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Economics | May 21, 2020

Queensland dominates high unemployment regions Manufacturing sector activity hits record low Detailed labour; Factory & services activity; Reserve Bank Governor speech Highest jobless rates: Toowoomba in Queensland had the highest jobless rate across Australia in April at

12.2 per cent. Unemployment rates are also high on the NSW Mid North Coast (11.8 per cent) and Shepparton, Victoria, (10.8 per cent). Queensland has seven of the top 15 jobless rates in Australia.

‘Flash’ Commonwealth Bank (CBA) purchasing managers’ indexes (PMI): The Services PMI rose from a record low of 19.5 points in April to 25.5 points in May. But the Manufacturing PMI declined from 44.1 points in April to a record low of 42.8 points in May. The Composite PMI lifted from a record low of 21.7 points in April to 26.4 points in May. Readings below 50 denote a contraction in activity.

Reserve Bank Governor speech: Governor Philip Lowe provided some remarks to the FINSIA Forum today: https://www.rba.gov.au/speeches/2020/sp-gov-2020-05-21.html

A raft of companies is affected by the employment data but especially those dependent on consumer spending. The CBA purchasing managers index is a timely reading on the economy, especially manufacturing and services. The speech provides information that will enable businesses to plan for periods ahead.

What does it all mean? While Victoria and New South Wales appear to have been hardest hit by virus economic lockdown, Queensland

regions continue to have the highest jobless rates in Australia. Of course, the tourism industry – a large employer in the Sunshine State – has been severely impacted by the closure of the state’s borders to both domestic and international tourists. And Queensland has a relatively large manufacturing sector compared to the national average. Factory activity across the nation hit record lows in May.

Of the 15 regions with the highest unemployment rates in the land, Queensland had the highest representation with seven regions in April. Leading the way was the Toowoomba, where the jobless rate rose by 5 percentage points - the most in the nation - to 12.2 per cent in April. Next was Wide Bay (10.2 per cent), followed by Brisbane-East (9.8 per cent), Queensland Outback (9.6 per cent) and Ipswich (9.4 per cent). The Brisbane Inner City jobless rate lifted by 4 percentage points to 9 per cent in April – the second biggest increase in Australia.

But NSW and Victoria weren’t spared with sharp increases in unemployment rates on the NSW Mid-North Coast,

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Economic Insights. Queensland dominates high unemployment regions

NSW Central Coast and Melbourne’s North and South Eastern suburbs. In fact, the most jobs lost in absolute terms was in Melbourne’s South Eastern suburbs, down by 25,300 in April. Sydney also featured prominently in the loss of positions as did the Gold Coast (-22,700).

The Commonwealth Bank’s (CBA) business activity gauges continue to highlight the extraordinary weakness in Australia’s private sector due to the virus lockdown. It’s been a harrowing time for Aussie small and medium sized enterprises (SMEs) in the services sector. Turnover has plummeted with many forced to hibernate or shut down due to government-enforced social distancing measures. New orders, exports and employment continue to contract due to weak demand – albeit at a slower rate. That said, the CBA did report “that business confidence jumped” in May as restrictions were eased.

Aussie manufacturers are also doing it tough. In fact, factory activity hit record lows in May as new orders fell, supply chains remained disrupted and input prices lifted. In response, factories reduced their selling prices for the first time in 3½ years – hurting profitability.

What do the figures show? CBA ‘flash’ purchasing managers’ indexes (PMI): May 2020

The Services PMI rose from a record low of 19.5 points in April to 25.5 points in May. But the Manufacturing PMI declined from 44.1 points in April to a record low of 42.8 points in May. The Composite PMI lifted from a record low of 21.7 points in April to 26.4 points in May. Readings below 50 denote a contraction in activity.

The PMI surveys cover senior purchasing managers in 400 Australian companies in the manufacturing and service sectors. They are surveyed each month on how output, orders, jobs, delivery times and stocks have changed relative to the previous month.

CBA noted, “The latest Commonwealth Bank Flash Composite PMI® signalled a further substantial decline in business activity in the Australian private sector as a result of the coronavirus disease 2019 (COVID-19) pandemic. Although May saw the tentative easing of restrictions, this was only enough to see a slight softening of the pace of contraction as demand continued to fall sharply. That said, companies were much more confident regarding the 12-month outlook than they were in April.”

Also, “May should mark the low point in the PMIs and we would expect activity to lift from here on a monthly basis. Company views on the economic outlook have improved and the lift in confidence is welcome. That said, it will be a long time before activity returns to pre-COVID-19 levels. And deflationary pressures highlight the huge amount of slack we have now in the economy.”

