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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This is an incredibly difficult question to answer, being both broad and specific at the same time. After the recent revision it sounds like it will be $60 billion less, but that’s beside the point. Government’s around the world have clearly learnt from the experience of the GFC and the European debt crisis and made the decision to be proactive in dealing with this unexpected and external shock to the global economy. It’s obvious they understand how difficult reducing unemployment can be and that the more people they can keep in work and businesses solvent, the better hopes for an eventual recovery.
I’ll try to keep my answer short and split it into implications for consumers and for investors. As a starting point though, it’s worth considering the concept that the Government must urgently repay the debt that is being accumulated during this period, as this seems to be a key reason behind Fraser’s concerns. The Federal Government has had no issue selling bonds to finance its spending in recent weeks, with a record $13bn in a single auction, and the 15-year bond yield is just 1.2%. If there has ever been a good time to borrow, it would be now. It’s also worth noting that the Government balance sheet doesn’t run the same as a normal person, in that any shortfall can simply be funded by issuing more bonds, whereas families would quickly run out of money. This is important as it removes the pressure on Government’s to repay debt at a time when markets and businesses need them more than ever.
In terms of consumers, my thoughts are as follows:
Short-term – The spending provides an important support to the economy at a time of incredible stress. It helps to support confidence which is key to people spending, travelling, investing and going about their daily lives. It won’t fully offset the lost demand, but it will go some way to smoothing the dramatic fall that is about to occur.
Medium-term – It really delays the inevitable, as when Job Keeper finishes, we know that Job Keeper will spike substantially, and many businesses will close. Retail was already in the doldrums in Australia before this, so it will simply speed up what has been a structural change occurring.
Long-term – The views in the article suggest higher tax rates are the only way forward, which would be a bad outcome for consumers and businesses alike. This will change the way we live and consumer, there will be a focus on improving our homes and quality of life, less international travel, a preference for domestic and experiential travel rather than consumption and shopping. People will naturally consume less with a more uncertain outlook, invest more in digital capacity and gravitate to things they value rather than useless items.
In terms of investors:
Short-term – It provides much needed confidence at a time of great market stress. The result of the combined global stimulus pushed the markets off their bottoms as investors saw a way through to the other side. It pushed interest rates and term deposit rates to nearly 0% reducing the options available for those seeking an income. Bond rates will remain near zero, meaning long-term bond investments are likely to underperform, it allows companies to raise debt at lower prices to keep themselves alive and those strong businesses to consolidate and look to acquire.
Medium-term - As highlighted, it will delay the inevitable which will be a huge spike in unemployment, falling demand, mass bankruptcies and many well-known names disappearing. Even with the cash a flush out of non-performing businesses will occur which investors will need to avoid. The first order companies impacted are clear, being travel, accommodation and hospitality, the second order are not so much. Who will be impacted next? Property owners facing higher vacancy and weaker tenants? banks with bad debts? The retailers who benefited from the first wave of spending?
Long-term – Investors will need to give up on investing for income and look outside of Australia’s borders. Identifying those businesses positioned for the new world will be as important as ever and they won’t be old-fashioned, mature business models, the world is moving online, and this has simply sped up the process. Investors will need to be more wary of the real experience and customer views of the businesses they own, seek exposure to economies growing faster than Australia will be more important than ever.
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