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Uncertainty could hamper economic recovery

By Aidan Curtis
20 May 2020 — 1 minute read

The Australian economy should start to see some recovery before the end of the year, but global uncertainty still poses a challenge for Australia, says a research house.

According to Morningstar, supportive economic policies and anti-COVID-19 lockdown measures mean it is “plausible” that Australia is at least near the low point in the global economic cycle.

However, Morningstar noted that, while the low point could indicate the start of the recovery, Australia is still subject to global uncertainty.

“There is no certainty in what happens next, and even countries like Australia, which has been effective in controlling COVID-19, remain hostage to recurring outbreaks in areas that have not been managed well,” Morningstar said in its May economic update.

“Although uncertainty remains high, the best view is that the Australian economy will recover from the September quarter onwards.

“But even if everything goes as planned, it is likely to be late 2021 or early 2022 before the economy goes back to a pre-COVID-19 level of business activity.”

Morningstar believes this prolonged recovery is due to business conditions remaining difficult on the back of major hits to the Australian markets.

It said that, though Australian shares have been “treading water” in recent weeks as investors await the initial impact of the pandemic, the scale of earlier weakness will be hard to overcome.

“Year to date, the S&P/ASX200 Index is still down by 19.1 per cent in capital value,” Morningstar said.

“The large weight of the financials has been an issue because, unlike some other sectors, they have not rallied from their March lows — they are down by 30.4 per cent and investors reckon they will be on the frontline of the pandemic’s damage.

“Consumer staples have held up relatively well, as would be expected, and are down by only 3.5 per cent; the globally popular IT sector has also done relatively well, with a small 3.9 per cent loss.”

Morningstar noted that, even with strong fiscal and monetary policy support, it would still be around two years before the equity market returned to a position where it could support pre-COVID-19 share prices.


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