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The View from the Outer

View From The Outer: Budget Blitz

Max Casey Tim Rocks Peter Dragicevich
7th October 2020

Budget Blitz

 

The Federal Government unveiled its ‘economic recovery plan’ budget. The FY21 deficit is large (~11% of GDP). Given the size of the economic shock caused by COVID-19 and the lockdowns/restrictions, it needs to be. To get the economy back to where it was fiscal and monetary policy will remain accommodative for some time. Fiscal spending should continue over the next few years. We also think the RBA will do a bit more at the November meeting. A micro cash rate cut, lowering the 3-year bond yield target (both down to 10bps), and announcement of outright QE could be on the table.

 

The fiscal focus is on trying to lift confidence (consumer and business), get businesses to look past the current economic storm and start investing for the post COVID world, and to support jobs. The tax relief for businesses is the centrepiece that should drive these trends. Other measures such as bringing forward income tax cuts, infrastructure and regulatory changes are designed to support demand and create a virtuous cycle.

 

A lot still depends on the path of the virus. But assuming domestic health risks are contained, we think the economic recovery should gain traction over 2021. In our view, the fiscal roadmap and updated strategy focus are medium-term positives. The measures should support natural momentum generated by the reopening, particularly interstate borders which will go a long way to unlocking the still relatively dormant service-providing sectors that were hit hard by the pandemic. Looking ahead, given more choice, we think consumers are likely to rotate away from spending on goods, which accelerated to unsustainable levels over recent months, back to services.

 

Recommendation

  • We still think stocks linked to the reopening (i.e. services/casinos, malls, domestic travel), jobs and construction should remain supported over the medium-term by Australia’s better health trajectory, and expansionary pro-growth policy settings.
  • But, note, short-term risks remain. At a headline/index level, overall market valuations are still elevated, and volatility looks set to persist as we approach US elections on 3 November, and key signposts for the COVID-19 vaccine. Locally, even after accounting for the tax cuts and new cash payments, household income support will still step down over Q4/Q1. This will be a tricky period to navigate.