A Push to GDP Estimates and Stocks centred around JobKeeper dependency 

A Push to GDP Estimates and Stocks centred around JobKeeper dependency 

Summary

  • Banks and travel stocks rally pushing ASX higher on 26 May before a marginal fall a day later.
  • UBS lifted its forecasts to -8.5% and -5.2% for Q2 and FY 2020 amid JobKeeper revision and favourable labour market data.
  • JobKeeper improvement unlikely to outweigh negative q/q for household cash flow in Q4.
  • Australian economy to face significant challenges after policy support ends in September.

Australian PM, Scott Morrison has taken responsibility for $60 billion costing mismanagement related to the JobKeeper subsidy program. He signalled a scheme could be extended in a more targeted way to vulnerable industries including new home construction and tourism workers when support is withdrawn in September. 

The Federal Government had earlier stated that the JobKeeper subsidy scheme would cover 6 million workers who will get $1500 fortnightly wage, but the estimate was overstated. The Australian Taxation Office discovered that only about 3.5 million people would be eligible, which will cost $70 billion over the next six months rather than the previous forecast of $130 billion.

ALSO READ: Australia’s action ahead after Reporting Error in Enrolment for JobKeeper

The Treasurer called the mistake as good news and has been picked up before it had any after-effects for JobKeeper payments the government had paid already. However, he refused all the calls by Senate to reallocate the $60 billion to more needy sections stating that it would mean more debt for future generations to pay back.

The PM welcomed the fact that the demand for the JobKeeper program was not that huge as anticipated by Treasury. He also assured that he would be digging in but resisted calls to extend the scheme to more casuals, university workers and foreign visa holders. He stated that it is not free money sitting somewhere that can be spent and instead asserted on targeted assistance. He added that the economy would face some significant challenges beyond September with a few specific sectors to bear the major burden, particularly tourism, which will be taken into consideration.

Banking stocks rallied amid optimistic sentiment

S&P/ASX 200 began the week at a fast pace rising 2.16% and closing at 5,615 points on Monday, 25 May. Investors were positive on the economy that is starting to come out of the COVID-19 slump as the country reopens post a massive amount of stimulus measures and historic low-interest rates announced by the government and RBA.

The S&P/ASX 200 rose 0.37% after closing at 5,780 index points on 26 May before declining slightly to close at 5,775 points a day later. The gain on 26 May was primarily due to substantial buying stress among the four major banks. On 26 May, National Australia Bank Limited (ASX:NAB) was up 5.65%, Australia And New Zealand Banking Group Limited (ASX:ANZ) gained 5.97%, Westpac Banking Corporation (ASX:WBC) was up by 6.33%, and Commonwealth Bank Of Australia (ASX:CBA) rose 3.93%.

Jonathan Mott, Analyst at UBS, stated that banks had underperformed by 19% in the last three months, but that is likely to reverse in the short-term. The recent data on cost revision of JobKeeper, recovery in credit card spending, and more than $10 billion consumers taking out of their Super to bolster their budgets could help the banks rebound.

Travel stocks surged

Airlines and tourism stocks of Australia had shed ~60-70% of their market value amid coronavirus-induced selloff and are rebounding now. However, travel and tourism stocks fared well after Treasurer Josh Frydenberg assured to conduct a review in June for JobKeeper and to offer further stimulus to the tourism sector as well as other struggling industries. This statement came after he was questioned on $60 billion cost blunder in JobKeeper.

Two travel stocks rose for two consecutive days before witnessing a fall on 27 May. Webjet Limited (ASX:WEB) and Flight Centre Travel Group Limited (ASX:FLT) surged 5.77% and 9.53% respectively on 26 May before falling 2.05% and 3.58% respectively on 27 May.  The travel stocks Qantas Airways Limited (ASX:QAN)  and Helloworld Travel Limited (ASX:HLOrose 0.49% and 10.50%, respectively closing at a share price of $4.090 and $2.42 on 27 May.

ANZ reveals Consumer sentiment bounces back

Consumers are more optimistic than two months before as per the ANZ-Roy Morgan consumer confidence. The confidence rose by 0.4% to reach at 92.7, gaining for an eighth straight week but still below average but increasing 42% from the March low in the weekend of 23-24 May. 

A score of below 100 shows that several pessimists surpass the optimists.

While the 4-week moving average of inflation expectations dropped 0.1 percentage points to 3.3%, current economic conditions gained 0.3% showing consumer confidence, future economic conditions declined, and current finances declined by 2.4% and 1.8% respectively reflecting weak sentiment ahead.

David Plank, ANZ Head of Australian economics stated that sentiment had recovered strongly from March though it is still below average. Government actions and stabilising of the jobs market are playing a vital part in the recovery of the index despite trade concerns with China and weak retail sales data.

UBS analysts cuts consumption and GDP forecasts

UBS Consumer survey indicated a strong willingness to spend through fewer savings and more debt.

The stabilisation of payrolls and wages, as well as the recent JobKeeper improvement, are welcome news reflecting less burden on the budget and a better labour market scenario. This led UBS to upgrade its household cash flow model to a positive quarter on quarter growth for Q2 and Q3 due to the reviving of consumer sentiment and upside risks to spend.

UBS raised its GDP and consumption estimate for Q2 to -8.5% and -7% quarter on quarter from the previous -10% and -9% due to early signs of progress. It also revised its prediction of -6.1% growth in 2020 to -5.2%.

The Investment bank also reduced its government spending estimate to overcome crisis to -8.7% of GDP or $167 billion due to JobKeeper revision and faster reopening of the economy.

However, UBS warned Q4 to be the most challenging given $10 billion policy support will end in September, putting the economic recovery at significant risk. There is still a possibility of the large negative quarter on quarter growth for household cash flow in the fourth quarter of 2020 despite improved JobKeeper figures. 

The Bank mentioned that even after fiscal flexibility that will eliminate stimulus and reduce the chance of W-shaped recovery, PM’s comments have signalled that the policy programs will not be extended except for some struggling industries like tourism.

 


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