Download the report for the full picture – Australian Markets Weekly: 21 April 2020

Analysis

• The instant recession caused by the coronavirus pandemic has seen an unprecedented easing of both monetary and fiscal policy.  On our calculation, the traditional easing of fiscal policy is worth about 12% of GDP and is mainly aimed at limiting the rise in unemployment, boosting consumer spending and supporting business cash flows.  Balance-sheet measures aimed at supporting the flow of credit total a further 6%.
• The discretionary easing of fiscal policy drives a deterioration in the budget from broadly in balance in 2018-19 to a deficit of about 4.5% of GDP in 2019-20 and 13% in 2020-21 (excluding stimulus measures, the cyclical deterioration is worth about 4% of GDP next financial year, close to the peaks of the early 1990s recession and the global financial crisis).  These estimates are highly uncertain and need to be refined as more information becomes available on the path of the pandemic, the near-term hit to the economy, the shape of recovery, and the take-up of key stimulus measures.
• Public debt in Australia could reach 50% of GDP, which would be the highest level since the early 1960s. This is well below international estimates of the point at which debt becomes a drag on growth, while the cost of servicing debt is very low given bond yields are less than 1%.  Unlike past recessions, the run-up in debt is rapid given the nature of the shock and the design of the stimulus measures.  We think the run-up in debt is justified given the severity of the shock to the economy and further stimulus is likely to be required as the economy recovers from the pandemic.  The budget is expected to sharply improve in 2021-22 given most of the stimulus measures finish next financial year, although the government might end up winding spending back more slowly.

The week ahead – RBA speech, weekly payrolls, retail sales; EZ PMIs

• Australia.  Today, Governor Lowe gives an Economic and financial update, where he may seek to boost confidence in a post-virus recovery and renew calls for structural reform.  He is also likely to discuss the Reserve Bank’s intervention in the bond market. Also today, the ABS publishes weekly payrolls, which should show a sharp fall in employment and total wage payments. Preliminary retail sales should show a small rise in March as panic buying of essentials offset sharp falls for spending on eating out, department stores and clothing. This trend has now eased and overall consumer spending is declining sharply as in other countries.
• International.  Flash manufacturing and service-sector PMIs for April for the EZ are due Thursday. The market expects some stabilisation after last month’s collapse in service-sector readings, although manufacturing should slow further.  Markets are closely monitoring some European countries that have gradually reopened sections of their economies.