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World — Persistent unemployment to drag on consumption exports

The COVID-19 fallout has seen unprecedented labour market disruption. The International Labour Organization estimates global working hours fell 14% in the second quarter, equivalent to 400 million full-time jobs. Indeed, the negative impact of the COVID‑19 crisis on hours worked in OECD economies has been ten times greater than during the GFC. Unemployment is projected to reach nearly 10% in OECD countries by the end of 2020, or 12% should there be a second wave, up from 5.3% at end-2019 (Chart).

The weak labour market and heightened economic uncertainty is driving consumer caution. China’s economy returned to growth in the second quarter, supported by a strong recovery in industrial production and investment. However, consumer spending continues to lag. While strict containment measures have been relaxed across most of the country, retail sales fell 1.8% y/y in June, after a 2.8% drop in May. This trend may temporarily delay China’s efforts to transition to a more sustainable consumption-led growth model. Such a shift could raise risks of a renewed increase in debt-fuelled investment spending. China’s debt surged by roughly 16 percentage points to 318% of GDP in the first quarter, the largest quarterly gain on record.

Historically, job creation is slow in the recovery phase following an economic recession compared to the rapid pace of job destruction in the midst of the downturn. Indeed, the OECD does not expect a jobs recovery until after 2021. A recovery in discretionary consumer behaviour and imports will therefore be frustrated by persistently high unemployment. Consumption is also vulnerable to a second outbreak. For instance, in the US, a recent surge in COVID-19 cases is likely to weigh on job creation despite solid gains in May and June. Further, reduced government support for some 60 million people across the OECD currently benefiting from job retention programs could see some economies suffer sizable income shocks that further hamper Australia’s consumption exports. The jobs crisis also threatens to increase poverty and widen income inequalities worldwide, thereby increasing the risk of social instability.