Can Australia carry Victoria?
Australia’s second wave of COVID-19 infections has driven lockdowns in Victoria and renewed fears of a deep economic downturn. The direct cost of this lockdown is estimated at $7 billion, rising to $12.5 billion with flow-on effects. Many forecasters have cut their forecasts for the recovery, seeing little, if any, recovery in 2H20. In our view, this is unduly pessimistic for six reasons:
- The other 80% of the Australian economy has seen little, if any, second wave and continues to recover.
- Aggressive RBA monetary stimulus: renewed bond purchases – so far $2 billion – and the Reserve Bank of Australia’s (RBA) Term Funding Facility mean the RBA’s balance sheet could expand by 6.5% of GDP over the next six months.
- Expanded fiscal stimulus: the Federal Government has extended and expanded its JobKeeper and JobSeeker programs by ~$35 billion.
- The COVID-19 super early release scheme has grown to an estimated $42 billion, up from an initial Treasury estimate of $27 billion.
- The V-shaped recovery of Australia’s major trading partners, led by China, but with Korea and Taiwan proving relatively resilient.
- Australia’s commodity prices have performed remarkably well and are 1.4% above pre-COVID-19 levels. The iron ore price is ~US$50/t above Treasury forecasts, worth about A$6 billion per month.
Overall, we see Australia as well-positioned to carry Victoria, with the lockdown’s $7 billion cost overwhelmed by positives of about $100 billion!
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