Yes, there is! And that is unbelievable isn’t it? The COVID-19 recession and the record deficit and unprecedented debt to GDP levels notwithstanding, let us read between lines and see if there are any silver linings? After all it is the positivity that will finally bring the country and the people out of this crisis.
What then are the good news? Well, people have understood since the outbreak of the second wave in Melbourne that we will need to live with the virus. The virus clusters will emerge, and we need to do the right things - follow the government directives, socially distance and be responsible. One reassuring news is that the typical winter flu season has been rather benign this year - perhaps because people are mostly working from home!
Jobkeeper and Jobseeker initiatives have helped Australians immensely. The Government told us that nearly 3 million Australians are accessing the Jobkeeper benefits. Jobkeeper was initially estimated to cost the country $130b but Treasury revealed a $60b error and the scheme is now going to cost about $70b. Jobkeeper 2.0 has now been announced for a continuation of Jobkeeper and Jobseeker albeit with a new turnover test and declining value of the benefits until March 2021 costing the programme a total of $85b.
The resources sector continues to be buoyant. Iron ore prices remained strong. Iron ore prices which were about US$120 a ton in July 2019 fell to US$80 twice - once in October 2019 and again in January this year. Since COVID due to continuing demand from China and due to disruption in supply in the aftermath of Vale in Brazil, the demand for our iron ore remains strong. The Brazil disruptions in fact resulted in a price surge as well and we are now well over US$100 a ton. The result has indeed been sweet for Australia. Treasury has been extremely conservative in pricing future iron ore prices at US$55 a ton even though there is strong analyst support for future prices to not fall below US$80 a ton.
Another strong performer has been the surging price of Gold. This was not unexpected given the precious metal’s traditional safe harbour status in the wake of a struggling US Dollar. Gold prices which were just over US$1400 an ounce in July 2019 is at US$1900 an ounce now. The year on year increase of 28% has filled most of Australian gold companies’ coffers. The surplus cash has seen significant acquisitions by the gold miners particularly in the North American/Canadian market. The royalty revenues that the Government received were significant.
What then are the good news? Well, people have understood since the outbreak of the second wave in Melbourne that we will need to live with the virus. The virus clusters will emerge, and we need to do the right things - follow the government directives, socially distance and be responsible. One reassuring news is that the typical winter flu season has been rather benign this year - perhaps because people are mostly working from home!
Jobkeeper and Jobseeker initiatives have helped Australians immensely. The Government told us that nearly 3 million Australians are accessing the Jobkeeper benefits. Jobkeeper was initially estimated to cost the country $130b but Treasury revealed a $60b error and the scheme is now going to cost about $70b. Jobkeeper 2.0 has now been announced for a continuation of Jobkeeper and Jobseeker albeit with a new turnover test and declining value of the benefits until March 2021 costing the programme a total of $85b.
The resources sector continues to be buoyant. Iron ore prices remained strong. Iron ore prices which were about US$120 a ton in July 2019 fell to US$80 twice - once in October 2019 and again in January this year. Since COVID due to continuing demand from China and due to disruption in supply in the aftermath of Vale in Brazil, the demand for our iron ore remains strong. The Brazil disruptions in fact resulted in a price surge as well and we are now well over US$100 a ton. The result has indeed been sweet for Australia. Treasury has been extremely conservative in pricing future iron ore prices at US$55 a ton even though there is strong analyst support for future prices to not fall below US$80 a ton.
Another strong performer has been the surging price of Gold. This was not unexpected given the precious metal’s traditional safe harbour status in the wake of a struggling US Dollar. Gold prices which were just over US$1400 an ounce in July 2019 is at US$1900 an ounce now. The year on year increase of 28% has filled most of Australian gold companies’ coffers. The surplus cash has seen significant acquisitions by the gold miners particularly in the North American/Canadian market. The royalty revenues that the Government received were significant.
outlook for Australia
GDP growth: Under a gradual COVID recovery scenario, the RBA forecasts year on year June 20 quarter contraction to be -8%. The forecast year on year GDP growth for June 2021 quarter is projected at 7% with the recovery forecast from September 2020 quarter onwards. The pace of recovery is uncertain and certainly the outbreak of active clusters in Melbourne is a worrying trend.
