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Road to economic recovery

28/04/2020

What to expect for the next six months as we recover from the impact of COVID-19.

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There are decades where not much changes; and there are weeks where decades happen.

Over the past month, this adage has certainly held true with all developed nations announcing significant monetary and stimulus policies so that respective national economies can weather and then recover quickly once the coronavirus outbreak is contained.

Domestically, the situation is no different. We have seen a series of unprecedented monetary and stimulus responses announced by the Reserve Bank and Commonwealth Government in an effort to minimise job losses and business closures arising from containment activities and to bridge the ‘gap’ in economic output.

At the end of March, the Government announced a third fiscal package which represents a significant escalation in the level of support for the economy.

A key aspect of this package is the $1500 wage subsidy or ‘Job Keeper’ payment, which is basically a government subsidy to affected businesses to keep eligible workers on the payroll for the next six months.

Initiatives outlined in the third fiscal package extend on previous initiatives designed to buttress the economy by:

  • Keeping workers employed by providing further business assistance via tax subsidies, wages subsidies and access to loans.
  • Providing a new ‘safety net’ wage for workers that lose their jobs or are temporarily stood down with payments set at a rate double the current rate of the New Start Jobseeker allowance.
  • Boosting business investment by increasing the threshold for the instant asset write-off and accelerating depreciation deductions.  
  • Providing relief for pensioners and others on social security, via a series of one-off payments, as well as adjustments to deeming rates and minimum drawdown rates.
  • Delivering regional financial assistance to areas most affected by the virus.

Complementing these extensive fiscal measures are a comprehensive set of policy responses to support the economy, protect the supply of credit to the economy, and, most importantly, incentivise lending to small and large business.

  • Key aspects of the RBA response include:
  • A reduction in the RBA official cash rate from 0.50% to 0.25% with the rate to remain stable until progress has been made towards full employment and inflation is sustainably within the 2%-3% target band.
  • The introduction of Quantitative Easing where the RBA will buy government bonds to lower the cost of credit in the economy.
  • The establishment of a term funding facility for the banking system to support the provision of credit to the economy, specifically focused on supporting small and medium sized business.

The size of domestic fiscal and monetary policy responses is significant, amounting to around $325bn or 16% of Gross Domestic Product. This is well above that delivered by the Rudd Government during the GFC, which highlights the scale of flow-on impacts of this health crisis to the broader economy.

The outlook for the economy over the next 6 months is for further tough conditions, with market consensus for unemployment predicting a peak between 8% and 11% in the June quarter (from 5.1%) before moderating to 6.5% to 8% in the December quarter.

The most heavily impacted sectors in terms of job losses are retail, transport, tourism and real estate, however industries such as health, government, and telecommunications are likely to experience growth in employment levels owing to changing customer behaviours and the impacts of containment policies.

In terms of broader economic activity, market consensus is for national output to contract by around 8.5% in the June quarter, followed by around 0.6% to 1.0% in the September quarter, with an uplift likely in the December quarter.

So overall, the economy is expected to contract by around 4-5% in 2020, with the growth for 2021 expected to be better, but below trend at a modest 2%.

The corporate sector and various financial institutions are responding with support. Recent announcements from various organisations provide positive examples of this intent and how corporate behaviour is subtly evolving.

We’ve seen a strong corporate response to the pandemic to cushion the economic impact – with many examples of large corporates (Coles, Woolworths) hiring workers impacted by other corporate closures or downscaling.

Most financial institutions too stand ready, offering various support packages geared to provide relief to individuals suffering hardship, or to businesses impacted by the effects of the pandemic. With each institution offering different packages, customers should make direct contact with their financial institution to understand the options available for them.

Over the near and medium term we can also take heart in the capacity for state and federal policy makers to announce further measures to support society and aid recovery, as they gain a clearer perspective on the path of the virus.

It is becoming clear that 2020 represents a pivotal point in history. We will recover from the impacts of the coronavirus pandemic, but our society and economy are likely to be changed by our experiences in 2020.

In the near future, we are likely to see what our new normal may entail.

With health authorities cautiously optimistic about the success of our social distancing measures based on the slowing growth in confirmed cases, we may soon be in a position to turn the collective consciousness to how we support local business communities, while maintaining our distance, and from there drive our economic recovery.

This article is intended to provide general information of an educational nature only. This information has been prepared without taking into account your objectives, financial situation or needs. Information in this article is current as at the date of publication.

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