviously the signs of consumer behaviour and panic buying that we did say unfold as the as the health process started to take shape. We we do believe that the sectors are expected to say further increases in the months ahead as consumers spend in focus still relies mainly on essential spending.

We know with a significant dance engine discretionary spending, that’s what’s going to be interesting. So, so what I’m really curious to watch in the data as opposed to the top line data is what’s going to happen in terms of yes, we absolutely know that there’ll be retail spending will be significantly impacted. Overall the number is going to be pretty ugly for the next couple of months. But what we are interested to see is, you know, that we know that the type of spending that’s occurring in say supermarkets a moment are as heavy as what they are at Christmas time. So you know how much of that retail spending in the discretionary side is going to be offset in spending in supermarkets and in pharmacy and in takeaway as we sort of play this up particular story out.

So that’ll be something interesting to watch. All right, let’s get into the property story. Because this is obviously, you know, the area of expertise that we hold in terms of looking at the market. To some surprises that even, as we said, we did see a significant, panic in financial markets. And the last couple of weeks of March we did see property prices grow across the nation. In fact, there was only one capital city, and that was Hobart, that had a negative growth story for the month. So you know that February pent up demand carried through into March and early indications from where we sit right now, a bit of that is still carrying in through into April. But we did see a 0.7 overall Sydney 1.1% growth, Melbourne 0.4 growth Brisbane 0.6 satellite points three Perth 0.5 Darwin, 2%, very strong there, 0.6 in Canberra.

So combined capital’s 0.7 and combined regional areas. 0.6 the quarterly numbers look pretty strong at a 2.7 quarter annual gross rate nationally 7.5. And if you add the yield, the rental yield coming onto those 11.6. Now again, yes, we absolutely know that that is historical data and that was pre-CV. Okay, so pre-coronavirus. So what we now want to look at is what’s happening in the Auction Clearance Rates because historically speaking, auction clearance rights are a very, very good indicator of the level of demand in the property market in real time as opposed to the, the reported data and the sales data, which can be one to three months old. So when you’re looking at auction clearance rates, it’s really important to get the context of that. And, and that’s pretty easy, but when you see public options banned you got to see what’s going to happen in terms of how results materialised.

So, by way of example, these last two weekends, whereas last weekend there was 3092 homes scheduled for auction. Now the weekend before that there was over 3000 properties also shared yield for auction in our two biggest markets. You don’t even look at Adelaide or Brisbane for any reliability in terms of how fast process will move because most people don’t do auctions in those particular markets. But certainly for our two big capitals, our two big property markets that is a real measure. However, when you start to see historical changes in terms of the way in which assets are sold, it can also be quite unreliable in regards to what that looks like. Now, it’d be give you context around that.

Traditionally leading up to this Easter long weekend and this Easter break, those t those two weekends are significantly big weekends for auctions.

Now traditionally we see around 6% of properties that we’re going to auction be pulled prior to auction.

And this past weekend we saw 45% of properties being withdrawn from auction. So that’s effectively almost wanting to, so we are definitely seeing those properties being withdrawn from auction. Now one could argue is that because you don’t have buyers and that’s showing up in demand and, and that potentially has a price ramification and that there’s validity in potentially some of that being the story. The other part of that story is that those people who are looking to sell are usually owner occupiers. Remember they control 70% of the marketplace. And so if they’re selling a property and they’re not confident that they’re going to be able to buy another property, whether it be an upgrade or a down-grader, they’re gonna pull their property from sale because there’s just no value and high risk in terms of having a property sold, but potentially nothing to buy.

Now, the other important measure here, um, of those remaining properties is 84%. I repeat, 84% of those properties were sold prior to auction. Now if you’re getting it 4% of those effectively, 55% that were remaining, so prior to auction, that also tells you that there has been still some of that demand in the marketplace and transactions have differently being taking place. Now in terms of has everyone just decided to drop their prices and sell for any particular price? Well, I wouldn’t have thought so I wouldn’t have thought that would be the case. So again our then look at the data and what I’ve seen in the release of the auction clearance rights data and most importantly the CoreLogic home price index. They had done an index. I look at that on a weekly basis and it’s telling me that property prices across the five national largest markets remains flat.

So we aren’t necessarily seeing property prices deteriorate in the current market as it currently sits.

So that’s not to say that we won’t see some price correction and we’re on record through our The Property Couch podcast as talking about what happens in these particular downturns. And, and this downturn is obviously a severe downturn. We’re not sort of not recognising that it’s not a severe short-term impact in regards to the economic impact. But what we’re also basically seeing is if there’s a significant amount of vendors not willing to sell and a significant amount of buyers who are also been put onto the bench because of their job security or their uncertainty in terms of what’s happening, then we have seen the property market slow down significantly what I would call the most significant slow down we’ve ever seen…. certainly in mine, you know, 25, 30 years of watching the property market in this respect, there’s nothing like, there’s nothing to compare to it in terms of people can’t get out to buy.

They won’t. And because the economic shock has been so immediate, that’s why we’re basically seeing a marketplace that is slowly closing down without basically closing down. So I want to repeat the market is definitely open, but if you’re not, if you don’t have to sell, you wouldn’t in this particular marketplace. And I’ll give you some examples of what potentially helping you from not being able to sell in this particular market. And the first one is the government relief measures are, again, fiscal relief measures are definitely helping. So the fact that you know that you’ve got, um, if you’re still a job keeper, you’ve got a minimum of $3,000 coming into the household. If it’s a combined household, you may have $6,000 coming in. Um, if you’re both being kept, uh, employed. Or if you’re in a job seeker environment where you’re getting $2,200 per month or obviously $4,400 if you’re both on job seeker payments or a combination of the two and you’ve got cashflow coming into the household.

