Economic Update, August 2020 – “Groundhog Day”

/ / Market Update

“Unprecedented and uncertain times” has been the most overused phase in the media this month. Today there is no more clarity than last month on the outlook for the Australian and Global economy.  There are, to use the Donald Rumsfeld risk planning framework, so many known unknowns.  First there is the course of the virus itself.  How long will it last? Will there be a vaccine and what time frame is reasonable? Will new therapeutic treatment options reduce both the severity and mortality of the disease?  Then there is the response of governments from containment and suppression to total lockdown.  What is becoming clear from the number of second waves now occurring across the globe is total lockdowns are not sustainable; the collateral damage to peoples lives and livehoods is just too great. 

What will happen when the massive stimulus packages provided by central banks and governments come to an end? As anticipated the Federal Government announced on July 21st the extension of the jobseeker and jobkeeper to March 2021, taking the total cost of government support to more than $100 billion. Such largess cannot continue for ever and this enormous debt will need to be repaid.

 

What will be the impact of the major re-calibration in global supply chains on global growth and geopolitical tensions? Just as we saw delayed shock waves from the Global Financial Crisis in emerging markets and highly indebted nations such as Greece the potential for similar shocks post COVID seem probable. 

 

Answers to these and other questions will impact the shape and speed of both the global recovery and our own. The Reserve Bank of Australia (RBA) released its take on the level of uncertainty producing a range of economic outlooks in their economic outlook statement on August 7th. 2020. With the situation remaining so fluid and changing, sometimes daily we are presented with a range of recession and recovery options.  Regardless of the path we take, the RBA baseline scenario is it will take several years to return to the trend growth path as outlined in the RBA’s February Statement on Monetary Policy (SMP).  The baseline forecast for our GDP is a decline of 5% in 2020.  Global GDP is forecast to decline by about 6 % in 2020.  Post the jump in the number of second waves occurring here and globally and the ongoing rise in cases in the USA, the RBA and many other forecasters have revised forecasts downwards and pushed out the recovery time frame. Across the top 20 economies that account for 80% of global GDP only China is expected to deliver positive growth in 2020.  Unemployment is expected to continue to rise under all three scenarios with a baseline peak of 10% in early  2021 before declining but remaining above 8% until 2022.  Underemplyment defined as employed people who want to work more hours. has also jumped sharply from pre COVID levels and currently sits at 11.2%. Under this scenario real wage growth is expected to trend downwards and turn negative in the short term.  This was confirmed  by the Australian Bureau of Statistics (ABS) this week with the release of the quarterly Wage Price Index (WPI) for the June quarter. This is the first quarter capturing the economic impact of COVID-19 on the wage price index.  After some improvement in wage growth in 2018 and 2019 the trend turned downward in the quarter.  This is shown in the WPI chart sourced from the ABS.  Private sector wages growth was negative for the quarter offset by positive growth in wages in the public sector.  To quote the ABS this was the first negative result recorded in the history of the Wages Price Index.

 

Employment will always be the key to the recovery. Incomes drive consumption and personal income tax is the main source of government revenue.  As outlined in previous updates serious industrial relations reform will be crucial to getting people back to work and sharing the burden through more flexible working arrangements in the future.  One thing we do know is COVID-19 is having a transformational impact on the when, where and how we work and this will only accelerate in line with the evolving digital economy.  

 

Here in Victoria it feels like Groundhog day following the declaration of a state of disaster by the Premier and the lock down of metropolitan Melbourne for six weeks from August 5th. At this juncture Victoria looks likely to be worst performing state across economic and employment growth in the short to medium term.  Many of us remember all too clearly Australia’s last recession in the early 1990s when Victoria was the worst performing state by a large margin.  As Mark Twain once wrote ‘History does not repeat itself but it often rhymes’.

 

Equity markets continue to hold up against this dire and deteriorating economic backdrop.  The ASX 200 has stalled at around 6,000 points  while the US S&P 500 is back to pre COVID levels and the technology focused NASDAQ index is now above pre COVID levels.  We shall leave the analysis and key takeouts on  markets to next month post the end of reporting season in Australia and the USA.

 

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