Finance Market Update 27 March 20
An emergency rate cut from the RBA, a $105 billion dollar funding program for banks, $250k unsecured business loans for small business, shut down of all social venues and over $83 billion in stimulus packages announced, all within the last two weeks. We have a lot to talk about in this fortnights update.
Well, that escalated quickly
2 weeks ago, ScoMo was saying we should be heading to the footy, and now he is saying we can’t even go to the pub.
That is a quick escalation in the fight in the virus crisis but there will be even more drastic steps in the near future (such as a complete shut down of all non-essential services).
Australia, and the world, is facing a global recession and possible depression greater than any in living memory. To combat the very real and viral threat on the economy, livelihoods and health of Australian citizens the federal government has announced a first package of $17.6 billion quickly followed up by a second $66 billion stimulus package.
This is in conjunction with a $105 billion RBA program supporting lending to businesses by banks and an emergency rate cut down to 0.25%, which we talk more about further below.
Rather than focusing on the details of the packages as you can find great write ups online I want to talk about what it means from a higher perspective.
First - this is just the start.
During the virus crisis over the next one or two years it is likely that Australia could spend between up to 20% of GDP (Gross Domestic Product) to combat the economic downturn.
This is a staggering amount and one that will certainly be a driving factor that plunges Australia into a recession.
What is unclear right now is if this will lead to a depression, which is much worse and would see millions of our people unemployed, potentially living marginally above the poverty line and relying solely on government support.
If we get to that low level it will be the worst situation the country, the world, has been through in a century.
If 20% seems high just know the US has passed a USD $2 Trillion dollar package this week. Ours is nothing by comparison.
Second – flattening the curve has a huge cost.
A large part of the GDP expenditure will be to “flatten the curve”.
This refers to reducing the spread of the virus to avoid overwhelming the hospitals which would lead to more deaths.
Any and all measures to save lives should be taken.
The recent measures of social distancing which has seen the majority of white collar workers start to work from home, to self-isolating and closing of pubs, clubs, churches and banning Australians from international travel, are all measures to stop the spread of the virus and flatten the curve.
This is all necessary and anything we can do to avoid unnecessary deaths should be done.
The interesting thing from an economic perspective on this is that as you flatten the curve, a line which shows the rate of infections, you also increase the curve of government debt.
For example, as the government has shut down pubs thousands of workers from the hospitality sector are now unemployed and will rely on government benefits to pay rent and buy food. Support they are and should be entitled too.
The curve of infections starts to slow or “flatten” because of this measure, but the cost to the government is millions of dollars every week, which increases government debt.
The packages the government put into play will have a huge economic toll on the country.
Third – the recovery will be fast in certain ways and weird in others.
Once a vaccination or successful treatment is found global markets will rebound fast.
The reason they dropped so much is because markets never had to price a global pandemic before, but once they see the light at the end of the tunnel they will come back in roaring fast.
But in many ways the recovery will be weird.
Like returning to the office, going to a big party or even the local gym or pub.
Those places and activities could be shut for half a year, more likely closer to a full year, so it might feel weird for a lot of people to start going to those places again.
People will be cautious to get back into those places, accustomed to distance, isolation and fear. Not all, but many people.
And even if they wanted to go back chances are their favourite local café, bar or restaurant collapsed during the recession or is markedly different when they reopen.
It is unclear if the unsecured and cheap business loans will be enough to get many businesses through the worst part of the pandemic and recession.
What is clear is that things won’t return to the way they were before.
Things will return to normal, but that normal will be different from what was normal pre-virus, and that will be a weird new normal to get used too.
Rates are near the bottom
The RBA dropped the cash rate to the lowest level in Australia’s history to 0.25 of a percent at an emergency meeting while at the same time setting up a $105 billion dollar funding program with banks.
They have clearly said this is the lowest it is going to get and that the cash rate will stay there for a few years.
In response to this the major banks moved again in unison to lower rates but not like they have in the past.
Their Standard Variable Rate, the number you see on their website, largely remains unchanged since the previous rate cut, and instead lowered their fixed rates.
Fixed rates are now hovering around 2%.
If your rate is higher than that, let's talk about refinance.
This is a signal that their variable rates are effectively at the bottom.
There will likely be competition in the margin with adjustments to the variable rate but for the most part this is the low point.
The other thing is the way the RBA is supporting banks to lend to small businesses, they are working with banks and fintechs to offer the $250k unsecured business loans.
This is done in a few ways, such as the $105 billion dollar funding line is Australia’s first form of ‘quantitative easing’ whereby the central bank pumps money into the banking system to provide liquidity for the banks to keep lending money. So far this week the RBA has bought around $15 Billion in bonds.
The other is that the RBA is lending money directly to the banks at 0.25% for 3 years so they can offer super cheap loans to businesses.
That is the deal here, the RBA lends them money at a super cheap rate and the banks push debt into the market and support small businesses.
Whether or not this will work, SMEs will actually be able to get the loans readily and if that will help them get through the trough to make it back up the peak is yet to be seen.