Finance Market Update - 5 June 20
It is official, we are in a recession. But it is not so bad, right now at least. In this update we talk about the first recession in three decades and the new schemes for people to fix up their houses.
We are in a recession
Historically when a country enters a recession the current political party in power loses their position and get voted out as people blame them for not doing enough, but this time around I am not sure history will repeat itself.
The Australian government is throwing money at people to avoid a bad recession.
Figures released this week show Australia experienced its first negative growth quarter since 2011 and is on track to record a (technical) recession for the June quarter, the first in three decades.
The decline in growth was negative 0.3%.
This is a vastly smaller contraction than our global counterparts with the UK contracting by -2% and the USA by -1.3%. It is also well below the 20% that was forecasted and much better than expected.
Indeed, in the worst-case scenario which was pointed across the media and being talked about showed millions would be sick and infected, thousands dead and the economy in shambles.
Fortunately, this reality has not materialised and there is reason to believe we could come out of this much, much better than expected.
The contraction was due to the sharpest drop in consumer spending in 34 years.
Of course, this makes perfect sense. If people are locked down, shops closed and now where to go people do not spend.
The numbers released this week are for the first three months of the year. The next round of figures released in September will be markedly worse because that is the period covering the depths of the lock down between March and June.
Because of this the Treasurer has basically said we are in a recession.
He did not bother waiting till September to see the next results because he knows it is going to be bad. We should all take that as a hint.
Not since Paul Keating in 1990 has a treasurer said our country is in recession. That was the “recession we had to have” and this is the recession we could not avoid.
The government estimates a 10% drop in GDP in the next results and a 13% drop in consumption. If that consumption figure is correct the result will be forty-three times worse than just reported.
There are also around 600,000 people unemployed. The jobless rate is expected to be around 10% but this will be masked by JobKeeper and probably close to double the official figure that gets released.
Seemingly perennial issues will also be there even when the economy starts to recover, namely high debt levels, elevated property prices and low productivity and wage growth.
Combating this awful picture is the governments stimulus packages.
$259 Billion dollars has been deployed by the government, equal to nearly 14% of GDP.
This includes $70 billion for JobKeeper (not including the $60 billion account error), loan deferrals, free childcare and doubling the unemployment benefit.
And there will be more to come, rest assured.
Tradies to the rescue
On top of all the existing recession fighting policies a new one has been announced, this time aimed at new home builders and homeowners who want to make home improvements.
The ‘HomeBuilder’ grant provides owner-occupiers and first home buyers with $25,000 to build a new home or undertake substantial renovations.
There are very clear and strict guidelines on who and what can be done and you can find the details here.
From an economic perspective it makes sense to throw money at houses. Australians are not only addicted to property, but property forms a fundamental sense of wealth for most people.
Their home, their castle, their wealth.
The government wants to boost consumption, and so it needs to boost people’s confidence, and almost nothing but rising house prices boosts confidence so dramatically.
Houses are also a huge piece of economic activity.
Building them and maintaining them keeps millions of people employed and spending and right now the that is exactly what the government wants - people to keep working and spending.
This new HomeBuilder scheme basically puts money in the pockets of tradies.
All home building and reno’s are done by tradesmen, “tradies” or subcontractors, “subbies” as we like to say and so this $25k kicker will be heading to them to get work done around the house.
The funny thing about that is that tradies are really good spenders so the government will get want it wants.
Tradies spend a lot on cars, tools, fuel, equipment, coffee, building materials and even chicken rolls from which ever neighborhood they are in.
This is a double win from the governments point of view. Boost people’s confidence and spending on their homes while trickling down money to businesses via tradies.
It is almost as if the government thinks tradies can fight the recession.