Based on Australia’s EY Global COVID-19 Economic Index, Australia is likely to outperform every country in the ranking except New Zealand by the time March quarter 2021 data is published – placing us in an enviable position for ongoing economic recovery. Such a position at the top of the rankings should also limit economic scaring in Australia, relative to other economies and compared to our last recession in the 1990s.
The Vice-Chair of the United States Federal Reserve, Dr Richard Clarida identified three critical components as being the differentiator for why economic scarring from COVID-19 wouldn’t be as bad as during the GFC: A fiscal response “scaled appropriately to the size of the shock… we did have the space [to respond because America is] a reserve currency country and we deployed it”; a strong monetary policy response; and “[America] went into this with a very well capitalised and very liquid banking system, which was not the case 15 years ago”.
Similarly for Australia where healthy balance sheets underpinned fiscal support scaled appropriately to the size of the shock, an strong monetary response and well capitalised and liquid banks.
So why aren’t Australian businesses taking more risk?
Australia has not only seen an impressive health response, strong economic outcomes and the resilience that our balance sheets provide, but Australian businesses have access to cheap and easy credit and buoyant capital markets. Moreover, EY’s latest Capital Confidence Barometer shows that Australian firms expect revenue and profitability will be back to pre-pandemic levels this year or next.
Despite all this, private business investment continues to disappoint; contracting by 5.1 per cent through 2020 despite policies to promote investment.
One factor explaining this lacklustre investment climate is that hurdle rates for investment in Australia remain high. Given hurdle rates are a combination of the weighted average cost of capital – which has clearly fallen, and risk appetite, what this tells us is that the risk premia remains elevated, and unnecessarily so given our analysis shows that Team Australia delivered and that Australia is well placed to continue to outperform as recovery continues.
That knowledge, especially as we continue down the vaccine rollout path, should be giving business the confidence to move into the future with certainty and pull the trigger on bolder investment decisions, which as Reserve Bank of Australia Governor Phil Lowe said, means invest, expand, innovate and hire.
Australia ticks the boxes for many of the preconditions for businesses to invest and hire, and for consumers to go out and spend. Consumers are doing their part, but improved investment appetite by corporate Australia would provide a broader base for recovery. Governments should see this as a great opportunity to innovate and legislate, an opportunity to push Australia’s current outperformance even further, to celebrate out-performance for years to come.