- A$ 17BN support package announced

- Will make recession less severe

- AUD continues to struggle in current environment

Above: Prime Minister Scott Morrison. File image © Pound Sterling Live, Still Courtesy of ABC

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Australia has unveiled a massive A$17BN (£8.5BN) spending plan designed to curb the economic impact of the coronavirus pandemic and avert the country's first recession in 29 years.

However, the immediate response by economists to the move is to say the efforts might still not be enough to prevent the country slipping into its first recession in 20 years.

Following the announcement, the Australian Dollar is soft and remains one of the year's worst-performing major currencies. The Pound-to-Australian Dollar exchange rate is at 1.9860, up 0.40% while the Australian-U.S. Dollar rate is at 0.6451.

We expect that while the fiscal stimulus unleashed by the government is welcome, markets are betting that the country's economy will still struggle amidst a global economic slowdown and the fundamental picture facing the Aussie currency is therefore ultimately unconstructive.

Prime Minister Scott Morrison said the support package, which is close to 1% of Australian GDP, was primarily targeted at businesses:

"This plan is about keeping Australians in jobs. This plan is about keeping a business in business. This plan is about ensuring the Australian economy bounces back stronger on the other side of this."

The stimulus package is accompanied by a A$2.4BN health package and hospital funding to the states and territories.

This spending comes in addition to the A$2BN drought and bushfire relief announced earlier this year.

According to AMP Capital, the total fiscal stimulus to the Australian economy over the next 15 months is worth just over 1% of GDP – "which is a solid amount," says Diana Mousina, Senior Economist at AMP Capital.

The Australian government has targeted its new measures at businesses, seeking to ensure they do not suffer cash flow problems as global trade and visitor numbers to Australia dry up.

The following details of the measures announced come courtesy of AMP Capital:

An increase in the instant asset write off threshold for small/medium sized businesses – this is done to boost business investmentAllowing higher depreciation deductions for small/medium sized businesses – also done to boost business investmentTax-free cash payments to small/medium sized businessesWage subsidy for employers of apprentices/traineesOne-off $750 payment to households who are on welfare payments and pensioners. This starts from 31 March and will go to 6.5 million households.Setting up a specific fund to help regions and communities impacted by the Coronavirus – specifically education, tourism and agriculture providers.Despite the measures, Mousina says the measures will likely not be enough to prevent the Australian economy sliding into recession.

"The hit to GDP growth in the March quarter from lower Chinese tourist and education spending, along with the impact to the bushfires will be large (around 0.7% of GDP), at a time when the Australian economy is already in a weak position," says Mousina.

AMP Capital meanwhile expect June quarter GDP growth will be impacted by the rest of world (ex China) dealing with the Coronavirus and we see a Eurozone and U.S. recession also this year which will be another negative impact to Australian export growth.

"On top of that, any further outbreak of the virus domestically will slow spending broadly. The fiscal stimulus package will help in limiting the depth of the Australian recession and should help the unemployment from rising too far (we think the unemployment rate will be around 5.5% this year – it is currently 5.3%)," says Mousina.

We reported earlier this week the Australian economy is being forecast to enter its first recession 20 years by local lender Westpac Bank, a prediction that if correct would likely entrench an ongoing spell of Australian Dollar weakness.

Westpac says the Australian economy will contract by 0.3% in the March quarter and the June quarter in 2020.

"Growth in the second half is forecast to lift by 2.2%. This constitutes a technical recession although with the expected recovery the unemployment rate is unlikely to lift much above 6%," says Westpac Economist Bill Evans.

The call comes as the Australian Dollar is confirmed to be one of the worst performing major currencies of 2020. The currency was impacted first by the slowdown to Chinese economic growth stemming from a shutdown to stem the spread of the coronavirus.

However, the currency remains subdued in an environment of deteriorating investor sentiment as it becomes clear the U.S. and Eurozone could also soon slide into recession.

Despite the RBA cutting interest rates to 0.50% this month, further cuts are now expected while economists also expect the RBA to announce it will conduct a programme of quantitative easing; the printing of money to buy government and corporate bonds.

On all fronts, the fundamental picture facing the Aussie Dollar is unsupportive and further declines in the currency are therefore likely.

"The Reserve Bank of Australia is still expected to cut the cash rate to 0.25% in April but today’s stimulus package might allow the RBA to wait a bit longer before implementing quantitative easing, which at this stage looks like it would be some sort of yield curve control method (where the RBA targets a specific level of bond yields)," says Mousina.

Mousina describes such measures as "a soft form of quantitative easing as the RBA would primarily allow the market to move to the targeted level of yields before being active in purchasing bonds."

This could therefore take some of the sting out of the tail that quantitative easing could have on the currency.