At an economic and market update webinar held recently for Banjo Loans clients, David Robertson, Head of Economic and Market Research at Bendigo and Adelaide Bank, said that due to the coronavirus, 2020 could be described as an ‘economic gap year’.
In other words when it’s over, business will resume, and will have a somewhat changed outlook from the experience.
Overall, Robertson took a fairly upbeat view of our economic future relative to the current situation. Here are some of his observations and predictions.
Australia is likely to have a deep contraction of its economy, rather than a recession.
Australia has benefitted from good management and good luck, in that distancing and shutdown measures were applied early and proactively, and so far have flattened our infection curve. Fiscal stimulus measures have been timely, and very effective so far.
There is expected to be a short-term impact on residential property prices, with a 5-10% reduction in prices coming through quickly. Clearance rates will probably remain low for the next 3-6 months. The government business stimulus package together with bank repayment pauses, should mean that forced home selling will be kept to a minimum. Robertson’s personal view is that this is a market to buy into.
Australian stock markets have to date been more volatile during COVID-19 than they were during the GFC, with a 39% decline in just under 4 weeks. As always, super and stock market investors would be well advised to take a long term view. Robertson believes that taking up the option introduced by the government to allow the withdrawal of $10,000 out of superannuation is unwise and should only be a last resort.
Not surprisingly, consumer and business confidence has fallen. Roy Morgan reports that consumer confidence is lower than during the GFC but not as low as the 1991 recession yet.
The Reserve Bank of Australia is predicting up to 10% unemployment. We have seen a 6.7% fall in wages since the shutdown began. Victoria, Tasmanaia, WA and the Northern Territory have been impacted the most, with NSW and Queensland being more buoyant.
Among the hardest hit sectors are: hospitality; arts and recreation; tourism and other service sectors. Seventy per cent of Australia’s GDP comes from services, tourism and education.
The sectors least impacted have been: education and training; utilities; health care; transport and logistics.
Retail has experienced its best ever March and April trading. No prizes for guessing that this is largely due to panic hoarding of supermarket goods.
International resilience is mixed, with varied implications for our exports.
The world’s largest economy, the USA, is arguably suffering the most with huge numbers of unemployed and the highest mortality rate.
China is getting back to business quicker than expected, despite the huge hit to their economy. As it is currently Australia’s largest trading partner, this is good news.
The iron ore price is holding up well, at more than US$80 per tonne, due to demand from China and SE Asia. The coal price is also holding up pretty well, the gold price is high, and agriculture prices are steady, all of which helps.
However, as we know from the bowser, the price of oil has collapsed. Australia is a net energy exporter, so the plunge in the oil price will flow through to a fall in LNG prices.
Borrowing has never been cheaper.
Robertson believes that now is a great opportunity to be locking in debt. The RBA has cut the rate to an historic low, and has now pulled the quantitative easing lever. The 3 year bond rate is down to 0.25%, a record low, and the 10 year rate for government borrowing is 1%.
The banks have access to cheap money and that is flowing through. Lenders and borrowers all have a part to play in getting liquidity into the market. Regulators recognise that.
Robertson believes structural reform is needed to drive sustainable growth beyond the crisis. In recent years there has been a focus on getting the Federal Budget back to surplus. Now we’re in deficit, the surplus is off the table, so why not spend on structural reform. In his view, the nation can afford more debt, and will see a return for that investment.
He argues that while Australia does need to be more self-reliant in manufacturing, it would be naïve to think we can compete for all types of manufacturing. He believes we should not indulge in protectionism.
There is an argument for tax cuts for small business. An increase in GST would be the fairest way to offset and make way for income tax cuts.
Recessions (even though we may technically not have one) are always followed by recoveries.
This has been the pattern for the last 100 years, so take heart.
Robertson’s informed view is that right now we have hit our lowest point in inflation. Given the last two years of record low interest rates combined with coronavirus stimulus measures, inflation will start to build on the other side of this crisis, as early as 2021. There is growth ahead!
The Aussie dollar remains low, currently at around 62 or 63 cents, which is a big help to the economy, contrary to popular belief. Depreciation tends to flow through to higher rates of growth, and better outcomes for jobs and inflation.
Over the next two years Robertson believes we will see our highest unemployment rate since the 1930's, but ultimately a big V or W in growth of both the Aussie dollar and employment.
Once we get past COVID-19 we will be back to old issues around wages growth, technology wars and climate change.
Finally, Robertson’s key message for small business is: just as your financial strategy and balance sheet structure are important, so too is your strategy in the context of changing consumer demand.
Have you considered what post-COVID-19 spending habits and consumer choices will look like? Make sure you adapt your business strategy to deal with digital disruption and compete with virtual commerce.
A recording of the webinar is available at Banjo’s website for you to view anytime.
Disclaimer: The information contained in the article is the views of Bendigo & Adelaide Bank’s Head of Economic & Market Research, David Robertson and not that of Banjo Loans.