With a return in business and consumer confidence, a pick-up in household spending, and ongoing stimulus and support from the government and RBA, Australia’s pandemic economy is recovering better than expected.
In a recent Industry Update Asset Finance webinar, Macquarie Bank’s Division Director, Martin Lakos, shared his insights on the state of the Australian economy and Macquarie’s projections for the future.
Consider how the following three takeaways might influence SME decision-making regarding new asset investment in the current climate:
Three Key Economic Insights
1. A Recession, Yes, but Nowhere Near the GFC
From March to May last year, there was a global recession. On graphs, it looks like a sharp V, with negative growth over two quarters and then a swift rebound. The circumstances that led to this recession vs. the GFC, and how governments and central banks responded, were markedly different, Lakos said.
Overleveraged businesses, households and governments caused the GFC. A global health crisis and nationwide lockdowns caused this recent recession. This time, governments and central banks did not hold back, implementing significant fiscal stimulus packages, about double the support that was injected during the GFC, Lakos said.
“With central banks cutting interest rates to zero and adding lots of liquidity into our global economies, that set the scene for a strong economic rebound,” he said. “As a result, this recovery is well and truly exceeding expectations.”
To put this in perspective, the U.S., the world’s largest economy and contributor to global growth, experienced the sharpest recovery ever seen during a recession, he added.
Despite the current lockdowns, Australia is ranked in the top 10 on the Bloomberg Index, as a result of Australia’s handling of the health crisis and its economic support. Growth assets such as property and share market, are set to maintain the positive momentum in to 2022, driven by low interest rates and government spending.
2. Australian Households Are Ready to Spend
“The current lockdowns will impact the September quarter national growth but past lockdowns when ended have seen strong rebounds. With increasing confidence around jobs comes increased consumer spending. Each state has continued to see job growth across key industries, “Lakos said, “with unemployment dropping to 4.9% from a peak in June 2020 of 7.5% “
There have been modest upturns in key sectors, including hospitality, health care, manufacturing, utilities, infrastructure and construction.
As for the housing market, Lakos anticipates that housing construction will heat up with affordable funding options available but expects national house price gains to cool off slightly from the 1.5-2% per month growth over the past six months. With the increase in housing construction, and in particular new builds, it is likely that there will be an increase in the need for construction equipment.
What Does This Mean for Business Equipment Demand?
With cheap credit and tax incentives up for grabs, current levels of investment in inventory, machinery and capital goods should continue to increase.
“From a consumer perspective, with production, supply chains and delivery finally improving in the new car market, there will be increased demand for new vehicles, these shortages have driven used car prices higher, this looks set to ease back in preference for new vehicles.” This may also flow on to an increase in leisure goods, such as marine and caravans.
3. Positive Outlook, but Uncertainties Remain
• Mutating Virus, Low Vaccination Rates
While there is light at the end of the tunnel, there are still some uncertainties and risks.
For countries lagging behind on the vaccine rollout, like Australia, the mutating virus and any flare-ups could cause serious problems for SMEs and families.
While we can’t dismiss or minimise these latest lockdowns, Lakos doesn’t expect them to affect the country as significantly as the nationwide lockdowns did in May 2020.
“Our current forecast will see a negative September quarter of growth for the broader Australian economy by about 1% or somewhat less; but we have seen resiliency in the economy post-lockdowns in the past… we expect to see a pretty strong rebound in the last quarter of this year.”
“The government and RBA have emphasised that they will continue to support businesses, add liquidity to the market and keep interest rates low, so as not to disturb the economy’s recovery.” This sends a clear message to businesses reliant on capital intensive equipment - take advantage of record-low interest rates while you can.
• Government Debt Levels
With all the spending going on, government debt has ballooned. “We’ve almost doubled debt from pre-Covid levels,” Lakos said. “Fortunately, in this current environment of low interest rates, debt servicing is still manageable.”
“We are a small cyclical economy and we can’t have high levels of debt for long periods of time particularly once interest rates start to rise, so it’s going to be incumbent on the government to work towards getting that debt down,” he said.
“Australia’s debt-to-GDP ratio will likely double towards 40% of GDP,” Lakos said. “This is still relatively low compared to Australia’s competitors and trading partners.“
Could This Mean Even Better Business Prospects for Business Borrowers?
With the Australian economy in a positive position, and business and consumer confidence on the rise, businesses are in an optimal position to take advantage of low interest rates, tax and other government incentive schemes, and an open and eager market.
