With interest rates near zero, the Government’s fiscal stimulus has done the heavy lifting in rescuing the Australian economy from almost certain abyss. The total spending will approach $400bn, or 16% of the GDP. A portion of the heavy lifting has been done by JobKeeper, which will cost over $115bn, in comparison to the coronavirus supplement, which will cost about $20bn.
JobKeeper effects some 3.5m workers and 1m businesses, while 1.4m Australians are on JobSeeker. The former was at $1500 a fortnight, is now $1200 and will be $1000 in the New Year and will almost certainly end in March 2021. It’s uncertain where JobSeeker will end up, but nobody expects it to remain at $550 a fortnight ($40 a day) where it was before 20 March 2020 when the coronavirus supplement was introduced, which initially doubled it. It’s now at $815 a fortnight to be reduced to $715 next year, until late March.
The unemployment rate is now 6.9% and will likely rise to 10% next year, while house prices are predicted to fall anywhere between 6 to 20%.
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What are the economic implications of JobKeeper?
In terms of the economic implications, the key issue is why they are being removed. There is evidence that key sectors are opening up and the removal reflects that we are moving back towards normality, in Australia at least.
Australia’s Reserve Bank anticipated concerns about fiscal stimulus removal and in recent weeks announced further monetary stimulus, indicating it’s doing everything and anything it can to underwrite the housing market (which is a turnaround from recent years) to ensure there is a floor of sorts under prices.
What about the stock market?
On the stock market front, we are surprised at how strong it has been. Clearly the market understands that it’s not like the balance sheet recessions of the past, which resulted from monetary tightening in order to cool rapidly rising inflation. The COVID-19 related depression has nothing to do with aggregate demand, being supply induced. When supply comes back on stream, subject to the development and distribution of a vaccine, we won’t have the same debt overhang in the global economy. Banks won’t have to be recapitalised.
When the vaccine gets widely distributed we will get further back to normal. There will be an understanding that further Coronavirus strains may appear, but it will be a case of two steps forward, one step back.
What about debt?
On the debt front, it seems that growing government debt has replaced corporate and household debt. When the economy pulled back and animal spirits lay dormant, governments have stepped up and borrowed on the private sector’s behalf, filling the gap. It’s a classic Keynesian solution. Possibly the overall debt situation now is similar to what it would have been had we not had the pandemic.
Interest rates will remain relatively low for some time although as we commented on last week, there are definite inflationary risks to be watching out for. Your portfolio should have a combination of growth and value, which will give you exposure to the animal spirits and protection for when they subside.