The COVID-19 pandemic has created unprecedented economic and financial uncertainty.
Many Australians are experiencing unemployment or underemployment, and business activity is likely to continue to be subdued for the foreseeable future due to the staggered removal of restrictions, and altered consumption patterns, both locally and globally.
But it seems that we’ve better than almost anywhere else in getting the virus under control, and this means the recession we are dipping into may not be as bad as many had predicted.
And our property markets are remaining more resilient than some expected, and we’re not going to experience the significant slump some were concerned about.
This week ANZ Bank upgraded their economic forecasts, and suggest our economic slump won’t be as bad as they initially forecast.
ANZ now expect GDP to decline 2% in 2020 (previously −4.7%) before rising 1.8% in 2021.
The reason behind this is that the shutdown response to COVID-19 was not as extensive as expected, the health outcomes have been much better than feared, and the government’s fiscal response has been substantial.
But we won’t get the V shape recovery some are predicting
ANZ continue to expect the recovery to be relatively slow and grinding, with both GDP and employment not expected to return to pre-pandemic levels until early 2022.
Here’s what ANZ said in their recent report:
Even factoring in some extension of the current fiscal stimulus past September, we expect that GDP will decline in Q4, as the level of support for the economy is cut back.
ANZ have factored in some additional stimulus, but to avoid a negative quarter, stimulus will need to taper off more gradually than we are currently assuming.
The unemployment rate is forecast to remain in the high-6s until well into 2021.
The extended period of elevated labour underutilisation will put downward pressure on wage growth, and we expect growth in the Wage Price Index to slow to an historic low of 0.7% y/y in H1 2021 before a gradual improvement.
ANZ expect trimmed-mean inflation to remain well below the RBA’s 2–3% target band to the end of our forecast period.
There is little doubt that fiscal policy will need to play a much larger role in supporting growth over the next few years, and we expect further announcements of targeted support packages over coming months.
At this stage, the RBA seems content to wait and see how the recovery evolves.
If the economy disappoints next year and the labour market does not improve, then the RBA would need to consider further measures.
A forecast upgrade, but no V-shaped recovery
The outlook for the Australian economy has improved substantially.
The shutdown in response to COVID-19 was not as extensive as we expected, the health outcomes have been much better than initially feared, and the fiscal response has been material.
ANZ now expect GDP to decline 2% in 2020 (previously −4.7%), before rising 1.8% in 2021.
While our new forecast has a smaller drop in activity in Q2, we still expect recovery to be relatively slow, with no expectation of either GDP and employment returning to pre-pandemic levels until early 2022.
In late March, when we last published GDP forecasts, Australia was averaging more than 350 new cases of COVID-19 each day, and health experts were warning of an outcome similar to Italy’s.
After closing the borders and instituting a gradual shutdown of the economy, Australia’s case numbers improved rapidly.
Daily new cases averaged less than ten in June, with around two thirds of those coming from international arrivals (Figure 3).
Moreover, ANZ-observed card data show retail spending has picked up quickly since the low in mid-to-late April and has accelerated through May and into June as states have incrementally opened up.
This boost in spending is encouraging, but is unlikely to be sustained given the weakness in the labour market.
Easing of fiscal support will be challenging
Helping to support the recovery has been an extraordinary amount of fiscal stimulus.
The JobKeeper payment in particular (worth an estimated AUD70bn) has helped to support incomes, while at the same time maintaining the connection between employer and employee.
The increase in unemployment benefits in the JobSeeker payment (AUD14bn) as well as household cash payments (AUD9bn) and the Boosting Cashflow for Employers measure (AUD32bn) have all been very significant supports to the economy.
Much of the fiscal stimulus is due to finish by the end of September.
Alongside the end of both the mortgage repayment deferrals offered by the banks and the residential eviction moratorium, this poses an enormous challenge for the economy.
If the support is withdrawn on the current timetable, the economy will deteriorate rapidly in Q4 and with it both business and consumer confidence, with the likely consequence that the recovery could stall.
