A larger than expected fiscal stimulus package
- “The Government’s package, at $17.6 billion, is larger than expected reflecting the fast moving nature of events. The economy almost certainly contracted in the March quarter, the question is will activity contract in the second quarter, pushing Australia into a technical recession for the first time in 29 years. The answer is, we don’t know but it remains possible even with the stimulus package announced today. While many of the measures announced are automatic – so not slowed down by the need to fill out forms and lodge – it takes time for spending to feed through the economy. The economy, though, should recover once the pandemic is contained and supply disruptions ease. The timing of that is highly uncertain. The economy will be supported by fiscal policy settings, low interest rates and the lower Australian dollar but much will depend on how households respond. “
- The stimulus package is aimed at keeping people employed - which we know is a key factor for how households respond in challenging times – supporting small business, and Australians who receive benefits including pensioners, the unemployed and families who receive the Family Tax Benefit. While the instant asset write off is a clear move to encourage businesses to bring forward investment spending in the second quarter.
- A key factor will be how households respond in the near term. Consumers were already cautious heading into this year, and fear of job loss has a significant impact of spending patterns, particularly for those carrying debt. Consumer confidence has slumped in recent weeks, and is now at five year lows, while the Westpac-Melbourne Institute measure of unemployment expectations jumped 8.5% in March.
- All the measures in today’s package are temporary so that when economic conditions improve the budget should return to a stable footing, however these measures could be extended and remain scalable, should the economy require additional support. Encouragingly, Standard & Poor’s have reaffirmed Australia’s AAA credit rating. Australia’s government debt as a per cent of GDP is low on global comparisons, meaning that we should be able to borrow to support the economy as required.
- Less positive though is that Australians consumers are carrying significant debt – 186% of disposable income – which will hamper the ability of this part of the economy to support activity and alleviate the demand shock.
- In addition, the currency is an important economic stabilise for Australia, and it is doing its job, falling to decade lows.
- The economy is currently facing a supply shock and a demand shock. There is significant volatility in equity markets but we are not seeing a liquidity shock. The supply shock should ease as the virus is contained. Indeed, various scenarios of the economic impact on Australia are available but all show that recovery emerges over time, although timing at the moment remains highly uncertain.
EY Partner
5 年Thanks Jo, will be interesting to see the New Zealand measures released on Tuesday.
Head of Markets - EY Oceania
5 年Informative as always Jo thanks for you insights