In a report released on Monday (19 Oct), Macquarie Equities Research (MQ Research) said that unemployment begun to show signs of stagnation at 4.7%, though MQ Research’s adjusted numbers show a 0.3% improvement. The unemployment stress falls heavily on the youth (15-24 year olds), suggesting that impact to banks’ asset quality will be minimal.

Labour Market Stats

• After a brisk post-lockdown recovery, reported unemployment improved a marginal 3bps to 4.67% (July: 4.71%, peak: 5.26%). However, when considering MQ Research’s adjusted unemployment figures (Fig 2 below), MQ Research sees substantially more improvement of ~36bps coming off a higher base. Labour participation rates also normalised to 68.4%, which allows MQ Research’s numbers to converge with the official stats in August.

Macro read-thru: <4% unemployment by 2021?

• The initial low-hanging rehiring post-lockdown appears to be losing momentum in August. Total new employment grew +81k month-on-month (m/m) to 15.15m. Meanwhile gross unemployment fell on -3k m/m to 742k, which is still 43% or 223k above pre-Covid average of 518k. Meanwhile, active job-seeking improved in August on improved rehiring prospects post-lockdown. Winding down of moratoriums by end-Sept likely another incentive for more active job seeking.
• On a positive note, long-term unemployment (>6 months unemployed) remains relatively stable at 148k. However, this indicator still needs to be monitored closely in 4Q20 as Covid-related layoffs in 2Q20 will need ~6 months to age into the statistic.
• Looking ahead, 4Q20 data will be critical. MQ Research anticipates unemployment could dip below 4% by end-2020 if employment can average +45k/month growth, assuming labour force grows at an average of +20k/month. However, there is cause for caution as 1) greater Klang Valley subject to conditional movement control order (CMCO) soft lockdown from Oct 14-27, and 2) wage subsidy program (RM600/month, up to six months) will begin expiring October onwards, barring further extension with Budget 2021 announcement. Note, six months of wage subsidies cost RM10.38bn and is estimated to have benefited ~2.62mil employees and 320,440 employers.

Banks Read-thru

• MQ Research’s read-thru on banks’ asset quality is a little more constructive. Firstly, unemployment stress is heavily skewed to youth aged 15-20 with 13.7% unemployment – roughly 30% above pre-Covid, average of 10.5%. This demographic makes up ~55% of total unemployment. Considering the younger demographic has lower income levels coupled in addition to lower exposure to total banking system loans bodes well for banks’ asset quality.
• BNM’s financial stability review (see: link) also indicated that the bulk of unemployment was skewed to low/variable wage earners. MQ Research concurs with BNM’s constructive on households’ asset quality through the crisis. MQ Research’s order of preference: RHB > CIMB > HLBK > PBK > MAY > AMM.

Source: Macquarie Research - 22 Oct 2020