- Of late, a significant decline in coronavirus infections, easing of lockdown restrictions and stability in hours worked by people have lifted up the market sentiment.
- However, the speed of economy recovery remains uncertain, and is much dependent on consumer confidence and how economy fares when fiscal support ends.
- RBA is helping the economy to keep funding costs low and support the supply of credit to aid jobs and businesses.
Many policy experts and corporate executives have been predicting a V-shaped recovery from coronavirus, i.e. a quick recovery in the economic growth after a steep decline. It implies that the recession lasts only a few quarters before the economy returns to growth to pre virus levels. Also, a U-shaped recovery is like V-shaped recovery with a mere difference that it lasts longer.
With most of the economy now reopened and border restrictions in place, whether the economy will rebound like a V-shape remains a question to address.
Here is a look at some developments happening in the marketplace that will determine the shape of the recovery-
- Easing lockdown
As lockdown measures are relaxed, people will actively start looking for work that is expected to lift the economy. RBA stated that a significant decline in the number of new COVID-19 infections and earlier than anticipated easing of restrictions have shown the effectiveness of the government, and central bank’s stimulus programs would help the economy survive the economic fallouts arising from COVID-19.
- Stability in hours worked
Economists are of the view that the most terrible of coronavirus economic contraction unemployment is over with the JobKeeper subsidy helping in increased employment in the arts, recreation and hospitality sectors.
ABS analysis of Payroll data from the Australian Taxation Office shows that in early March to mid-May the number of employees on payrolls dropped 7.3% nationally. However, the speed with which jobs were being lost slowed down by mid-April and early May.
In addition to this, some industries also showed the reduced impact of COVID-19 like accommodation and food industry lost about 33.3% of payroll jobs by the week ending 11 April, and a subsequent increase in jobs witnessed it shrinking to 27.1% by the week closed 2 May this year. Arts and recreation services added some jobs, while retailers and educational institutions brought back some workers.
- JobKeeper savings can help fund stimulus
A recent announcement by Treasury that JobKeeper Payment will cost only $70 billion instead of the original forecast of $130 billion has freed up some funds for the government. Treasurer Josh Frydenberg stated the miscalculation as good news for the taxpayers, and the budget as there will be less borrowing than initially was projected.
The Federal government has plans to announce home-buying grants to give some long-term support to the distressed residential property sector amid COVID-19.
Prime Minister Scott Morrison verified that the new stimulus would help large infrastructure development plans and new housing construction. However, the withdrawal of stimulus by September can be a huge worry and can slow the progress of the country.
- Treasury expects major collapse in employment over in June
ABS’ latest figures for 4 weeks to mid- April show that about 2.7 million workers were adversely affected due to recession. While the total employment dropped by 4.6%, total hours decreased by 9.2%, indicating the significant anguish was being suffered by part-time workers.
However, Steven Kennedy, Treasurer expects that these figures will be most of the downfall witnessed in employment. While unemployment figures may spike in May and June, but that would reflect the underlying position would not get any worse.
However, the unemployment rate is expected to become worse at 10% by mid-June from 6.2% in mid-April. During coronavirus, a lot of people have not been looking for work due to stay at home measures and ceasing of trading by many employers.
Nonetheless, when lockdown eases, many people will be looking for job, changing their status from not in the labour force to unemployed, making the unemployment numbers look a lot worse.
- Substantial fiscal support
Dr Kennedy asserted that fiscal policy would play a central role in getting the economy back to full employment levels. He added that it will now be more about the demand and consumer sentiment as the economy reopened.
He stated that the manner in which Australia entered the economic downturn and the nature of the shock gives him some expectations that if Federal government responds well through their fiscal measures, the economy could pick up on its path to growth.
The fiscal stimulus comes with a lag and how it is built over time will be the key in determining a V or U-shaped recovery.
- Dynamic sectors affected
The Treasurer also noted that the industries that are worst affected by the lockdown measures implemented are quite strong. Jobs in the accommodation and food sector fell by more than 25% in 3 weeks to 4 April. Several workers were rendered jobless in the arts and recreation services sector, which fell by almost 19%, as per ABS.
He further added that these sectors have had high sales in businesses coming and going, high turnover in employees and a lot of casuals. They have the capability to re-launch promptly. Manufacturing, construction and mining have been allowed to continue without much interruption in the recession as the lockdown was eased.
- RBA maintains cash rate
RBA Board meeting on 2 June decided to maintain its cash rate at 0.25% and the yield on three-year government bonds of Australia of 25 bps. This move comes as government bond markets are working successfully with the target yield of government securities at 0.25%. RBA bought government bonds just once since the previous Board meeting with total purchases to date of ~$50 billion.
The central bank is also indulging in market operations to support liquidity in the Australian financial system.
- Banks pushed to use capital buffers
RBA Governor asserted banks to use their buffers (capital), which were solely built for such times to absorb losses and preserve the smooth flow of credit in the economy. He urged banks to not be concerned about maintaining buffers during once in a century shock.
- Coordinated policy initiatives on the way
As per a strategic plan of Australian National University (ANU), a bunch of economists, politicians and a senior Australian public servant called upon the Federal Government to work with Asia to pull the global economy from COVID-19 slump.
The group urged Australia and Asian neighbours to synchronise financial, public health, trade and food security strategies once COVID-19 is over. Since the Australian economy is built on Asia, a bit of the focus must be given to it, stated Adam Triggs, co-author of the plan and director of Research, ANU.
- Vaccine development
Doctors and vaccine developers are looking for new ways to keep the pace of research going so that a vaccine is developed by 2021 as the risk of COVID-19 second wave still prevails.
The outlook for the economy, including the nature and pace of recovery, stays highly ambiguous with a lot depending on consumer sentiment of their own finances and overall health situation. A significant and coordinated monetary and fiscal policy is helping the economy to recover and sail through this challenging period.
(Note- All currency reported in AUD unless otherwise stated)
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