On the back of some quite disappointing economic data through the months of March and April – whether it be unemployment, retail sales, industrial production – we thought it would be worthwhile having a look at what support we’ve seen from governments and central banks globally. As economies begin to reopen, and we start to see a normalization of economic and industrial activity and how that’s going to provide the platform for growth to the second half of this year into 2021 in our view.
This first chart shows the GDP spend by countries in the OECD. You can see that Australia has been roughly around about 9.5% to 10% of its GDP since the beginning of COVID-19 in February. That equates to close to $160 billion. To provide the necessary support might come in different forms than what we’ve seen so far today, but we certainly believe it provides a very solid platform for the economy to maintain some level of activity.
More importantly, as we move through the second half of this year when the economy starts to reopen again, that will provide a solid base for growth through the fourth quarter of this year and into next year.
This next chart shows our domestic perspective with the RBA. First and foremost, we’ve seen a significant cut in the cash rate to an all time low of 0.25%. We believe that the cash rate will stay at this level for a number of years and the RBA is certainly very focused on maintaining not only monetary support but ensuring that we have sufficient market liquidity going into this environment.
That really leads to the second element which is the significant increase in the money supply. This is the most liquid form of assets held in the economy and you can see that we’ve had quite an extensive uptick in the money supply driven from RBA policy. From our perspective, that’s a really smart move. We saw that particularly increase through the month of February and March, when liquidity in financial markets was becoming quite constrained in certain areas. The RBA’s decision to increase the money supply certainly alleviated some of the risks associated with financial markets.
This next chat is from the US Federal Reserve. Looking at the Fed’s balance sheet you can see it’s expanded quite incredibly over the last couple of months compared to the GFC in 2008/2009 .The absolute level that we’re seeing in terms of the Fed maintaining a very sizable balance sheet we believe will continue as we head into the second half of this year into 2021 and beyond. The Fed has introduced a number of new mechanisms and tools trying to provide not only support to the broader economy, but equally to ensure that financial markets maintain stability and can function appropriately through what has been a very difficult period as it relates to the global economy.
Central banks, markets and governments around the world continue to look at and price off what’s occurring from a US perspective. So the actions of the Fed are quite critical in the context of providing financial markets support and stability.
If you look at both these actions from governments and central banks, it is providing that floor by which commerce can start to rebuild as we move out of the lockdown phase. From our perspective, we think the next three to six months will continue to remain very challenging. But ultimately the stimulus packages we’ve seen from governments and central banks will provide a really good platform for growth through the back end of this year and into 2021.
When we think about that from a strategy point of view, we continue to focus on the growth opportunities that are presenting themselves, but we’re mindful of the ongoing risk that we’re facing into now. Our core view remains that despite some really challenging economic data that we’ve seen over the last couple of months, and potentially will continue to see over the next three to six months, we believe the base has been set. We expect with the packages that have been delivered so far and potentially more to come, that it will provide a really good platform for growth as we move forward.
As always, if you have any concerns about your portfolio, please feel reach out to your advisor.
Piers Bolger is Chief Investment Officer at Viridian Advisory
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