The federal government is preparing to roll back stimulus measures — should investors be worried?
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As the Australian economy emerges from the depths of the COVID-19 crisis, the Morrison government now faces a delicate balancing act in how it rolls back emergency fiscal stimulus measures.
Key to those changes will be what it does with the ~$70bn JobKeeper package, which was launched in March when the end of the world looked near.
For one thing, “the Australian economy is clearly performing better than initially feared”, UBS said on Friday. Approaching the end of Q2, the bank upgraded its June quarter contraction forecast to -8.5 per cent, from a previous estimate of more than 10 per cent.
In addition, the UBS economics team highlighted that the JobKeeper spending plan was calculated on the basis of a forthcoming shutdown which would have seen economic growth fall by more than 20 per cent.
Fast-forward three months, and COVID-19 containment measures have beaten expectations which has allowed states to accelerate their reopening plans.
UBS also noted that consumer sentiment surveys had rebounded to pre-crisis levels, while early spending data indicated a preference to “spend (rather than save) the fiscal stimulus, seeing consumption rebound rapidly”.
However, that also means the initial six-month timeframe for JobKeeper is likely to be shortened at the budget update on July 12, UBS said.
And yesterday, Prime Minister Scott Morrison indicated the Coalition government was preparing to tighten its purse-strings.
For stock investors, what the government does from here will be worth keeping an eye on given the ongoing uncertainty around the virus (particularly on a global front).
Speaking with Stockhead last week, Pengana small-caps fund manager Ed Prendergast highlighted that the April/May market rally was largely in response to historic government stimulus measures across the major western economies.
So in effect, the valuations of shares have priced in the likelihood of a government backstop should the pandemic cause more problems ahead.
Domestically though, the Morrison government appears to have made its priorities pretty clear — addressing the post-COVID budget deficit which is expected to increase to $62bn this financial year, to $185bn in 2020/21 and $48bn in 2021/22.
So for the second half of 2020, Australia’s reopened economy will have to pick up the slack as government support measures are reduced.
And it may have to do so in a subdued global environment, with UBS now forecasting that global growth in 2020 will fall by 4 per cent (now from -2 per cent in April).