So they are going a long way over the short-term to ensure that we don’t see distressed selling in this particular market because it’s really, really important to understand that.

And the other thing that when you see a marketplace like this is you need to also understand if you are still an active buyer, that finding good properties during these times is a little bit more challenging. One thing that we’ve noticed occurring in our businesses, we’ve never bought or seen more properties being offered to us then than ever before in an off market way. So basically the selling agents are contacting us because they know that we’ve got a lot of buyers who are looking to buy and so they’d come to us with potentially off-market opportunities. And they are obviously being considered. So the general properties on the marketplace are also going to be harder to find if people pull them off the search engines like realestate.com.au and domain.com.au as well.

So it’s important to understand that. And when you do see a slow down like this, the other thing we’re also noticing is the pace of the transaction is slowing down. So by that I mean I’m getting access to inspect the properties in the first instance to validate whether it’s a good property. Then getting the building and pest inspection done on the property. And then also seeing the value of go out and value the property. All of those take time because we have to get the health perspective involved and making sure that it’s safe for our staff and for the tenants or the owners of the property, in terms of people coming through their property as well. So that’s really important to understand that it’s a more civil process in terms of buying those properties. The other point to, to also note is that we do know through history, um, that we will see, um, some of the more premium properties just basically be removed from sale.

There’s not too much happens in the premium market during this time unless it’s a distressed style. And we’re not necessarily saying that there’ll be a lot of those coming onto the market. So, with that being said, we also know then that with the lower volumes, the median record, which is the middle property in a series of sales over a period of time is going to be fluctuating a lot. Because if you take out that top 25% of the quartile a property is basically not coming to market. You may see, month to month, some real fluctuations in the median prices of properties across the state. Now remember that you can’t buy the median house. So I wouldn’t worry too much about that. I would be monitoring what’s happening to property prices for similar types of properties in my area to get a better sense in terms of what’s happening to property prices in your local area.

Because, again, across Sydney and across Melbourne, we do expect that there’ll be negative reports coming through. And we also know during these times that any prebuilt house and land packages and additional stock and high rise apartments and medium apartments that are coming to a finish and that will be offloaded. So what we refer to as junk stock and there’ll be a fair bit of junk stock on the market. And I suspect you can put in some pretty aggressive offers on those particular properties and they may be accepted if this crisis was to continue. And if the crises was to continue, we normally don’t see a lot of distress stock… we won’t see a lot of distress stock in the first couple of months. But if the crisis continues and we see a longer economic deterioration, then we’ll start to see some more distressed properties coming to market and a little bit more distressed selling.

But I’m not predicting that. I don’t believe that that will be the case. But again, you know, nobody really knows in terms of what’s happening. But if that slowdown is longer than potentially more of those distress properties will come on once obviously the relief from the government potentially runs out. And also the other critical relief that’s being put in place, which is the, repayment pause by the banks, also gets reviewed as well. So, and again, we don’t know whether the government’s going to introduce some further stimulus in terms of what’s happening there. So I think that’s an important message to say that the property market is not immune to this, but in terms of the quality, have a look at what’s being offered and what’s being bought and sold at this time. It’s usually inferior. You’ve got to hustle really hard to get what we call investment grade.

There’s plenty of investment stock out there. Don’t touch that. Keep away from it. Do your due diligence. And then in terms of my final observation, and this will be a bit of rinse and repeat for the next couple of months in my view, and I’ve already started saying this publicly, but for those who are in a position to act in the property market now there is definitely less competition. We have absolutely moved to a buyer’s market. So if you are in a stable work with solid, solid fundamentals in terms of job security, and a fundamental financial buffer, this is definitely an opportune time for you to have a look at the property market and see what’s available to you. And try and see if you can find a nice little a property to acquire during these uncertain times.

For those who are not you who have no ability to act in the property market because your circumstances have changed and your finances aren’t in a position to allow you to do anything that’s completely fine, but there’s no excuses for you not to be looking at your household finances and effectively getting them in order in terms of what they currently look. So make sure you know that you cleaned them up, make sure that you really do understand what are your money in and money out, what’s essential and what’s discretionary. Make sure you’re right across that because one thing for me, and something that Bryce and I have been passionate about on our The Property Couch podcast and how we’ve been educating both our clients and also the broader community is that this crisis does highlight to me that too many households don’t pay enough attention to their finances and have, have failed to put a financial buffer in place.

From my point of view, something that everyone should always have is a little bit of a buffer, in terms of their situation.

And what this has crisis has shown is that too many people across this country are living paycheck to paycheck without putting any money away.

And that just says to me that we’ve got a fair bit of work still to do around financial literacy and about teaching people how to organise and manage their money and we’ll continue to do so as we continue to offer our free services such as the the MyWealth Portal, which is our money smarts platform. So if you want to get access to that for free, you can simply go to www.ew.moneysmarts.com.au That’s a free place for you to organise and set up your finances and it will always be be free an it’s highly secure. If you want to organise yourself and organise your finances, that’s a great place to start because if you can’t organise your money and trap your surplus, then you’re not going to have any type of financial transformation. And that ultimately, that’s what Bryce and I are all about in terms of making sure you transform financially. So there we have it. That’s the April RBA rap. I’ll look forward to chatting to next month.

Just remember, knowledge is empowering, but only if you act on it.

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