Insight sees a “Neofiscalist” regime which would see the government assuming a more “direct and proactive” role in economic management through fiscal policy, taking the wheel from central banks.
“The neoliberal paradigm of smaller government involvement in the economy is under threat,” said Gareth Colesmith, head of global rates and macro research at Insight.
“Longer-term trends were already moving in this direction, but emergency policies implemented to deal with the COVID-19 crisis have created a potential tipping point.”
In the post-COVID world, governments will face extraordinary pressure to spend big, maintaining fiscal deficits at elevated levels for an extended period. Austerity measures introduced in the wake of the GFC were unpopular, while a significant proportion of private sector activity has likely been permanently lost. On top of that, COVID has highlighted areas where governments already needed to be spending more – including on healthcare systems and infrastructure.
“The COVID-19 crisis has pushed fiscal and monetary policy to extraordinary levels,” said Bruce Murphy, Insight director for Australia and New Zealand.
“While Australia’s debt-to-GDP levels have historically been far lower than many developed economies, we expect the prolonged lockdown in Victoria will see fiscal deficits materially widen on par with the UK, and our debt-to-GDP ratio to increase significantly.”
Corporates with state support could have an advantage during funding droughts, and identifying governments that are able to maximise trend growth will become more important for equity markets as it becomes “a key driver of earnings”.
“Rather than being hostage to markets, many corporates are likely to benefit either from indiscriminate financing from central bank quantitative easing programmes, or from financial markets desperately seeking yield,” Insight said.
“However, governments may also seek to provide additional support to favoured sectors.”
