29 March 2024
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How in the hell is the economy going? Will we be victorious against this virus?

Peter Switzer
28 August 2020

Last Friday I did a commentary piece for Nine’s A Current Affair and the programme’s long-term reporter Brady Halls asked me after we did our on-air Q&A, if I thought we were heading for a crash. My reaction was pretty prompt and shocked him as well as the nearby camera and sound guys.  “No, I think we’ll get out of this without a crash!” I said, I guess with my usual optimism.

However I did add that I can see another period where the stock market does pull back. But if that happened, say down 10% or even 15%, I’d be telling my subscribers taking the Switzer Report that this is a buying opportunity.

But I did throw in one proviso: “We have to get a vaccine to let us travel around our country and then worldwide before the end of the year preferably, but at worst case by early next year.”

If the world can start heading back to normal living, travelling, dining, jumping in lifts and going back to work in CBDs, then we can avoid an economic crash, and consequently a stock market crash.

Overnight the Federal Reserve boss, Jeremy Powell, said he’ll let inflation get above the usual 2% target in the US, which means growth is going to be given a greater chance to boom in coming years. And following this, bank share prices rose and the Dow Jones Index went above its pre-Coronavirus crash levels!

Other central banks, including our own, will be encouraging growth and not worrying about inflation in coming years because economic growth is the only real solution, given the alternative is too scary for politicians to consider. It’s a really bad recession or depression that wipes out a lot of jobs, businesses and debts until we start from ground zero and rebuild the economy.

That’s what doomsday merchants are effectively wishing for when they argue governments shouldn’t intervene to encourage economic growth.

So given that, how is the economy responding to the government assistance that’s being thrown at it? Are the economic readings supporting my case that we will avoid a crash?

Here’s the latest data. Let’s look at the good news on the economy first:

  • The weekly ANZ-Roy Morgan consumer confidence rating rose by 4.6% to 92.7 – the biggest increase in three months (long-run average since 1990 is 112.7). Sentiment is up by 42% since hitting record lows of 65.3 on March 29 (lowest since 1973). 
  • According to the CBA, card spending in the week to August 21 was up 5.1% on a year ago, compared to a 3.6% lift for the week ended August 14. Online spending rose 26.2% on a year ago (previous week: +21.2%), but in-store spending was down 3.8% (previous week: - 4.5%). 
  • The ABS survey of the impact of COVID-19 showed some improvement. “Fewer businesses reported a decrease in revenue in August (41%), compared to July (47%).”
  • Also from the ABS:“The proportion of businesses that expect revenue to decrease in September (28%) was lower compared to the proportion that reported a decrease in August (41%).”
  • In the year to July, the trade surplus was $77.2 billion, down from the record high of $87 billion set in the year to May but that’s still a big surplus.
  • According to the Australian Bureau of Statistics (ABS), “The June survey showed a slight increase in the numbers of Australians who had received a Government stimulus payment in response to the COVID-19 pandemic, rising from 32% in May to 35% in June. The main use of the stimulus payment in June was to pay household bills (32%), which was a change from May when the main use of stimulus payments was to add to savings (29%)”.Victoria’s problems explain the increase. That’s to be expected. But the fact people aren’t panicking and saving money but instead are spending it, is good for the economy.

The bad news is:

  • New business investment (spending on buildings and equipment) fell by 5.9% in the June quarter to be down by 11.5% over the year. Economists had tipped an 8.2% fall in the quarter, so it’s bad but not as bad as was tipped.
  • Construction work done fell by 0.7% in the June quarter. The value of construction work done is down by 2.2% on a year ago to 3½-year lows of $50.1 billion. Once again this is bad but not dramatically bad.
  • Residential building fell by 5.5% in the June quarter – the seventh decline in eight quarters. Work done is down 12.1% over the year – the biggest annual fall in 19 years. New residential work fell by 5.6% over the quarter to be down 13.6% over the year to June – also the biggest annual fall in 19 years. This is big and is more consistent with recession talk.
  • The Australian Bureau of Statistics (ABS) reported that between the week ending 14 March 2020 and the week ending 8 August 2020, employee jobs decreased by 4.9% and total wages decreased by 6.2%. Jobs fell most in Victoria (-7.8%) across states and territories. Yep, Victoria best explains these numbers and it’s understandable.

Those numbers tell us that big issues like investing, constructing and building homes are affected by the Coronavirus-created recession but the stimulus from the rescue programme and the getting-back-to-work and more normal social activities are all helping consumers spend. And because we can’t spend on tourism and hospitality as freely as we used to, we are buying stuff.

Clearly, if Victoria (which is nearly 25% of the economy) wasn’t in lockdown, our numbers would be a hell of a lot better. But we still have a CBD problem. The unwillingness of workers to go back to offices is impeding the return to economic normalcy and this reading on public transport shows this has to change.

In Sydney and NSW, the use of public transport is down 45.6%, Perth 35.5%, Brisbane and South-East Queensland 37.3% and Melbourne and Victoria is down 83.8% (though we all know why). This low use of public transport is explained by workers doing it from home.

For my “V-for-victory” optimistic scenario to come to pass, it relies on two Vs. First, that vaccine solution asap is critically important for economic growth to rebound in 2020. That’s exactly why the US stock market isn’t at record highs. Wall Street believes a vaccine will comes and the stimulus creates a big growth story.

Second, Victoria has to re-join the national economy. And when that happens, hopefully in company with a looming vaccine, we could really see a great 2020/21.

I really don’t want to contemplate the alternative. I believe we’ll beat this challenge because there’s a lot of Nelson Mandela in our collective resolve.

The great man said:“Do not judge me by my success, judge me by how many times I fell down and got back up again.”

And if you need more than my belief in my fellow man to remain optimistic, last week two of the USA’s best economists, Ed Yardeni and Jeremy Siegel, both gave the US economic recovery the thumbs up. And these two guys have a very good track record of being right.

“All in all, we’re still seeing that economies are recovering pretty well from what was basically a lockdown recession,” Yardeni told CNBC this week.

And Citigroup economists in the States were even more bullish. “The generally good health of the world economy pre-COVID and rapid fiscal action by governments fuelled a rebound in global activity that has been extremely sharp, V-shaped in fact,” they told their private bank clients.

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