The Prime Minister unveiled a stimulus package for the economy which will provide $17.6 billion in support to the economy over the forward estimates period

The package is targeted at supporting businesses through the restrictions on activity and reduced demand conditions as the coronavirus unfolds. The main features include:

  • Immediately increasing the Instant Asset Write Off for qualifying businesses from $30,000 at present to $150,000 until 30 June 2020 for businesses with turnover below $500,000.
  • Accelerated depreciation allowances on business assets purchased prior to 30 June 2021 for all firms with annual turnover below $500 million.
  • At least $2,000 and up to $25,000 tax free in cash flow support for businesses with turnover of less than $50 million that employ staff.
  • A wage subsidy for employers of apprentices equivalent to 50% of the apprentice’s wage for the period from 1 January 2020 to 30 September 2020.
  • Direct payments to lower income Australians of up to $750 per person.

On Thursday, the Prime Minister unveiled a stimulus package for the economy which will provide $17.6 billion in support to the economy over the forward estimates period.

The stimulus is likely to be expanded in the Federal Budget for 2020/21 on 12 May next.

The Federal Government's huge economic stimulus came during an extraordinary week across the globe.

In the financial markets, the stock price losses were severe with Thursday seeing the US and UK markets losing about 10% in a single day. Losses in Australian stocks during the week were of a similar calibre to those during the GFC in 2008.

The perceived exposure of Australia’s economy to the corona-induced slowdown in China has caused the Australian dollar to move lower over the course of the week and is now close to 60 cents to the US dollar. Ironically, the geographic isolation of Australia has contributed to a slower rate of coronavirus diffusion than in many advanced economies and this is clearly to our advantage in limiting the damage it does to our people and our living standards. The weakening of the Aussie dollar is also favourable from the point of view of our international cost competitiveness.

Not surprisingly, the expectation on the market is that interest rates will be chopped again in early April – if the Reserve Bank waits that long. You’ll remember that the official cash rate was reduced to 0.50% early last week. It’s only a matter of time before we’re all the way down to 0.00% - and that is likely to just be the start. The current economic crisis gives the RBA the justification to get moving on Quantitative Easing (QE) – an unconventional monetary policy deployed successfully in other economies to shove their economies back on track after the GFC.

Whereas previous economic crises have usually been either a supply shock or a demand shock, this one sticks out as being a mix of both. From Australia’s perspective, demand is being curtailed by the negative economic mood overseas and well as the restrictions on travel to Australia which are hampering tourist and student arrivals. The inescapable atmosphere of uncertainty has also induced consumers, households and businesses to curtail some spending for the time being. Fortunately, the deep pockets of government are attempting to offset this element of the demand shock and Thursday’s stimulus package is hugely helpful from this perspective.

Whereas previous economic crises have usually been either a supply shock or a demand shock, this one sticks out as being a mix of both.

The supply side, which relates to our economy’s capacity to produce goods and services, has also been hampered. Initially, this was through the reduced flow of supplies and materials from China. More detrimental will be the probable necessity to curtail human activity and movement around Australia. As well as slowing down coronavirus, any further measures will also slow down economic activity to a considerable degree and this adds another challenge to the equation.

All told, the squeeze on economic activity over the next few months is likely to be very considerable. It is important to remember that coronavirus will come to an end at some point later this year and once the restrictions on activity are lifted, most economic activity is likely to revert back to some semblance of normality. Events in China this week illustrate this, with some factories and manufacturing operations resuming output as the virus there comes under control.

Later in the year, the overhang of delayed expenditures in areas like travel and recreation will kick in alongside the huge government stimulus, meaning that there is real possibility for momentum returning to economic conditions later on in 2020.

Builders back well targeted stimulus. Read Master Builders Australia's media release

 

Shane Garrett

Chief Economist

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