In a recent strategy report to clients, we discussed the state of the Australian economy and assessed the merits of post-lock down economic recovery in Australia.
Clearly, everyone has a view on what the shape of the economic recovery may eventually be and these forecasts are perhaps in the main based on opinions, published in mainstream media or its variant, of individuals and groups perceived to be more in the know. On the other hand, those in the know are forming their opinions from ingesting data and information from a broad spectrum of sources that range from patch work of economic data, consumer and business surveys, a raft of latest data available on the thrust of the pandemic, to the framework of coordinated response we are seeing from central banks and their respective governments.
Worst is off the table
By all accounts, it appears that the worst case scenario of a runaway contagion overwhelming the emergency departments at hospitals and unleashing death and despair appears to be now off the table. Will the worst case scenario rear its head again? No one really knows for sure and we are not going to enter in that debate. But clearly, it has been now six months in China since the first outbreak and there we have not yet seen the second phase rear its head or even the first outbreak spreading uncontained beyond Wuhan. Similar conclusions could be reached about the bordering Asian economies to varying degrees.
Having said this, we do not completely discount a second wave. However, what we do know is that the regulators and medical authorities’ response system to this contagion is now alert and more ready then they were when the pandemic caught much of the world off guard in its first round. We also know that central banks of hard currencies such as the US$, Euro, Yen, Renminbi, and $A together with their governments will effectively throw whatever-it-takes kind of helicopter money at businesses, households and the banking sector and so have effectively underwritten the liquidity in their respective economies. The emergency response template for future lock-down support and restart measures appears to be down pat.
The meaning of recession being re-defined
Whenever the word recession is mentioned we often conjure up in our minds a collection of images of past economic recessions with people losing jobs, losing incomes, asset prices falling, businesses failing etc. However, this recession may actually just re-write how recessions are actually defined. Early on in the Covid-19 outbreak and subsequent lockdown did lead to long queues outside Centrelink offices across Australia, which we all witnessed either in person in our suburbs or splashed across our digital screens through news clips.
However, those long jobless queues didn’t quite translate to total loss of income (or even a massive spike in unemployment rate) as one would have traditionally expected as a forgone conclusion from a sharp downturn in economic activity. It is clear that the connection of employment and income was disrupted by the government’s job keeper policy and in the end it’s income that matters to livelihoods, no matter the source! Moreover, the deferral of mortgage repayments and other measures such as free child care were instituted to keep households solvent.
Similarly, we haven’t seen businesses fail in this recession to the extent that you would expect in a typical recession as the government relieved businesses of their two biggest cost items, rents and wages. Moreover, businesses were given direct financial support. Businesses fail when their revenues fall or dry up and costs don’t. Clearly, in this recession the costs were frozen or taken out in tandem with a fall in revenue. This great experiment of managing recessions by leveraging government and central bank balance sheet is thus far on script!
The test will now be managing the ramp up of business’ costs vis a vis the recovery in revenues. We may just see policy implementation from the government to manage the rate of recovery of costs and revenues for businesses so that businesses remain solvent. This will be a period of economic rehabilitation, it may be prolonged it may not be, time will tell! Finally, when consumers and businesses remain largely solvent and relentless effort from regulators and governments to pump start their economies not just with evolving policy but with fire power of their monetary base it is only natural for asset prices and capital markets to remain intact. I will leave you with the following quote from the Australian Prime Minister in a recent interview where he provided a look into the core premise from which he and his government make economic decisions.
Zach Riaz – Director / Investment Manager
Bayantree Investment Group is an investment management firm based in Sydney, who manage client funds across Australian and Global equities and Multi-Asset mandates.