The economics of COVID-19

Weekly Petrol Prices; Business Indicators; Credit; Inflation gauge; China data

Petrol prices: According to the Australian Institute of Petroleum, the national average price of unleaded petrol rose by 6.3 cents to 122.5 cents a litre last week – the biggest rise in 11 weeks.

Lending: Private sector credit (effectively outstanding loans) fell 0.1 per cent in July but was up 2.4 per cent on the year. Personal credit fell by 1.8 per cent in July and fell 12.2 per cent on the year – the biggest annual decline in the 44-year history of the series.

Profits: Company operating profits rose by 15 per cent in the June quarter (consensus: -6 per cent), boosted by government subsidies and payments. Sales fell 9.4 per cent in the quarter to be down 9.7 per cent on the year.

Inventories: Inventories fell by 3 per cent in the June quarter (consensus: -1 per cent) and will detract around 0.5 percentage points from Gross Domestic Product (GDP).

Inflation: The Melbourne Institute inflation gauge rose by 0.1 per cent in August to an annual growth rate of 1.3 per cent.

China purchasing manager indexes (PMIs) for August: Manufacturing: 51.0 (survey: 51.2); Services 55.2 (survey: 54.2); Composite index 54.5.

Movements in the petrol price can affect consumer spending, and in turn, prospects for retailers. Business indicators data provides a guide to how industry sectors are faring – including data on profits, sales, inventories and wages. Private sector credit figures have implications for finance providers, retailers, and companies dependent on business spending. The inflation gauge estimates month-to-month price movements for a wide-ranging basket of goods and services.

What does it all mean?

• Welcome to the economics of COVID-19. Over the week some eye-popping economic figures will be released – all largely driven by the fact that COVID-19 prompted a lockdown of Aussie families and businesses, and in response, governments had to pay support payments to get the economy through the crisis.

• Profits soared by 15 per cent in the June quarter, supported by ‘government subsidies’. Sales slumped by 9.4 per cent, reflecting the lockdowns in place across the country. The September quarter will be a different question for most of the country except Victoria.

• The money and credit figures show the boost to liquidity but the reluctance to take up more debt. Personal credit is falling by the most since records began over 40 years ago – although the reluctance to borrow started before COVID-19. But overall loans and advances by banks are growing at the slowest pace since the last recession.

• The Business Indicators publication is largely important each quarter for the data on inventories that helps finalise the estimate for economic growth. The gross domestic product (GDP) or economic growth figures are released on Wednesday and are expected to show a 6 per cent contraction in output. That means that the economy is in ‘technical’ recession for the first time in 29 years.

• Today in Sydney, Melbourne and Brisbane the unleaded petrol price is near $1.40 a litre. In Perth, unleaded it is near $1.07 a litre. While the other capital cities are close to $1.20 a litre. The volatility creates uncertainty for consumers, restraining their ability to plan their weekly spending. Filling up the car with petrol is the single biggest weekly purchase for most families.

What do the figures show?

Petrol prices

• According to the Australian Institute of Petroleum, the national average price of unleaded petrol rose by 6.3 cents to 122.5 cents a litre last week – the biggest rise in 11 weeks. The metropolitan price rose by 9.2 cents to 125.0 cents a litre and the regional price was down by 0.4 cents to 117.5 cents a litre.

• Average unleaded petrol prices across states and territories over the past week were: Sydney (up by 20.2 cents to 130.3 c/l), Melbourne (up by 11.6 cents to 128.2 c/l), Brisbane (up by 10.9 cents to 125.2 c/l), Adelaide (down by 15.7 cents to 111.1 c/l), Perth (up by 0.2 cents to 118.0 c/l), Darwin (down by 0.2 cents to 117.8 c/l), Canberra (unchanged at 122.1 c/l) and Hobart (down by 0.3 cents to 124.2 c/l).

• The smoothed gross retail margin (2-month rolling average) for unleaded petrol rose from 17.30 cents to 17.68 cents (24-month average: 14.5 cents a litre).

• The national average diesel petrol price fell by 0.1 cent to 120.0 cents a litre over the past week. The metropolitan price also fell by 0.1 cent to 118.5 cents a litre and the regional price was down 0.1 cent to 121.4 cents a litre.

• Last week, the national average unleaded Terminal Gate Price (TGP) stood at 104.8 cents a litre, up by 0.4 cents over the week. The terminal gate diesel price stood at 104.7 cents a litre, down by 0.4 cents over the week.

• Today, the average unleaded TGP stands at a 2-month high of 105.2 cents a litre, up 0.5 cents over the week. The terminal gate diesel price stands at 104.7 cents a litre, down 0.1 cents a litre over the week.

• MotorMouth records the following average retail prices for unleaded fuel in capital cities today: Sydney 137.6c; Melbourne 142.4c; Brisbane 144.4c; Adelaide 141.0c; Perth 106.6c; Canberra 122.3c; Darwin 117.7c; Hobart 124.2c.

• Last week the key Singapore gasoline price fell by US$1.25 a barrel or 2.6 per cent from 9-week highs, ending at US$47.75 a barrel. In Australian dollar terms, the Singapore gasoline price fell by US$2.60 or 3.8 per cent to $65.42 a barrel or 41.14 cents a litre.

