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Economic Update

Strong tailwinds will drive COVID recovery

australian covid recovery

Government measures will provide a strong tailwind behind Australia’s economic recovery as consumers also open their wallets as lockdowns end.

The Australian economy has a number of tailwinds, including low interest rates, ready access to cash and positive consumer sentiment, that should drive its recovery in the wake of COVID-19, according to an investment manager.

La Trobe Financial Asia-Pacific head of distribution Michael Watson said while business investment and population growth had fallen to very low levels as a result of the coronavirus and the second lockdown in Victoria had created a drain on the national economy, efforts by the federal government and the Reserve Bank of Australia (RBA) were aimed at countering those impacts.

Watson noted the federal budget included a number of policies that targeted businesses and households, offering income tax relief, and the government was focused on getting the economy back on track and reducing the jobless rate below 6 per cent.

“If there’s any doubt of the unanimity of our policymakers, take a look at recent actions from the RBA,” he said at the recent SMSF Association SMSF + Investor Expo.

“Following its declaration in October that reducing unemployment is a national priority, it has since cut the official cash rate to a new low.

“The afterburners for the economy are really about to kick in. After saying the official cash rate is already zero bound, we saw that 15 basis points cut in November.

“The RBA is redlining its official cash rate response in supporting fiscal policy and the $300 billion three-year funding facility it announced ensures our financial system will continue to be awash in very cheap, stable money.

“Finally, [RBA] Governor Philip Lowe has undertaken to move the bank’s bond-buying program out on the duration curve beyond three years. That will put substantial downward pressure on long-term interest rates.

“So, the federal government’s all in there, the RBA is all in and this is a serious tailwind for the Australian economy.”

He also pointed to increasing levels of household cash as a further tailwind, which was being reflected in disposable income and consumer sentiment.

Banks are “awash with cash” and deposits are at record levels, and a “surprise tailwind comes from how resilient household finances have been through hibernation thanks in part to government support for the economy”, he said.

“Disposable income was up 2.2 per cent in the June quarter and the savings rate increased to 19.8 per cent, and early access to superannuation has slowed to a crawl now Australia is basically getting back to work,” he said.

“It is a surprise that in this environment we’re continuing to see consumer sentiment readings above the long-term average and it has recaptured altitude at a very rapid pace.

“The best read of this situation is that consumers are feeling the wealth effect of excess savings, deposits, income and tax cuts. That’s a strong positive for the medium-term consumption outlook.”

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