What did the Reserve Bank Governor say? In prepared remarks to the FINSIA Forum via webinar today, Reserve Bank Governor Philip Lowe made the

following observations about the Australian economy and financial system:

On the financial system: “The Australian financial system is resilient and is well placed to deal with COVID-19. In particular, the system has large capital and liquidity buffers and it has made substantial investments in operational resilience.”

On capital and liquidity buffers: “We should not expect to see capital buffers be maintained during a once-in-a-century shock. These buffers have been built up to be utilised in events such as this, and some reduction in capital ratios is entirely appropriate as lenders support their customers through this difficult period.”

On credit availability and funding: “The Reserve Bank, through its package of policy measures, is doing what it can to keep funding costs low and credit available.”

On bank capital ratios: “APRA has announced temporary changes to its expectations regarding bank capital ratios. [APRA Chairman Wayne Byres earlier said, “Major bank CET1 ratios below 10 per

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Economic Insights. Queensland dominates high unemployment regions

cent again are to be expected.”]

On the economic downturn: “We are living through the biggest and the most sudden economic contraction since the 1930s. Unlike previous contractions, this one is not being caused by a financial event or by macroeconomic policies. Rather, it is the result of society's efforts to contain a pandemic.”

Labour market observations in May: “The labour market data that post-date April's Labour Force Survey suggest a further decline in hours worked in May, although the decline does not look to be as large as it was in April. If this is an accurate gauge, it is possible that the total decline in hours worked will be less than earlier feared as firms make use of the JobKeeper wage subsidy.”

On fiscal and monetary policy response to COVID-19: “This has been the right approach and it has involved coordinated and unprecedented monetary and fiscal measures. The banks, too, have been part of building this bridge through their repayment deferrals and their provision of credit lines to businesses.”

Limitations to monetary policy and need for economic reforms: “There is, though, a limit to what can be achieved with monetary policy. Fiscal support through this difficult period has also been crucial and will continue to be over the months ahead. So too will be a reinvigorated economic reform agenda that gives the community the confidence that once the virus has passed, we can move quickly out of the economic shadow it is casting.”

What is the importance of the economic data? The Labour Force estimates are derived from a monthly survey conducted by the Bureau of Statistics. The

population survey is based on a multi-stage area sample of private dwellings (currently about 22,800 houses, flats, etc.) and a sample of non-private dwellings (hotels, motels, etc.). The survey covers about 0.24 per cent of the population of Australia and includes all people over 15 years of age, except defence personnel. Detailed demographic and regional information is provided a week after top level estimates.

The Commonwealth Bank (CBA) undertakes a survey of purchasing managers across manufacturing and services sector. The ‘flash’ or ‘early/preliminary ’readings provide timely information on the economy. As such, the survey is valuable for investors.

What are the implications for investors? In addition to the prepared remarks above, Reserve Bank Governor Philip Lowe dashed economists’ hopes for a

fast-paced economic recovery. He said, “restoring confidence on health is a key recovery precondition” and noted that since the pandemic is a “health issue worldwide, it’ll be a slow recovery.” Dr. Lowe also cautioned against deploying negative interest rates as an additional policy tool, suggesting that the “costs of negative interest rates exceed the benefits.”

In testimony to the Australian Senate Committee today, Australian Treasury Secretary Steven Kennedy said that “we’ve gone well past” a recession. And “housing and business investment are key signs for recovery” after the virus lockdown. He added, that restoring “demand confidence” is vital to a pick-up in economic activity and that “consumption is expected to pick up fairly quickly because the lockdown [is] constraining the ability of households to spend for some time.” Dr. Kennedy surmised, “We as a country – amid all the global gloom – are looking pretty good. We’re handling the health crisis well, we’re in a sound fiscal position and I believe – I realise this is contested – there was a very quick response from the fiscal side. So far so good.”

After the historic plunge in Aussie jobs due to virus lockdown in April, the labour market is showing tentative signs of stabilising as restrictions are eased and the economy is gradually reopened. According to job search engine SEEK, “In the fortnight ended May 17 we saw an increase in job advertising of 26.8 per cent compared to average of the month of April.” Importantly, for jobless Queenslanders, job ads are up by 35.1 per cent since the April trough. Hopefully those suffering with high unemployment in proud Queensland towns, cities and suburbs - such as Toowoomba, Maryborough, Hervey Bay, Gympie, Townsville, Townsville, Logan, Ipswich and around Moreton Bay – can get back up on their feet after the virus setback.

Ryan Felsman, Senior Economist, CommSec Twitter: @CommSec