Reserve Bank bracing for biggest economic decline in decades

Reserve Bank governor Philip Lowe expects economic growth to contract by seven per cent when the June quarter figures are released.

Dr Lowe expects next month’s data to reveal the biggest decline in many decades as a result of the coronavirus pandemic.

“If there is any good news to be found here, it is that this decline is not as large as initially feared,” he told a parliamentary hearing on Friday.

“Similarly, while the labour market outcomes have been poor, they have not been as bad as expected.”

Dr Lowe reiterated the central bank’s expectation the unemployment rate will reach 10 per cent.

The jobless rate has risen to 7.5 per cent, with the number of people unemployed topping one million for the first time.

Economic growth is expected to contract six per cent in 2020 before expanding by five per cent next year and four per cent the year after.

Unemployment is still expected to remain about seven per cent at the end of 2022.

The Reserve Bank has kept the cash rate at a record low of 0.25 per cent since March and has been buying bonds to maintain liquidity in the market while keeping a lid on interest rates.

The central bank has indicated it will not increase the cash rate until progress has been made towards full employment and inflation returns to the two to three per cent target.

“These conditions are not likely to be met for at least three years,’ Dr Lowe said in his opening statement.

He dismissed suggestions the Reserve Bank should create money to directly finance spending.

“I want to make it clear that monetary financing of the budget is not on the agenda in Australia,” he said.

“There is no free lunch. There is no magic pudding. There is no way of putting aside the government’s budget constraint permanently.”


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REIT investors bracing for a dire reporting season

Andrew Parsons, the founder and chief investment officer of real estate securities manager Resolution Capital, said any notion or clarity would be appreciated “but I’m not holding out too much hope”.

“Obviously there’s some exceptions, such as most logistics-related real estate, but investors will be trying to ascertain the extent to which rent cashflows are lost, deferred and permanently reset lower,” Mr Parsons said.

Due to COVID-19, the majority of A-REITs have already withdrawn their 2020 financial year guidance, cut distributions and several raised equity. Many in the retail sector have slashed asset values by as much as 11 per cent.

While the macro environment is supportive, fundamentals vary by asset class with retail and office he harder hit.

Sholto Maconochie, the head of real estate research at Jefferies, says he expects a “big divergence” in underlying earnings on a funds-from-operations basis versus cash-flow.

He said investors will be paying “close attention” to the treatment of rent abatement and deferral.

“We also expect many A-REITs may provide only limited or no 2021 financial year guidance,” Mr Maconochie said.

He said while the virus will make it difficult for A-REITs to provide meaningful guidance, he will be seeking updates on rent collection rates; the level of rent abatement/waivers agreed; and the direct and indirect impacts on the results in the year ahead.

SG Hiscock & Co. portfolio manager of Australian real estate investment trusts Grant Berry said for the retail-focused trusts, while it has been in the front line of the lockdown and there has been income implications, “there may be encouraging signs of foot traffic improving from the low levels in March/April”.

“As investors we will be looking for progress and information on Small Medium Enterprise [SMEs] lease negotiations under the National Code of Conduct and any lease negotiations with tenants that reside outside the Code and how these have been structured,” Mr Berry said.

The office sector has also been hard hit with staff working from home and recent surveys indicating that the trend will continue, leaving towers half empty.

Mr Maconochie believes the “death” of the office is overdone, and he remains contrarian on his buy recommendations for landlords Dexus and Centuria Office REIT.

“But I concede negative office sentiment on work from home and structural shifts may see Dexus underperform in the near term,” he said.


For Mr Berry, rent collection has been better in the office subsector, with a smaller proportion of SMEs and companies less impacted by the shutdown measures, as they have been able to predominantly work remotely.

“Our interest will be in the office sublease environment and changes in tenant preferences and requirements for space,” he said.

“The longer-term implications of [working from home] and how the landlords will adapt to work with this in order to enhance the appeal of the office environment will be another area of interest in the reporting season.”

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PM bracing for heartbreaking jobless data

Prime Minister Scott Morrison is bracing for another set of “heartbreaking” employment figures but says there are signs the economy is on its way back from the coronavirus pandemic.

