Charting Out Australia’s Path to Recovery, Are There Any Bright Spots?

  • Jun 20, 2020 AEST
  • Team Kalkine
Charting Out Australia’s Path to Recovery, Are There Any Bright Spots?

Summary

  • Lower GDP contraction of Australia compared to many other countries indicate that Australia is better positioned to reboot economic prospects.
  • The nearing discontinuation of JobKeeper funding, while the Government focus shifts to JobSeeker scheme indicates that Morrison Government is planning a long-term economic recovery approach. 
  • While May retail sales data reflected largest M-o-M uptick of ~16% over 38 years, Goldman Sachs now predicts 7.5% Q-o-Q GDP dip in Q2, with 4.5% rebound in Q3.
  • Domestic concerns such as job numbers, consumer confidence and business revival along with external forces such as growing tension with China may affect the pace of economic revival. 

 

While analysts are debating nation’s positioning amidst possible recession scenario since almost three decades, country’s March quarter GDP dipped by 0.3% . Although impact of lockdown will be mostly visible in second quarter, Goldman Sachs’ latest downgraded projection of 7.5% Q-o-Q GDP dip in Q2, with 4.5% rebound in Q3 deserves closer attention.

Besides economic reopening has fostered hopes for labour market scenario, as many employees are getting back to work while businesses revamp their strategies to suit the paradigm shift in competitive landscape. While Australia might take some time to recoup at this pace, second wave of infection needs to be carefully monitored as also evident in China’s case. 

Prime Minister Scott Morrison stated, “The road ahead will be very hard” and “There is a mountain yet to climb.”

Meanwhile, Australian Treasurer Josh Frydenberg talking about the pandemic impact on economy said, “We’ve climbed this mountain before, we’ll climb it again.”

Notably, Government and Central Bank undertook a range of strategic measures to counter imminent dangers that accompanied the onset of pandemic. The Government spending to support the financial well-being of Aussies during lockdown, however, has created a huge fiscal deficit.

Meanwhile, RBA extensively undertook quantitative easing programs and lowered the cash rate to 0.25% to maintain the cash flow. 

Some of the critical Government initiatives undertaken during the pandemic concerning economic management includes:

  • Loan Guarantee scheme providing Government-backed loans to small and medium enterprises.
  • JobKeeper wage subsidy under which the workers receive a fortnightly payment of $1,500 through their employer.
  • JobSeeker for stimulating recovery for enhancing skills in a bid to secure jobs
  • Domestic Travel Subsidies for the hard-hit travel sector
  • Mortgage Holiday Scheme allowing the mortgage holders to defer the payments 

 

The nearing discontinuation of JobKeeper funding, while the Government focus shifts to JobSeeker scheme indicates that Morrison Government is planning a long-term economic recovery approach.

Emerging Green Shoots

The swift actions and strategic measures to flatten the Covid-19 curve and avoid the peak has allowed Australia to reopen its business activities. The frequency of domestic flight operations has increased, indicating that even the hardest hit travel sector is slowly rebooting.. 

Australian Treasurer Josh Frydenberg confirmed that the country is already in depression. Meanwhile, Mr Frydenberg also hinted that the contraction in the June quarter could be even worse.

However, the repercussions of loss in economic activities overall have been less severe than the one expected earlier. GDP has plunged by 0.3% compared to the expected 0.4%. 

Although Australia is facing economic headwinds, the country in terms of losses seems to fair much better compared to other nations. The contraction in China (9.8%), US (1.3%), Britain (2%) and many other countries have been much higher compared to Australia.

Notably, the Government, in a bid to counter “1-in-100-year global event”, placed strict measures to manage mounting health crisis.

RBA’s June Meeting indicated that while the Australian economy is going through a tough time, the economic impact is “shallower than earlier expected”. The minutes of the meeting stated that income for the Aussies is well supported through the JobsSeeker and JobKeeper Programs.

 Although, the economy still faces the burgeoning concern of job losses as the total hours worked in April fell by 9%. The meeting minutes, however, also suggested the slowdown in job loss pace. The industries which were most impacted by the restrictions have started reconciling. 

What Lies Ahead for the Australian economy?

Prime Minister, Scott Morrison stressed on the loss of more than “$100 billion of economic activity” during the year as he indicated that the country would take around two years to reach to the economic activity during Pre-Covid level. 

Scott Morrison recently told the Committee for Economic Development of Australia (CEDA) that despite Government’s aid, many businesses will still fall due to the impact of the pandemic. He highlighted on the immense challenges which the Australian economy is yet to face. 

Mr Morrison stressed if the country is to face such a grim scenario for long, it would “damage the capacity of the Budget” to tackle the necessary services. He also underlined the threat that the protracted downturn can have on the dynamics of economy.

At the same time, economic projections also highlight the grey aspect for economy in the upcoming time. JobKeeper scheme that helped run the households stay afloat is nearing its discontinuation which is due on 27 September 2020. While the Organisation for Economic Cooperation and Development (OECD) urged for extension of the scheme, the Government has not given any signs of its prolongation. 

OECD projects that Australian GDP would dip by 5% in the year 2020 and is expected to recover by 4% next year. However, the unemployment rate could continue to worsen over time, reaching 7.4% this year and 7.6% in 2021 as projected by OECD. Treasury, meanwhile, revised down the severity of pandemic impact as it expects the unemployment rate to hit 8% compared to the previously projected 10%. 

The aggravating tensions with China can also impact Australian trade being the largest exporter for Australia. Australia’s stand on the global inquiry on the Coronavirus origin further aggravated the bilateral tension.

The reduced consumer demand and Australians’ unwillingness to invest has also remained as a serious cause of concern that is threatening to stifle economic growth in the country.  

Bottom line

Australia is moving through tough and critical times, while the fear of the second wave of infection still lingers over the country. To survive the crunch and emerge more robust, the focus should be shifted to a long-term approach as the reboot might take substantial time before the economy reclaims its lustre. 

 


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