In our view, policy will need to remain extremely supportive for some time.
The private economy looks to be starting the long slow process of recuperation, but it will need considerable support for some time until the recovery gathers momentum.
While the government clearly has one eye on the budget balance and public debt forecasts, we expect that it will consider a targeted extension of the JobKeeper program, focussing on sectors still impacted by restrictions, such as businesses reliant on international tourism.
In fact, our forecasts assume that JobKeeper will be extended in some form into Q4 (possibly under a different name), and also that the JobSeeker payment will not be fully wound back to the extremely low levels of Newstart prior to the crisis.
Even assuming a modest extension of fiscal stimulus past September, we expect that GDP will decline in Q4.
Consider that growth in Q2 and Q3 will be propped up by fiscal injections in the order of 13% of GDP.
By Q4, it is very unlikely there will be enough strength in private sector demand to offset the withdrawal of this magnitude of support.
To avoid a negative quarter, stimulus will need to taper off more gradually than we are currently assuming.
The labour market will take time to fully recover, with implications for wage growth
Australia has endured the initial impact of the crisis better than expected, and there is likely to be a short period of strong growth as the economy reopens, but a V-shaped recovery seems unlikely.
Many businesses will not resume trading after the shutdown period, and many more will not restore employment to pre-shutdown levels.
This will be reflected in the labour market’s recovery.
In April, almost 600,000 workers lost employment, hours worked fell by 9.2%, and the underemployment rate jumped 4.9ppt to a record 13.7%, from an already close-to-record high.
But the unemployment rate rose only 1ppt to 6.2%, as almost three quarters of people who lost employment during the month withdrew from the labour market because of the dearth of job opportunities, the temporary suspension of job search obligations to receive JobSeeker and extra caring responsibilities.
Furthermore, an estimated 3.5m workers on JobKeeper were counted as employed even if they were working zero hours.
Still, almost a fifth of workers were underutilised in April, well above anything recorded since the monthly data began in 1978.
While JobKeeper and the coronavirus supplement for JobSeeker have cushioned the blow, the hit to the labour market has had a devastating impact on income, security and wellbeing for many people.
Unfortunately, the labour market likely deteriorated further in May, but we expect employment will start to pick up again from June.
This is consistent with the weekly payroll data.
In Q3, with many restrictions lifted and a surge in economic activity, a strong but partial rebound in employment is likely.
But we think employment growth will be more subdued in Q4.
JobKeeper will likely have ended for most businesses and many employers will prioritise increasing current workers’ hours over hiring or rehiring to meet demand.
Despite the initial recovery in employment, it will take a long time to reduce underutilisation.
In fact, we are forecasting the unemployment rate to rise to a peak of 7.5% by Q4, even as employment increases, as participation also recovers.
Improved employment prospects, the reintroduction of job search obligations to receive JobSeeker and a return to more normal caring responsibilities (ie much less home-schooling) will see many people enter or re-enter the labour force.
We expect that the unemployment rate will remain in the high-6s until well into 2021.
Like GDP, employment is not likely to reach pre-pandemic levels until early 2022.
The extended period of elevated labour underutilisation will put downward pressure on wage growth.
A minimum wage freeze would worsen the impact.
While we expect a freeze will be announced by the Fair Work Commission for the first time since 2009, we think this would hinder, rather than help, the economic recovery and exacerbate inequality.
Consequently, we expect nominal growth in the Wage Price Index to slow to an historic low of 0.7% y/y in H1 2021, from 2.1% y/y in Q1 2020.
From mid-2021, we should see a gradual improvement in wage growth to 1.2% y/y by mid-2022, as spare capacity is slowly eroded.
But taking into account our muted inflation forecasts, this means that real wage growth would turn negative later this year and into 2021.
Source: ANZ Economic Research which was intended for ANZ institutional, marketing and private banking clients. It is general in nature and doesn’t constitute financial product advice or take into account your objectives, financial situation or needs.
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