Written by The Investor
24 March, 2020
Not since WWII have we seen government spending packages like these. They are unprecedented in peace times. Last week we tabled stimulus packages that ranged from 0.25 percent to 3.5 percent of GDP. This week the range is a 2.9 percent to 17 percent! Clearly governments have stepped up their game with packages that are sensibly attacking the core problems of unemployment benefits, company financial support and continued help for health services in these extraordinary times.
Some governments like the UK are spending 17 percent of GDP in bailout packages that will pay workers 80 percent of their lost wages. The US has also stepped up support, proposing a stimulus of 9 percent of GDP. Note the bill has not passed through the Senate yet as they argue about details in the package.
Sunak’s (UK treasurer) package also includes:
Australia announced another $60 billion ($US 36B) of spending measures that sound large, but by comparison to the UK and the US, are not so large. The Morrison government would need to up the $A spend to more than $A400 billion, or five times the current total spend, to offer support similar to the UK. Cashflow to people is a key ingredient of success right now.
“I now seems that the GFC (of 2009) was merely a ‘dry run’ for this even more serious crisis but it has at least given the central banks a template with which to operate. We find that some governments seem to have grasped what they need to do, while others are still dithering.” reports Hunt Economics.
In relation to the bond markets there will be a huge amount of government bond issuance coming into markets to fund these very large fiscal stimulus packages. As previously stated there will be many more packages in 2020 and beyond to support companies, workers, and the banking system.
This spending will push up the levels of debt held by governments and it will exceed the World War II peaks in the debt chart several years sooner than projected—possibly even this year.
Interesting to note is that Japan has the highest ratio of government debt to GDP in the world. Japan has been in the economic doldrums for many years following their 1980s debt binge and many expensive fiscal packages that failed to revive their economy. Much has to do with their older population that saves and does not spend like they used to, keeping economic growth slow. This demographic story is now commonplace in Europe and is also emerging in the US just as their debt levels are rising exponentially.
Share markets are “on hold” in many countries around the World. From a practical point of view no one knows what will happen to consumer or business sentiment in the short term so company earnings will be ‘guess work’ in the short term.
“There is nothing this side of 1945 that compares with what is going on today. Consequently, working out any form of fair value estimate for the equity market is best described as guestimation at best, although our best guess remain that ultimately the S&P will make its way to 1700” Hunt Economics reports.
Over the longer term it looks like there will be permanent changes with a lesser focus on a globalization. Japan’s equity markets in the 1990s spent a great deal of time going up and down but ultimately settled back to its long term trend levels. The Nikkei 225 has not been close to its boom-time peak of 40,000 reached back in 1990.
This week it appears that the Australian property market finally started to show signs of slowing down with clearance rates in Sydney and Melbourne dropping back from 80% to 60% levels. We expect more weakness as reality bites i.e. people will be more worried about employment trends than FOMO property price trends.
We have included a detailed analysis on the prospects of property by Nucleus Wealth How high can the Australian house price boom go?
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