Economic Outlook: 23 March 2020

What is the current macroeconomic environment?

Before the global pandemic announcement for COVID-19, the macroeconomic environment was largely the same as described in the December 2019 Outlook (low economic growth, productivity growth, interest rates, inflation, real wages, increasing inequality, high household debt, weak business investment etc.).

With COVID-19 we are seeing the following additional features:

Global economic environment

• COVID-19 is now in 192 countries/territories with 300,000 confirmed cases and 13,000 deaths (WHO, March 21)
• Restrictions of the movement of people across borders as well as within countries and cities
• Deep uncertainty over the economic fallout resulting in high market volatility and withdrawn investment across all asset classes, large declines in equity prices and government bond yields, and pervasive restrictions across funding markets
• Heavily constrained private sector spending means worsening financial conditions for the public sector and threatens price stability
• Growth projections are very uncertain but OECD projects global GDP growth to drop from an already weak 2.9% to 2.4% in 2020, with growth possibly being negative in the first quarter of 2020. Under a very pessimistic scenario, GDP growth could fall to 1.5% in 2020
• OECD also notes that in the medium to longer term, strategic public investment is necessary, particularly in areas with large positive externalities for the rest of the economy where under-investment is likely, such as health, education as well as digital and environmental infrastructure
• OECD projections already incorporate announced policy actions to support near term incomes. OECD recommends macroeconomic policy stimulus to help restore confidence as outbreak effects and supply-side disruptions decrease, and low interest rates to support demand, noting advanced economies have little room to lower rates further
• Although the outbreak appears to have slowed in China, the impact on the Chinese economy is worse than initially expected, with growth expected to fall below 5% for 2020. Given Australia’s close ties with China, declining growth will subdue demand for Australian exports, particularly in higher education and tourism
• Slowing job creation will limit income growth and heightened uncertainty will prolong already very weak investment and productivity growth, limiting real wage gains
• The speed of the health threat and peak will differ depending on the policy responses in each country and the economic, social, and wellbeing consequences will last much longer than the health threat.

Global assistance measures

• Emergency financial assistance is being provided to countries and companies by most governments, but also IMF and World Bank are providing further assistance for low-income and emerging markets
• US Federal Reserve reduced interest rates to zero, will buy at least US$700B in government and mortgage-related bonds, make available up to US$4 trillion in liquidity through refinancing operations, but U.S. Senate unable to agree on size and details of economic package (as of 23 March)
• The European Central Bank announced assistance packages for €120B and €750B (7.3% of euro area GDP) so far, plus making available up to €3 trillion in liquidity through refinancing operations and cutting its main interest rate to -0.75%
• Many see Singapore as providing a best practice response example, with their efficient bureaucracy, world-class universal health care, early action, and consistent, science-based messaging (see for example commentary from The Economist).

Australian economic environment and assistance measures

• 1,100 confirmed cases and 7 deaths (WHO, March 21)
• Interest rates down to 0.25% and the Reserve Bank is providing $90B in loans to banks for small business financing
  ANU researchers project Australian GDP loss in 2020 of between 0.3% (very optimistic) and 7.9% (very pessimistic); KPMG project a 0.9% loss to GDP in 2020
• A recession is now very likely
• Australia's financial system is resilient and well placed to deal with COVID-19; the banking system is well capitalised and in a strong liquidity position; substantial financial buffers are available if required to support the economy
• Australians are warned to prepare for at least six months of disruption to society (Prime Minister’s Statement, 22 March)
• Federal Government has so far announced economic stimulus packages of $17.6B on 12 March, $66.1B on 22 March, plus $100B in emergency banking measures, $2.4B for health sector support; and $715M for airlines and airports. States and Territories have announced further packages worth $4B. More packages are expected.

How might macroeconomics impact the Australian innovation community?

The Australian innovation community earns its revenue from both the public and private sectors and for both R&D and professional services. The two sectors and two types of activity may be either proactive or reactive or even uncorrelated to macroeconomic conditions.

