I recently read a very well written piece from Dr Shane Oliver, Chief Economist from AMP Capital Management.
So upfront, I will be referencing Dr Oliver and I am giving him credit for much of the discussion points that I am about to share with readers.
For an economy to suddenly have double the unemployment, increasing part- time work, businesses in hibernation, the result will be negative economic growth.
According to Dr Oliver, roughly 25% of the economy is being severely impacted and covers discretionary retailing, tourism, accommodation, cafes, restaurants, bars, property and various personal services.
There is likely to be a flow on effect to other parts of the economy such as construction and financial services.
Only about 20% of the economy such as healthcare, public administration and communications, will really get an economic boost from the current situation.
Dr Oliver went on to say that while it’s not possible to be precise, assuming 25% percent of the economy contracts by 50% with some offsets from other sectors, a 12.5% detraction in economic activity is the June quarter is likely.
This is the biggest hit to the economy since the great depression.
The secondary effects of this is that even when business return to operation, the additional debt, deferred rent etc. could see businesses go bust anyway.
Studies from NAB and Westpac are on similar themes and results, but with variances in the numbers and assumptions.
Government support
What is absolutely necessary, is the universal support from governments worldwide to stimulate and support their economies.
The stimulus tranches for Australia totals around $200b or 10% of GDP which is nearly double that of the GFC stimulus.
The Government via the RBA have also supported banks by releasing capital to them at .25%pa over 3 years, which enables the banks to fund loan deferrals without stressing credit, which in-turn supports business and landlords to stay viable.
The 10% kick to GDP, while not staving off recession, is a massive shot in the arm.
The Government via the RBA have also supported banks by releasing capital to them at .25%pa over 3 years, which enables the banks to fund loan deferrals without stressing credit, which in-turn supports business and landlords to stay viable.
Can Australia Afford this and how is it funded?
To put this in perspective, compared to Australia’s forecast net public debt of nearly 20%, the Eurozone 70%, USA, 80%, & at 160%, Japan has been operating on a deficit for decades.
Some modern economic theory of effectively printing money to stimulate an economy, is supported by Japan’s policies.
The RBA, has now joined the Bank of Japan, Fed (USA) and ECB ( Eurozone) in “ Quantitative easing” which is effectively printing money, to buy government bonds in the secondary market ( eg from fund managers) which helps keep interest rates down as well as supporting the government.
By keeping rates down, the funding of the deficit is manageable.
According to Dr Oliver, those major world economies have been doing QE for years without a rise in inflation.
My own observation is that fixed interest style fund managers, now have increased cash in their portfolio’s as well as an increased relative exposure to government securities, no doubt due to the RBA activities in that secondary market.
How high will unemployment go?
Dr Olliver, suggests that Australia’s unemployment is likely to be contained below 10% due to the Government’s wage subsidy scheme which is far better than many other countries.
My view is that for once, both sides of the Parliament need our applause because they have not engaged in much politicking, but instead got on with the job with a swift passage through the parliament and agreement on what is needed.
The practicalities around job-keeper where $1500 per fortnight to employers who have suffered a 30% or more drop in turnover, may not have been thought through however in my opinion.
For many businesses, there is a lag where the 30% required reduction in turn-over, may not be registered in their financial position until after May.
It is my view, that the Government may do well to consider this with further windows for business to apply for this assistance to keep staff on their wages rather than forced on job-keeper allowance.
However, the hardest hit, such as restaurants and those directly or indirectly impacted by tourism, are likely benefit immediately according to Dr Oliver.
When will share market’s recover?
I have often described the share market as the barometer or predictor of future profitability.
If the market of buyers and sellers of shares have a view, that dividends or profit will be lower, then prices fall but if there is a pickup in activity, a positive future or a stronger position than first forecast, then a rise in share prices reflect that view.
This may simply take a discovery, or an announcement of positive news followed by definite restoration of normal activity, then a lift in share markets will follow.
Experience over 30 years in the business of providing advice, suggest to me that the choice between cash or fixed interest given almost zero returns verses the need to stomach market swings that rewards investment in long term in assets, ought to be easy. However, human resilience and the psychology that is attached to decision making, is as much a barrier when it comes to investing, than the factors that affect investment outcomes.
Now is a time for investor resilience but also a recognition of opportunity both for investors and businesses.
There have been many large employers now recognising that productivity from employers who have stayed on task and worked remotely, has been high.
There must be opportunity for regional Australia to position itself to enable people to work remotely and relocate to regional areas relieving the cost of housing and transport that is associated with life in the major cities.
Alan Tickle
This information contained in this article is of a general nature only, and no reliance is to be applied to this in investment or other decisions without first seeking individual advice from a licensed adviser.
Alan Tickle (309339) & Your Heritage Financial Planning (330480) are authorised representatives of Alliance Wealth AFSL 449221 ABN 493161647