Impacts of COVID-19 on finance and wealth estimates
The March quarter 2020 saw a series of extraordinary events buffet the Australian economy, starting with bushfires and other natural disasters, followed by the outbreak of COVID-19 and the subsequent imposition of restrictions. These events had an impact on many, perhaps most, of the macroeconomic statistics produced by the ABS, as discussed in detail in The Australian Statistician’s analytical series, 2020 (cat. no. 1016.0).
This spotlight examines these impacts on the March quarter for household wealth and superannuation. The impact of RBA and government policy interventions on financial markets in response to these developments, is also described.
Australian and international financial markets experienced significant disruption from late February 2020 as a result of uncertainty surrounding the effects of COVID-19. Global equities markets declined during the quarter including the Australian Stock Exchange (-24.9%) and corporate debt markets became impaired.
RBA monetary policy brought the cash rate and 3-year commonwealth bond yields down, which resulted in the Commonwealth government bond markets stabilising. Significant amounts of government bonds were issued during the quarter, and large amount of debt securities including significant amounts of government bonds were purchased by the RBA to ensure the financial markets remain liquid. These events impacted all sectors of the economy.
The RBA and Government policies were announced and implemented in mid to late March. While there were initial impacts from these policies in March, the most significant impacts will come through in June quarter.
During the March quarter 2020, household net worth declined $204.0b (1.8%). Average household net worth decreased $9,982 per person, the largest decrease since the September quarter 2011.
Figure 1: Household net worth, contribution to growth, quarterly, current price: original
Source: 5232.0 Table 34 and 35
The impacts from COVID-19 on the Australian and international financial markets from late February 2020 caused much of this decline in household net worth, with declines in superannuation and equity holdings of private trading corporations and banks (Figure 1). These declines were partly offset by an increase in the value of land and dwellings (residential assets) and a fall in liabilities from short term loans. The fall in short term loans was a result of a decline in expenditure on travel, accommodation, restaurants, and recreational and cultural services due to COVID-19 restriction measures and bush fires.
Restrictions on auctions and open house inspections, which were implemented in the last week of the quarter, had no significant negative impact on the value of residential assets in the quarter. By contrast, at the end of the first quarter of the global financial crisis (GFC), household net worth declined 2.6%, from December 2007 to March 2008, due to negative impacts on both residential and financial markets.
At the end of March 2020, household net worth was $11.0 trillion, comprising $7.3 trillion of land and dwellings, superannuation assets, and other financial assets, offset by housing loans (Figure 2).
Figure 2: Household net worth, amounts outstanding end of quarter, current price: original
Source: 5232.0 Table 34 and 35
At the end of March 2020, total assets of superannuation (pension funds) fell 9.2%, the largest quarterly fall since the time series began in June 1988. The decline was slightly larger than the 9.0% decline at the height of the GFC in December 2008.
The largest assets invested in by superannuation are equities (67.8%) (either directly held or through units in investment funds), deposits (11.5%) and debt securities (7.2%).
Figure 3: Superannuation assets, contribution to growth, quarterly, current price: original
Source: Source: 5232.0 Table 18
The primary contributors to the 9.2% decline in superannuation assets were falls in equity units held in investment funds, directly held domestic equity, and foreign equity holdings. Debt securities also fell, driven mainly by redemptions of government bonds. These declines were partially offset by an increase in deposits (Figure 3).
While superannuation funds sold off some equity holdings, valuation losses drove most of the decline in value (Figure 4).
Figure 4: Superannuation assets, equity revaluations, quarterly, current price: original
Source: 5232.0 Table 18.
In response to COVID-19, superannuation funds partly shifted from debt and equity securities into deposits. There were a number of reasons for this. Funds received the redemptions of equity units from non-financial and non-money market investment funds, and there were more member requests to switch from high to low risk investment options. Further, funds paid variation margins on derivatives used to hedge foreign currency assets, and prepared for members to request early access to their superannuation entitlements, which was part of the Government’s stimulus package and took effect from April 2020.
Reserve Bank of Australia (RBA)
In early March, in response to the deteriorating economic outlook and financial market volatility arising from COVID-19, the RBA announced several policies to keep funding costs low and credit available to households and businesses. These included:
- A 25 basis point target for both the cash rate and the three-year Australian Government bond yield.
- A substantial increase in the amount and maturity of its daily market operations, in response to the increased demand for liquidity.
- Remuneration of exchange settlement balances (deposits) at the Reserve Bank to 10 basis points to mitigate the cost to Authorised deposit taking institutions (ADIs) associated with the large increase in settlement balances at the RBA.
- A three year Term Funding Facility (TFF) at a fixed rate of 0.25 percent for ADIs to provide credit in particular to small and medium-sized businesses.
These interventions resulted in increased holdings of bond assets issued by government, ADIs and securitisers, and a large increase in ADI deposit liabilities (Figure 5).
Figure 5: Reserve Bank of Australia, Financial assets and liabilities, amounts outstanding end of quarter, current price: original
Source: 5232.0 Table 15
Government policy response
During the March quarter, national and state governments issued net $38.1b in debt securities, an increase of $31.4b from the net issuance in December quarter 2019 (Figure 6). The increase in debt was used to fund government expenditure in the March quarter on the bushfire response in Victoria and New South Wales, and the government measures in response to COVID-19.
Figure 6: Issuance of government debt securities, quarterly, current price: original
Source: 5232.0 Table 43 and 44
Government policies implemented in April 2020 have had no impact on the March quarter outcome. The implications of these policies will be seen in the June quarter. These policies included the early release of superannuation entitlements, loan repayment deferrals for businesses and households, actions by the Australian Office of Financial Management to support non-ADI financial sector (small lenders and securitisers), and a $40b loan guarantee scheme for small and medium businesses.
Authorised deposit taking institutions and Securitisers
ADIs which predominantly include banks, are the key intermediaries that provide loans and deposits to households and businesses. Securitisers mainly provide household housing loans.
While the majority of the implications of the RBA and government policies implemented in late March will be captured in the June quarter, there was some early impacts on the loan and deposit estimates for private non-financial corporations and households (Figure 7 and 8).
Private non-financial corporations, primarily large corporations, utilised their existing credit lines with ADIs to draw down on new loan commitments from earlier months. They also increased their credit limits from revolving credit facilities (and drew down on these).
Large corporations placed the extra credit drawn during the quarter into deposit accounts with ADIs to prepare to fund operational expenses and possible capital investment in deteriorating domestic and international financial markets.
Figure 7: ADI and Securitisers, total loan transactions, quarterly, current price: original
Source: 5232.0 Table 8 and 34
Figure 8: ADI total deposit transactions, quarterly, current price, original
Source: 5232.0 Table 8 and 34
The significant slowdown in household loans during the quarter was driven largely by ADI credit card loans, reflecting the weak expenditure on non-essential goods and services associated with COVID 19 restriction measures and bush fire impacts.
Housing loans grew modestly, with drawdowns of new loan commitments for owner-occupier loans offset by existing borrowers paying down their loans ahead of schedule payments. This reflects households taking advantage of the very low interest rate environment.
Household deposits with ADIs increased by 1.3% in the quarter, reflecting households’ preference for safe and liquid assets in times of economic uncertainty and the low levels of consumption of non-essential goods and services due to COVID-19 restriction measures. Unincorporated businesses placed the extra credit drawn during the quarter into deposits accounts with ADIs in preparation for funding operational expenses in deteriorating domestic financial markets.