Private sector expenditure on R&D and professional services

• Traditionally, investment depends on (low) interest rates, (high) expected profits, policy and technology change
• Prior to COVID-19, we had low interest rates and continued profit increases but Australian business investment and expenditure in R&D continued to fall
• The impact so far plus the ongoing economic uncertainty from COVID-19 will further depress business confidence around expected profits and business investment is likely to continue to fall
• The market and expenditure for professional services was growing before COVID-19 and focused on compliance, governance, risk management and responding to disruptions
• Post COVID-19, the market for professional services is likely to be patchy. High expenditure areas include health, risk management, debt advisory and insolvency services, and technology services (particularly cyber security as demand for remote technology services increases)
• With high uncertainty in the demand for R&D and professional services, it is prudent to expect at least a slight decline in demand and profitability over the coming year.

Public sector expenditure on R&D and professional services

• Like for the private sector expenditure, we may benefit from the current increase in public expenditure in so far as our work relates to this funding, particularly around primary services and infrastructure
• With announced public funding and activity such as those relating to bushfires and the three current Royal Commissions (into national natural disaster arrangements, disability arrangements and aged care), further demand is likely for professional services in those areas (risk management, environmental infrastructure, agriculture, health, disability and aged care), as public agencies and private sector organisations develop responses and operationalise recommendations
• However, given the competition for public funds and the high costs of economic stimulus measures to manage COVID-19, it is prudent to expect less expenditure available for other areas of R&D and professional services.

Conclusion

1. In the short term, the focus is on slowing the spread of COVID-19 and economically protecting Australian households and businesses, while funding vaccine development and related science
2. In the long term, focus should shift to how science, technology and innovation can lead the Australian economy’s recovery.

Disclaimer: This document contains general information only, and we are not, by means of this document, rendering professional advice or services. Before making any decision or taking any action that might affect your finances or business, you should consult a qualified professional advisor.

What is the current macroeconomic environment?

Before the global pandemic announcement for COVID-19, the macroeconomic environment was largely the same as described in the December 2019 Outlook (low economic growth, productivity growth, interest rates, inflation, real wages, increasing inequality, high household debt, weak business investment etc.).

With COVID-19 we are seeing the following additional features:

Global economic environment

• COVID-19 is now in 192 countries/territories with 300,000 confirmed cases and 13,000 deaths (WHO, March 21)
• Restrictions of the movement of people across borders as well as within countries and cities
• Deep uncertainty over the economic fallout resulting in high market volatility and withdrawn investment across all asset classes, large declines in equity prices and government bond yields, and pervasive restrictions across funding markets
• Heavily constrained private sector spending means worsening financial conditions for the public sector and threatens price stability
• Growth projections are very uncertain but OECD projects global GDP growth to drop from an already weak 2.9% to 2.4% in 2020, with growth possibly being negative in the first quarter of 2020. Under a very pessimistic scenario, GDP growth could fall to 1.5% in 2020
• OECD also notes that in the medium to longer term, strategic public investment is necessary, particularly in areas with large positive externalities for the rest of the economy where under-investment is likely, such as health, education as well as digital and environmental infrastructure
• OECD projections already incorporate announced policy actions to support near term incomes. OECD recommends macroeconomic policy stimulus to help restore confidence as outbreak effects and supply-side disruptions decrease, and low interest rates to support demand, noting advanced economies have little room to lower rates further
• Although the outbreak appears to have slowed in China, the impact on the Chinese economy is worse than initially expected, with growth expected to fall below 5% for 2020. Given Australia’s close ties with China, declining growth will subdue demand for Australian exports, particularly in higher education and tourism
• Slowing job creation will limit income growth and heightened uncertainty will prolong already very weak investment and productivity growth, limiting real wage gains
• The speed of the health threat and peak will differ depending on the policy responses in each country and the economic, social, and wellbeing consequences will last much longer than the health threat.

