Weekly Wrap by Pythagoras Investing: Economic Update

Economic Update

The budget has been deferred and this week’s economic update was the first chance to see the “damage” and understand what is likely to occur in 2021.  There are a lot of numbers but critically unemployment is forecast to peak at 9.25% by Christmas and drop from there.  Unemployment is now 7.4%.

Going into this crisis, Australia had some of the highest household debt in the world. Without a change in public policy, by year’s end, well over a million Australians will be out of work.  Of those still in jobs, many are likely to have reduced incomes for at least a couple of years. Consumer demand from heavily indebted households will be depressed.  Amongst others, banks are going to struggle.

Government support to the tune of $289 billion increases debt to $852 billion by the end of FY21. Treasury believes real GDP (Gross Domestic Product) will fall 3.75% in 2020 and grow by 2.5% in 2021.

The update from Treasurer Josh Frydenberg was a big dose of reality. Government assistance will lead to the biggest deficit since World War II.  All in an effort to buffer us against the health led response to the coronavirus.

Plainly we can see now that our net debt levels are extremely high.  The government is at pains to say “not as high as most other countries”.  One way or another we have many years, perhaps decades to pay off mountains of debt.

Damned if you do.  Damned if you don’t

Having made the decision and taken action to close the economy, no matter what the deficit and how long it takes to pay it back, the government’s support was necessary.  Without it there would be mass unemployment, a collapse in government revenues and a huge budget deficit anyway.  Keeping household spending supported was designed to bridge the economy initially to survive the health induced recession. 

We may need more government investment over coming years. The October budget will have to deliver quite a bit more, though just how much is unclear.  Hopefully once the economy reopens, we thrive. But trying to move back into surplus too quickly would be dangerous.  This is going to be a long row to ho. 

We expect the Covid-19 vaccine development will evolve rapidly in 2020.  Overall, we expect many approved vaccines by early 2021 – probably in use from mid-2021. New vaccines are moving into trials and progressing into phase 3 more quickly than we anticipated.  This is all moving at alarming speed – let’s hope safety and side effects aren’t neglected.

We expect a confidence boost for markets when we get closer to a finalised vaccine.  But virus mutations mean that this is not a long-term solution.  Either way the effect on confidence, economies and therefore stock markets will free people from their isolation. 

We need to learn to cope with Coronavirus – it is not going away. 

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