V-shaped trajectory for economy unlikely while stocks approach closer to reporting season

Summary

• Leading indicators in most of the developed nations and emerging markets have returned to relatively better levels, but a widespread lockdown remains a major risk to the economic outlook.
• With Melbourne going for a six-week shutdown, the start of third quarter has not been the same as many economists would have had considered in their forecast and outlook.
• Australian equity markets ended last week in red territory.

Economists are revising their outlook for the economy as Melbourne has entered a six-week lockdown. As a large and productive economic area, the shutdown of real economy in the city will likely have repercussions on the output of the country.

COVID 19 crisis is intensifying again as number of new cases continue to mount in several countries, but people have now somewhat accepted that they need to adjust their lifestyles and learn to live with the virus until there is a vaccine.

Recent results of leading indicators around the globe have been getting optimistic lately as economies continue to reopen. It has ensured that optimistic economists continue to pitch for a V-shaped recovery.

These leading indicators include PMIs of several nations and business confidence indices, which touched severe lows in the midst of lockdowns i.e. March and April. But this crisis also forced Governments to introduce policy reforms, which were augmented with monetary and fiscal measures.

Among the most relevant measures for the markets were wage subsidy schemes in many countries, which have provided support to consumer and potentially evaded a precipitate downfall in household demand across many counties.

But leading indicators could take U-turn if Governments are forced to implement lockdowns again across major parts of the world. At the same time, if Government and authorities could keep new outbreaks limited to some areas, the economic outlook could well-remain in a better position.

Moreover, a second move to impose widespread lockdown will likely result in much bleak outlook for the global economy. Containment efforts of policymakers should be efficient and effective, and lacklustre efforts will result in adverse outcomes.

If this new wave in Melbourne were to be limited to city or state, it could well be a win situation for the nation. And, this assumption would need the same or even higher level of containment efforts by the Government, including testing and contact tracing.

As a significant contributor to economic output of the country, Melbourne needs to be up and running as soon as possible, which will likely paint relatively better outlook for jobs, income, production and demand.

Vaccine programmes have also reached advanced stages. And, it is only the prospects of a widely-accessible vaccine that would take us out of the virus wreckage and from the psychological barriers of a consumer mind.

It’s a rocky road to V-shape recovery

Job losses were already high before the Melbourne lockdown, and now they are likely to intensify as the state capital closed its doors again. Victoria embracing isolation also means a restricted flow of people, goods and services to other states.

A slowdown in reopening of the economy also means further damage to a gradual resumption we have been seeing over the past months. This blow to the reopening has dropped at the start of third quarter, which was poised to post a positive outlook growth.

Since lockdown was at the peak in April, the picture of second quarter will be the hardest hit as of now, and start of third quarter is already asking economists to consider revising their outlook. Most of the good things now depend on how well Victorian Government would perform in keeping the outbreak small and contained.

Even more important will be return to normal, and how long it would take the Government to remove the restrictions on people movement that are currently pegged at six-weeks – anytime earlier than six weeks will likely be favourable for the economy.

Supermarkets in virus ravaged areas are already witnessing panic buying, and rationing of items is back again, which indicates that people are likely to stay-at-home for some time now. With borders closed, it is unlikely that a resurgence of outbreaks is possible in other states, which may dent further hopes of a smooth recovery.

ASX on a losing streak as virus and reporting season comes closer

Stocks have pared gains in the last week as an increasing number of new infections forced lockdown in Melbourne. Investors continue to punish stocks having exposure to impact of shutdowns. Next few months in markets will be crucial for investors.

By the end of this month, ASX-companies will start releasing results, and management commentary of Corporate Australia may have got a new excuse since Melbourne is closed once again. As uncertainty continues to be present, it is likely that the companies will refrain from providing forward guidance.

Lenders would need to reconsider their stress levels and incorporate the updated economic scenario when calculating expected credit losses, which may result in additional credit provisions. But there is a possibility of reversal in provisions for expected credit losses since majority of states are better positioned.

Businesses like supermarkets and liquor stores are likely to see further demand. And, retailers that sell stay-at-home items could be at a favourable position now. Online sales of the companies will see another jump as consumer will be at home.