The Australian Government has injected billions of dollars into the economy, what is the short, medium and long-term impact of this on investors and consumers? (in response to this article)
Colin in Bondi, NSW
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Great question. Will this COVID-19 crisis shape a generations’ spending like the Great Depression did, as this will slow down any economic recovery. It also highlights the importance of financial literacy to ensure people are as well-equipped as possible to deal with crises in future, and maybe this is an area the government could inject some capital into. It is currently not taught anywhere and would help provide future generations with the basic financial skills they need.
The initial impact from COVID-19 on investors and consumers has been pronounced. Some of our clients viewed the downturn as an opportunity to invest further for the long term, some eager to maintain their cash safety buffer, many pensioners reduced income drawings to keep monies invested, but most importantly none of our clients panicked and sold investments. These reactions typically reflect our investment attitudes & experience, risk acceptance and stage of life. Withdrawals from super have also shown to have been considerably lower for “advised” clients than for those that are “unadvised”.
Consumer spending has contracted short-term resulting from lower incomes due to reduced working hours (or unemployment), debt servicing issues, or from something we have not really experienced before, being simply unable to live our lives as we are used to (courtesy of all the forced changes to business operating conditions, complete closures and isolation measures).
Economic recovery is the key to success over the medium and long-term. Governments have limited monetary policy available given prevailing interest rates, so fiscal policies and investment will need to be directed to areas where consumer spending is occurring now and into sustainable businesses in Australia, rather than business profits continuing to grow offshore.
Will more people now work from home and will this reduce consumer spending overall? Or will they merely divert their spending to other areas? ie. lower consumption of fuel but higher consumption of online or other services. Will investors seek opportunities in areas that will prosper from this potentially changed consumer behaviour?
The Australian government response to COVID-19 has involved temporary measures to date to prevent an economic calamity. The “response to the response” is unlikely to be as temporary in nature and will likely be dealt with over a much longer period of time. This scenario has similarities to investment market behaviour where, “the drop or downturn” (or raising of debt for the government and intended injection of capital in the economy) is much quicker than the “recovery” (or repayment of that debt).
Fortunately for governments they are an ongoing entity and do not have a finite life, so unlike people, their debt repayment strategy can be managed with no set end-date applying. As the article you referred to suggests, to help reduce the debt it may mean revisiting franking credits, negative gearing, possibly also capital gains tax and superannuation.
Even prior to this current crisis occurring, expectations were for a period of lower returns (compared to for example the last 30 years) for most asset classes over the longer term. This is unlikely to have changed too substantially, though may be slightly higher now given the size of the downturn to date. For an investor this crisis has again highlighted the importance of blocking out short term noise and focusing longer term.
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