Global assistance measures

• Emergency financial assistance is being provided to countries and companies by most governments, but also IMF and World Bank are providing further assistance for low-income and emerging markets
• US Federal Reserve reduced interest rates to zero, will buy at least US$700B in government and mortgage-related bonds, make available up to US$4 trillion in liquidity through refinancing operations, but U.S. Senate unable to agree on size and details of economic package (as of 23 March)
• The European Central Bank announced assistance packages for €120B and €750B (7.3% of euro area GDP) so far, plus making available up to €3 trillion in liquidity through refinancing operations and cutting its main interest rate to -0.75%
• Many see Singapore as providing a best practice response example, with their efficient bureaucracy, world-class universal health care, early action, and consistent, science-based messaging (see for example commentary from The Economist).

Australian economic environment and assistance measures

• 1,100 confirmed cases and 7 deaths (WHO, March 21)

  

• Interest rates down to 0.25% and the Reserve Bank is providing $90B in loans to banks for small business financing
  ANU researchers project Australian GDP loss in 2020 of between 0.3% (very optimistic) and 7.9% (very pessimistic); KPMG project a 0.9% loss to GDP in 2020
• A recession is now very likely
• Australia's financial system is resilient and well placed to deal with COVID-19; the banking system is well capitalised and in a strong liquidity position; substantial financial buffers are available if required to support the economy
• Australians are warned to prepare for at least six months of disruption to society (Prime Minister’s Statement, 22 March)
• Federal Government has so far announced economic stimulus packages of $17.6B on 12 March, $66.1B on 22 March, plus $100B in emergency banking measures, $2.4B for health sector support; and $715M for airlines and airports. States and Territories have announced further packages worth $4B. More packages are expected.

How might macroeconomics impact the Australian innovation community?

The Australian innovation community earns its revenue from both the public and private sectors and for both R&D and professional services. The two sectors and two types of activity may be either proactive or reactive or even uncorrelated to macroeconomic conditions.

Private sector expenditure on R&D and professional services

• Traditionally, investment depends on (low) interest rates, (high) expected profits, policy and technology change
• Prior to COVID-19, we had low interest rates and continued profit increases but Australian business investment and expenditure in R&D continued to fall
• The impact so far plus the ongoing economic uncertainty from COVID-19 will further depress business confidence around expected profits and business investment is likely to continue to fall
• The market and expenditure for professional services was growing before COVID-19 and focused on compliance, governance, risk management and responding to disruptions
• Post COVID-19, the market for professional services is likely to be patchy. High expenditure areas include health, risk management, debt advisory and insolvency services, and technology services (particularly cyber security as demand for remote technology services increases)
• With high uncertainty in the demand for R&D and professional services, it is prudent to expect at least a slight decline in demand and profitability over the coming year.

Public sector expenditure on R&D and professional services

• Like for the private sector expenditure, we may benefit from the current increase in public expenditure in so far as our work relates to this funding, particularly around primary services and infrastructure
• With announced public funding and activity such as those relating to bushfires and the three current Royal Commissions (into national natural disaster arrangements, disability arrangements and aged care), further demand is likely for professional services in those areas (risk management, environmental infrastructure, agriculture, health, disability and aged care), as public agencies and private sector organisations develop responses and operationalise recommendations
• However, given the competition for public funds and the high costs of economic stimulus measures to manage COVID-19, it is prudent to expect less expenditure available for other areas of R&D and professional services.

Conclusion

1. In the short term, the focus is on slowing the spread of COVID-19 and economically protecting Australian households and businesses, while funding vaccine development and related science
2. In the long term, focus should shift to how science, technology and innovation can lead the Australian economy’s recovery.

Disclaimer: This document contains general information only, and we are not, by means of this document, rendering professional advice or services. Before making any decision or taking any action that might affect your finances or business, you should consult a qualified professional advisor.