According to Franklin Templeton’s director of Australian fixed income, Andrew Canobi, it is consumer spending stopped in late 2019 which will force the central bank to deliver monetary stimulus, not the coronavirus.
“The novel coronavirus, COVID-19, has received more than its share of the blame for a range of market moves, and it is true that the fallout from this on growth will likely be severe and far exceed the overly optimistic utterances of central bankers and government alike made in recent weeks,” Mr Canobi said.
While the impact has been felt on the sharemarket, with over $100 billion being wiped off the sharemarket, Mr Canobi argues there are real problems in the economy that the bond market is showing.
“The bond market always tells a story. The general level of term bond yields is communicating a somber message in terms of potential growth and inflation,” Mr Canobi continued.
“It is doing this because the marginal dollar is being saved rather than borrowed, which remains disinflationary. In an over-levered global economy, the price of money continues to have little impact on demand to borrow and invest or consume, even as extreme, even negative yields, abound.”
Due to this, the fund manager believes monetary policy will be used to stimulate the economy, but it will not be because of the coronavirus that the central bank will act.
This is after claims by the Australian government that its surplus which it previously promised may not happen as the impact of the coronavirus plagues the Australian economy.
“A key reason why monetary policy lacks its traditional potency is not because it is ineffective per se but because its role has changed. Its ability to bring forward future demand from the future to the present is limited if future demand is already exhausted. So, its role is not to stimulate demand to borrow, but to expedite deleveraging in order to shorten the balance sheet repair process,” Mr Canobi said.
He concluded: “While hopes and expectations of any ‘V-shaped’ bounceback from the COVID-19 epidemic are increasingly being fed through the shredder, the lingering disinflationary impulse remains in place for now, which is the real reason why we should see more monetary stimulus in 2020.”
nestegg has previously discussed how a leap year could save the Australian economy.
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