May 26, 2020
Australian Markets Weekly: Scope for additional stimulus
Budget revision provides scope for additional stimulus to shore up recovery.
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- The government has overestimated the total cost of its JobKeeper wage subsidy by $60 billion (3% of GDP) given the unexpected success in containing the virus and major tracking errors by the tax office. This reduces NAB’s forecasts budget deficits to $70 billion in 2019-20 (3.5% of GDP) and $210 billion in 2020-21 (still a record peacetime deficit of 11% of GDP).
- The wage subsidy and additional welfare payments have played a vital role in supporting the economy at the worst point of the shock from the virus, but the damage to the labour market will take time to repair. While hospitality and entertainment have borne the brunt of record job losses, most other industries have seen job cuts in line with the experience of the last recession and the Reserve Bank’s central scenario is that total employment will take until 2022 to regain its pre-virus level.
- In NAB’s view the unexpected revision to the cost of JobKeeper allows the government to consider extending its wage subsidy and additional welfare payments past their legislated end-date of September, albeit in a narrower form. Although a tentative recovery is under way, almost 1 in 10 adults are now on unemployment benefits, with Governor Lowe and Treasury Secretary Kennedy both emphasising the need to restore confidence to ensure households and businesses spend and hire. This suggests room for further fiscal support as the economy recovers.
The week ahead – PM and Gov. Lowe speak, construction & capex survey, trade; RBNZ Financial Stability Report
- Australia: The PM speaks on Tuesday, where he may discuss Australia-China relations. Governor Lowe testifies before the senate on Thursday on the impact of the virus. Construction work done should fall by 1.5% in Q1 on weaker housing activity. We forecast business capex to fall 3%, with equipment investment down 4%. Importantly, we expect a recession-like downward revision to firms’ investment plans. ABS business and household surveys are due. April credit growth should slow after a large boost in March. NZ: The ANZ business survey is due Thursday and consumer confidence is on Friday. The RBNZ delivers its Financial Stability Report and press conference on Wednesday, which will raise concerns about financial stability risks brought on by COVID-19.
- CH: The National People’s Congress continues until 28 May and will cover stimulus measures, Hong Kong and US-China trade. US: Monday is a holiday. May consumer confidence and the Fed Beige book are due. Friday’s personal consumption should fall 12% in April. EU: Monday’s May Ifo survey should improve from a record low base. UK: Monday is a holiday.
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