The Disappearing Cliff
The Australian economy is showing the first signs of a “V-Shaped” recovery beyond Q2. Consumer sentiment, according to the Westpac survey, after falling by a record 17.7% m-o-m in April rose by 16.4% in May and by a further 6.3% in June. It is increasingly likely that household consumption spending contributing most to the reduction in Q1 GDP (-0.6 percentage points to the 0.3% q-o-q fall) and punching a bigger hole in Q2 GDP will change direction abruptly in Q3 providing a large positive contribution to rising GDP.
The fear among some analysts is that the initial consumption-driven sharp lift in GDP will be short-lived as key income-support programs for households provided during the COVID-19 shutdown, such as the $1,500 a fortnight JobKeeper program and the doubling to $1,100 for JobSeeker support come to an end in September. The termination of these two programs alone means potentially a sharp reduction in household income and a renewed fall in household consumption spending.
The economy going over a cliff will be exacerbated by the termination of other household support initiatives from the banks around September as well. The banks have provided six-month holidays on interest payments including home loans for customers who can show financial distress caused by COVID-19 restrictions. Effectively the banks are capitalising interest, adding to the size of customer loans.
The economy going over a cliff from September idea is dependent upon the Government and the banks stopping household support programs abruptly. Allowing the economy to go over a cliff, however, is the worst option for the Government and the banks. For the Government, it means an economy in prolonged recession with lengthy and high unemployment and no chance of using stronger economic growth to reduce its medium-to-longer term budget deficit and borrowing position. For the banks it means an economy more likely to generate loan defaults and higher bad debt provisioning.
It seems to us inconceivable that the Government and banks presented clearly with a problem (the economy going over a cliff from their actions) that is in their worst interest will take no action and let it happen. It is especially hard to see why they will choose to take no action when the action required to provide a much better economic and business outcome is not hard to take.
In the case of the Government, it is a matter of retailoring JobKeeper, with early ending of the program for some occupations in businesses recovering fastest, but extending JobKeeper including its scope for occupations related to businesses where COVID-19 restrictions are longer lasting and where businesses will take longer to recover. The double JobSeeker payment should have a long taper and to a level materially above the pre-COVID-19 $550 a fortnight starting point. Also, the Government should be spending more (as it is already doing) on initiatives aimed at boosting employment.
These changes will mean that the Government’s budget deficit and borrowings are higher in the near-term but the longer-term benefit from avoiding protracted recession and boosting economic growth prospects will far outweigh. A bigger near-term Government budget deficit and borrowing program could help the Government grow the economy and generate much smaller budget deficits and borrowings over the medium term and a surer path for returning to budget surplus longer-term.
Very low borrowing interest rates for the Government add another compelling reason for the Government to use its capacity to spend and borrow more in the near term. It is almost a matter of masochistic strange choice if the Government cuts support programs dead in September and gives the economy a push over the cliff. We think it is much more likely that the Government will announce various transitional arrangements for income support measures and more job-boosting economic recovery measures (the latest announced over the weekend bringing forward more than $70billion of spending projects). The feared cliff beyond September may disappear before long.
We also think it unlikely that the banks will stop dead the holiday on interest payment arrangements for COVID-19 affected businesses and households in September. Some banks have already indicated that they have the capacity to extend programs in the cases of some borrowers.
Undoubtedly banks will be assessing how their lending arrangements can be adjusted to reduce the likelihood of forced selling pressure in the residential and non-residential property markets. Extending full or partial interest rate holidays where full loan servicing is likely to return as a reasonable possibility even if not as early as September makes much better business sense for banks rather than precipitating a rush of forced property sales collapsing property prices and adding to the number of problem loans.
Our view is that the economic cliff beyond September, feared by some analysts if Government COVID-19 income support programs and bank support programs stop dead, is unlikely to happen. The cliff is relatively easy to avoid and we do not see the Government or the banks willingly pushing the economy into a prolonged recession that is in their own worst interest.