The fiscal cliff and EL&C Baillieu’s V-shaped recovery
Australia is in the early stages of a strong V-shaped recovery, which we expect to more than offset fears of a fiscal cliff in 4Q20 when the Government’s JobKeeper and JobSeeker programs are set to expire. First, Australia is seeing a powerful recovery. May retail sales rose 5.8% YoY to be 4.4% above pre-COVID-19 levels. June CBA card spending is even stronger. Consumer confidence is just 1% below pre-COVID-19 levels. Exports have been resilient, with the May quarter 1.1% below the prior quarter. Overall, we see 2Q20 real GDP tracking at about half the pace of decline in the RBA’s forecast -9% QoQ.
Second, we see five drivers of strong 3Q20 growth: reopening, fiscal support becoming major stimulus, rebounding confidence and strong household cash flow. A potential vaccine success could supercharge the recovery.
Third, the Morrison Government has proven flexible on fiscal policy, ditching its long-sought surplus and announcing fiscal stimulus of 10-11% of GDP in March! As such, we expect added fiscal stimulus if it is needed.
Fourth, our scenario analysis suggests fiscal cliff fears are overdone. Even moderately successful stimulus should overwhelm the headwinds from 2Q’s lockdown, leaving the economy much stronger than pre-COVID-19 levels.
Finally, beyond the cliff, Australia’s world-leading handling of COVID-19 should enhance its attractions to skilled migrants, international students and tourists. Potential economic reforms could further lift potential growth.
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