Unemployment: The RBA has pointed out unemployment numbers as the key economic parameter that will drive its monetary policy measures. The headline unemployment numbers are expected to reach 10% for the June 2020 quarter and then showing marginal improvement to 8½% in June 2021 quarter.
Inflation: What is that? Indeed, inflation is expected to be moderate from a negative 1% for the 12 month period to June 2020 rising to 2¾% for the 12 month period to June 2021.
Dwelling: The investment in dwellings are forecast to decline year on year to -17% for the June 20 quarter and a moderate recovery for the twelve months to June 21 quarter. Rentals continue to fall and vacancies are at all time high – which is unlikely to recover in the short term. There has been flight of people to regional Australia as workplaces are now committed to people working from home.
Business investments: The RBA forecasts business investment to decline year on year to June 20 by negative 8% and remaining depressed by negative 6% for the twelve-month period to June 21.
Unemployment: The RBA has pointed out unemployment numbers as the key economic parameter that will drive its monetary policy measures. The headline unemployment numbers are expected to reach 10% for the June 2020 quarter and then showing marginal improvement to 8½% in June 2021 quarter.
Inflation: What is that? Indeed, inflation is expected to be moderate from a negative 1% for the 12 month period to June 2020 rising to 2¾% for the 12 month period to June 2021.
Dwelling: The investment in dwellings are forecast to decline year on year to -17% for the June 20 quarter and a moderate recovery for the twelve months to June 21 quarter. Rentals continue to fall and vacancies are at all time high – which is unlikely to recover in the short term. There has been flight of people to regional Australia as workplaces are now committed to people working from home.
Business investments: The RBA forecasts business investment to decline year on year to June 20 by negative 8% and remaining depressed by negative 6% for the twelve-month period to June 21.
our view on rates
Cash rate and the Dollar: Given the above parameters and toeing the line of the RBA, we forecast the cash rate in Australia to remain steady for the foreseeable future at least until June 2021. The decline of cash rate in the OECD countries to negative rates means that the support for the Australian Dollar will continue to rise. In the absence of a vaccine and inevitable breakout of COVID infections from time to time will result in some headwinds, we still forecast the Aussie to remain above US 70 cents but below US 75c until June 2021. With the economy expected to slowly recover from September, we expect the 3-month BBSW to remain in line with the cash rate of 0.25% from the present levels of 0.10%.
In the longer end of the curve, the spreads between the US and the Australian ten year bond rates is expected to remain steady at around 25 basis points but we expect beyond June 2021 the spreads to slowly normalise to around 40 basis points. With US ten year receiving steady support at the longer end of the curve, our forecast is for the ten year bond to climb from the present 0.85% to remain around 1.05% to June 2021.
In the longer end of the curve, the spreads between the US and the Australian ten year bond rates is expected to remain steady at around 25 basis points but we expect beyond June 2021 the spreads to slowly normalise to around 40 basis points. With US ten year receiving steady support at the longer end of the curve, our forecast is for the ten year bond to climb from the present 0.85% to remain around 1.05% to June 2021.
summary
In summary, we can see that despite the COVID downturn worldwide, Australia is still the better place to be and can consider itself lucky on the back of relatively low infection numbers and some strong iron ore and gold prices. We expect the economy to slowly recover from the Q2 this financial year but we do expect significant headwind to continue in travel, international tourism, hospitality, recreation and education sectors (due to significant decline in international students). Business investment and investment in dwellings will remain depressed but will be somewhat offset by high prices of iron ore and gold in the short term. The US market will go through a painful period due to the sheer numbers of COVID infections and its impact on the economy will take a long time to recover. The US Dollar is therefore expected to decline in value and the Aussie is expected to surge. However as the Euro Zone is expected to recover better due to stronger COVID measures taken by the administrations across Europe, we expect the Euro to also rise against the US Dollar which means on a cross currency basis, Euro and the Aussie will remain somewhat steady.
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