There have been signs the impact on unemployment will not be as bad as first feared, but economists expect the jobless rate will leap to seven per cent when May data is released.

It would be the highest rate in 21 years.

In April, the unemployment rate jumped to 6.2 per cent from 5.2 per cent, the biggest month-on-month rise on record, as almost 600,000 people lost their jobs.

Economists expect a hefty fall of about 100,000 in the number of people employed in May.

“We’re in a recession and when you are in a recession, they are the sort of heartbreaking numbers we have to deal with and we still have a long way to go,” Mr Morrison told 2GB radio on Thursday.

“But it is good to see more and more businesses opening up now, the restrictions are coming off and I think people do get a sense we are on our way back.”

He noted consumer confidence had recovered from a huge jolt a few months ago when people were expecting the worst from the crisis, and business confidence had also improved.

April’s labour force figures were complicated by the impact of the JobKeeper wage subsidy and the many Australians who left the workforce altogether not being counted in the unemployment tally.

“Australia’s unemployment rate masks severe underemployment and the hundreds of thousands of people that have either dropped out of the labour force or are working zero hours,” shadow treasurer Jim Chalmers told AAP.

But Employment Minister Michaelia Cash said while the government expected the unemployment rate to grow in coming months, recent data had shown some employers were starting to hire again.

She pointed to Australian Taxation Office payroll data that showed about 124,000 jobs were added in May.

“While Australians and the economy have a long way to go in terms of a full economic recovery, this data shows we are making progress,” Senator Cash told AAP.

Treasury secretary Steven Kennedy expects unemployment to reach eight per cent by September.

A new Deloitte Access Economics report expects rising unemployment will impact on spending, which will see retailers suffer a 1.4 per cent drop in turnover growth in 2020, the worst year on record.

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Kiwis enjoy coronavirus freedom but Jacinda Ardern is bracing for economic turbulence

New Zealand’s government has swung its hastily assembled public information campaign behind an economic push after it’s last active case of coronavirus was cleared.

Previous messaging around social distancing and contact tracing has been pushed to the side, replaced by information around “wellbeing” and “jobs and training”.

The policy pivot from Jacinda Ardern’s government is a remarkable measure of how well New Zealand has fought back the virus.

NZ Prime Minister Jacinda Ardern speaks to the media

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Since the first case appeared on 28 February, the Kiwi government ramped up to a 51-day lockdown and has now eased off on all restrictions except for border controls.

The pivot is also a sign of the suffering that Kiwis can expect to face in the next phase of the pandemic.

“We’re all enjoying the easing of the disruptions but we can’t mistake that for a sign the upcoming recession won’t be bad. It will be,” ANZ New Zealand chief economist Sharon Zollner told AAP.

“It’s fantastic we don’t have any COVID-19 and people are comfortable, they can go to the rugby, they can go dancing, they can go out and about, and that is worth a lot for wellbeing beyond the economic. 

“It doesn’t mean we’re not going to have a hard recession. There is a tourism-sized hole in our economy.”

Ms Zollner said international tourism accounted for five per cent of the Kiwi economy.

Her bank’s latest projection was New Zealand’s GDP would be eight to 10 per cent smaller this Christmas than it was last year and that unemployment will be “in the low double digits”.

In last month’s budget, the NZ government predicted GDP will shrink by 4.6 per cent in 2020, with unemployment peaking at 9.8 per cent.

Prime Minister Jacinda Ardern admits much now depends on the ability of Kiwis to retrain and move into other sectors. 

“Horticulture, the dairy industry, they desperately need workers so we need to support people into those jobs,” she told 1News on Tuesday.

“The early signs are that we are on the optimistic side of recovery.

New Zealanders Return To Normal Life Under COVID-19 Alert Level 1 As Country Records No Active Cases

Morning pedestrian traffic returns to Wellington during the first day under COVID-19 Alert Level 1 restrictions

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“Things are coming back into play a bit more quickly but we know it will take time.

“We know people have lost work, be it in tourism or otherwise … we’ll be utterly focused on jobs, jobs, jobs.”

The budget included a $NZ1.6 billion ($A1.5 billion) package towards apprenticeships and trades, noting that Australia will be competing for the same labour market after the establishment of a trans-Tasman bubble.

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