The Alphabet Soup Recovery – The Economic Outlook Amid COVID-19 & Beyond

The key points in this report are:


  • The economy is beginning to recover as restrictions are lifted and businesses re-open. However, it is a fragile recovery and one characterised by considerable uncertainty.
  • The shape and nature of the recovery will be determined by consumer confidence. Jobs are also critical to the outlook and the looming financial cliff for many businesses at the end of September is a concern.
  • The possible shapes that the economic recovery can take is like an alphabet soup. There are the shapes of the letters L, U, V and W. L means we stay in this downturn for a very long time. U means a gradual recovery. V is a quick snap back to business as usual and pre-crisis conditions. W is a double-dip recession.
  • Our core view is still of a U-shaped recovery. But a shape that we are increasingly liking is the back-to-front or inverted J-shape recovery. This shape incorporates our view that it will be a long time before unemployment falls to 5% again and a long time before economic activity fully recovers.
  • There are other shapes that also fit this profile – there is the augmented square-root symbol and the Greek mu, µ, written sloppily with a weaker second rise. These shapes all fit in the with the idea that the pandemic will cast a shadow on the economy for some time.
  • Financial-market participants see a high chance of a W shaped-recovery due to elevated concerns about a second wave of infections and the end of key stimulus measures around the end of September.
  • A recent business survey revealed around one third of businesses could not survive with cash on hand beyond three months, highlighting the deteriorated operating conditions of many businesses in Australia.
  • We may have to learn to live with the virus and manage outbreaks with partial or targeted lockdowns and rigorous testing, tracking and quarantining. The pandemic is going to continue to change the way we live, work and learn.
  • One of these trends is de-globalisation and the reshaping of global-supply chains. Global supply chains are also being reshaped by the US-Chinese trade tensions. These tensions might ramp up further ahead of the US election in November.
  • One of the norms over the next few years will be low interest rates. The RBA might need to do more heavy lifting over the year ahead.
  • Rhetoric from the RBA has been strong that it is reluctant to turn to negative interest rates. However, the environment we are in means nothing can ever be ruled out.
  • The Federal government will undoubtedly need to do more in the year ahead. No crisis should be wasted. In the short term, priority of resources must be given to battling this pandemic and economic crisis, but in time structural reform will also be needed.


Please see the attached report for more information.




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