Business Indicators – June quarter

• Company operating profits rose by 15.0 per cent in the June quarter to be up 11.3 per cent on the year. Profits rose in 12 of the 15 industry groups in the June quarter.

• Over 2019/20 profits hit a record high of $395.8 billion, up 6.3 per cent on the year. Mining operating profits rose by 5.1 per cent for the year to June to a record high of $153.9 billion. Non-mining profits rose by 7.2 per cent to a record $241.9 billion.

• Inventories fell by 3.0 per cent in the June quarter after a 1.4 per cent rise in the March quarter. Inventories will slice 0.5 percentage points off quarterly economic activity. Five of the six industry sectors posted declines in inventories led by Accommodation and food services (down 11.6 per cent).

• The total real value of sales fell by 9.4 per cent in the June quarter to be down 9.7 per cent on the year. Real sales fell in all of the 15 industry sectors except Utilities in the June quarter. In current prices, sales fell by 10.5 per cent in the quarter and fell 10.1 per cent on the year.

• Over the full year to June, real sales fell by 2.2 per cent on a year earlier (decade average 1.6 per cent). And in current prices, sales fell by 0.6 per cent in the full year to June (decade average 3.5 per cent).

• In current prices, sales fell in all states and territories in the June quarter: NSW (down 12.7 per cent), Victoria (down 12.0 per cent), Queensland (down 8.9 per cent), South Australia (down by 10.6 per cent), Western Australia (down by 5.1 per cent), Tasmania (down 12.4 per cent), Northern Territory (down 9.4 per cent) and ACT (down by 10.4 per cent).

• Wages & salaries (includes changes in wages and employment) fell 3.3 per cent in the quarter to be down 3.1 per cent on the year – slower growth in wages; lower employment.

Private sector credit: July 2020

• Private sector credit (effectively outstanding loans) fell by 0.1 per cent in July after falling 0.2 per cent in June. Credit is up 2.4 per cent on the year.

• Housing credit grew by 0.2 per cent in July to be up 3.1 per cent on the year.

• Owner-occupier housing credit rose by 0.4 per cent to stand 5.4 per cent higher over the year.

• Investor housing finance fell 0.1 per cent to be 0.7 per cent down from a year ago.

• Personal credit fell by 1.8 per cent in July to be down 12.1 per cent on the year – the slowest rate in the 44-year history of the series.

• Business credit fell by 0.6 per cent in July but was still up 3.7 per cent on the year.

• The M3 money aggregate lifted by 0.9 per cent to be up 10.8 per cent from a year ago – the strongest annual growth rate in 10 years.

• Broad Money rose by 0.9 per cent in July to be up 10.7 per cent on the year – highest growth in 10 years.

• Loans and advances by banks grew by 2.6 per cent in the year to July – the slowest growth in 28 years. Loans by all financial institutions were up by 1.0 per cent.

What is the importance of the economic data?

• Weekly petrol prices data are compiled by ORIMA Research on behalf of the Australian Institute of Petroleum (AIP). National average retail prices are calculated as the weighted average of each State/Territory metropolitan and non-metropolitan retail petrol prices, with the weights based on the number of registered petrol vehicles in each of these regions. AIP data for retail petrol prices is based on available market data supplied by MotorMouth.

• The quarterly Business Indicators publication by the Bureau of Statistics contains measures such as inventories, company profits and income from sales. Higher inventory (stock) levels can be either intentional or unintentional. If stocks are low and sales are expected to rise in the future, businesses will seek to build up stocks. However an unintentional build-up in stocks is where sales fall short of expectations, leaving more goods on the shelves than desired. If profits are increasing then this may point to increased capital spending and employment in the future. Rising profits are also a sign of favourable business conditions.

• Private sector credit figures are released by the Reserve Bank on the last working day of the month. Credit is separated into three categories – housing, other personal and business. Private sector credit is effectively the amount of loans outstanding in the economy. If growth in lending is strong then it suggests that credit from financial institutions is freely available, underlying demand for assets such as cars and houses is firm and that the price of credit (interest rates) is attractive.

• Melbourne Institute developed a monthly inflation indicator to give markets and policy makers a more regular update on inflation trends. Based on the ABS methodology for calculating the quarterly consumer price index, the Melbourne Institute Monthly Inflation Gauge estimates month-to-month price movements for a wide-ranging basket of goods and services across the main capital cities of Australia.

• China’s National Bureau of Statistics releases its monthly economic statistics around mid-month. Quarterly GDP data is released around the 19th of January, April, July and October. China’s Customs Office releases trade data, and the People’s Bank of China releases financial statistics, around the 10th of each month. China is Australia’s largest trading partner and changes in the Chinese economy have major implications for the Aussie economy.

What are the implications for investors?

• It’s all about COVID. It’s an extraordinary period but we are coming out the other side into a different world.

• The exit will take time and the path is uncertain. But what we know is that governments will support consumers and businesses despite the rhetoric of some of the more extreme and shrill commentators. And we know interest rates will remain at record lows for three years or longer.

Published by Craig James, Chief Economist, CommSec