The COVID-19 pandemic is a global health crisis without precedent in living memory.
It has triggered the most severe economic recession in nearly a century and is causing enormous damage to people’s health, jobs and well-being.
Australia has handled the crisis much better than almost any other country and this suggests our economy won’t suffer as badly as many initially predicted and it should rebound more quickly than many initially anticipated.
The NAB recently released its latest economic forecast for Australia.
And while the bank expects the economy to suffer severely in the current quarter (Q2), it then forecasts an extended period of economic recovery in the second half of this year.
But remember we are almost at the end of the Q2, however the economic data won’t be reported for another 3 months.
By that time it is likely that the recession will be well and truly over.
Here’s the latest forecast from National Australia Bank Group Chief Economist Alan Oster.
A small fall in GDP in Q1 expected to be followed by a very large fall in Q2 –followed by an extended period of recovery.
The Q1 national accounts – which showed a decline in GDP of 0.3% – suggest that Australia has all but ended its 29-year run without a ‘technical recession’.
The result was slightly weaker than we had expected in the lead-up to the release and showed a more significant impact of COVID-19 than we had expected, with a notable decline in the household services consumption.
In addition to the softness in services consumption, nonmining business investment and dwelling investment declined.
Overall, this was a very weak outcome for private domestic demand which subtracted 0.8ppt from growth.
Key offsets were government spending and a strong contribution from net exports (where a fall in exports was offset by a larger fall in imports).
The large decline in services consumption was notable with the most significant lockdown restrictions only occurring the last two weeks of the quarter.
Travel and accommodation and food services saw a large decline, while health services also softened.
Following the integration of the Q1 national accounts our near term forecasts for growth in 2020 are broadly unchanged.
We still expect a large fall in activity in Q2 – a decline 8.5% q/q, before an earlier and stronger than previously expected pickup H2 2020 and continued recovery in 2021.
We have also included forecasts for 2022 for the first time (around 2.8% expected).
That said we still don’t have the level of GDP exceeding the level of Q4 2019 GDP until mid 2022.
We have revised lower our forecasts for the measured unemployment rate.
With labour force participation temporarily impacted by definitional changes to Jobseeker payments and the impact of Jobkeeper in supporting jobs it is likely that the unemployment rate will now peak at a much lower rate – around 8½%.
The unemployment rate is expected to remain elevated for sometime, despite the rebound in growth.
This reflects the time it will take to fully recover the level of GDP to pre-COVID levels following the large expected fall in Q2.
While Australia has achieved a better than expected outcome on the health front and restrictions have been eased much sooner than expected we expect the economy will continue to require ongoing support from policy makers – particularly as existing measures naturally end.
This will likely come from ongoing fiscal support while we expect the RBA to keep rates very low for an extended period.
Labour market, wages and the consumer
The April labour force survey showed a very large deterioration in labour force conditions.
Employment fell by 594k – its largest decline on record – alongside a very large fall in the participation rate.
The unemployment rate also saw the largest monthly rise on record, increasing 1ppt to 6.2%.
However, the move in the unemployment rate was tempered by the fall in participation (with the requirement of dole recipients to actively search for work temporarily relaxed).
The ABS estimates that should this requirement have not been eased the unemployment rate would have reached 9.6% – a staggering result for a monthly move.
Alternative measures of labour market activity – hours worked and the underemployment rate – are a more accurate representation of the deterioration in the labour market at this point.
In the month, hours worked fell a record 9% while the underemployment rate rose to 13.7% (from 8.8%) taking the total labour force underutilisation rate to 19.9%.
The fall in employment appears to be stabilising, with the ABS payrolls data showing a stabilisation in “jobs” after the large deterioration in mid April.
Nonetheless, we expect he unemployment rate to rise from here, reaching 8.6% at its peak (previously 11.7%) as workers re-enter the workforce.
The Q1 national accounts showed that even at an early stage, the impact the coronavirus pandemic was significant.
Household consumption declined 1.1% in Q1, with a 2.4% fall in services spending partially offset by the spike in retail sales – related to hoarding.
Discretionary spending saw a large fall – with restrictions on travel followed by more significant domestic lockdowns which impacted accommodation and food services late in the quarter.
While essentials spending held up, this was supported by the ‘goods’ component with health expenditure also seeing a significant fall in the quarter.
Q2 is likely to see a much more significant fall in household consumption with restrictions in place for a larger portion of the quarter despite the recent easing.
Indeed, nominal retail sales fell by 17.7% in April, more than reversing its 8.5% increase in March.
The NAB Cashless retail sales index points to a 5½% rise in May – with the ABS preliminary estimate to be released next week.
This suggests that some normalisation in retail sales has occurred but overall consumption is still very weak.
Thus while retail business conditions improved in the May Nab Survey to -20, personal and recreational services remain stranded at -44.
Overall, we expect household consumption to decline by 10% in Q2.
Further out, we expect a rebound in consumption in the second half of the year before returning to a more normal pace of growth in 2021.
There is some risk around this forecast, with unemployment remaining elevated for the next two years, and income growth slowing as wages growth softens further.
Housing and construction
As the broader economic downturn continues to play out the impact on the housing market is becoming clearer.
Capital city dwelling prices recorded their first monthly fall since June 2019 with the CoreLogic 8-capital city house price index falling 0.5% in May.
Nonetheless, the slowing in house prices has been gradual and prices are still up 0.6% since 3 months ago.
In the month, the decline was broad-based across the capital cities, led by a decline of 0.9% in Melbourne, with Sydney declining 0.4% and Perth falling 1.6%.
Hobart and Adelaide rose by 0.8% and 0.4% respectively.
We continue to expect falls of 10-15% over the next 1218 months.
Higher unemployment, slower wage growth and falls in overseas migration will weigh on prices in capital cities while new supply continues to come online.
Offsetting this will be impact of lower interest rates – with mortgage rates at historical lows – and a pullback in construction seeing a rapid adjustment on the supply side.
Indeed, the Q1 national accounts showed that residential dwelling investment continued to fall in early 2020. investment in new building declined 1.7% and has fallen 15.4% over the past year.
Investment in alterations and additions rose by 0.4% in the quarter.
The largest declines in new building were in NSW and WA, though SA and Vic also saw declines.
Going forward we see dwelling investment declining by around 15% over the next year or so before levelling out in mid-2021.
High rates of completion are likely to rapidly erode the pipeline of new dwellings while uncertainty in the housing market will see caution in new commitments going forward.
Indeed, while approvals have trended slightly higher since the trough in house prices last year (up 4.5%) they remain around 30% below their peak in late-2015.
Monthly data for April saw private residential building approvals decline by 2.4% driven by a 8.9% decline in approvals for apartments; approvals for detached houses rose 2.7% in the month.
A more significant improvement in approvals will be needed going forward to see a return to growth in dwelling investment.
However, as noted the impact of softer prices in the established market and uncertainty about the level of migration going forward may weigh on the development process going forward.
Source: NAB – This information is general advice and not specific investment advice because it has been prepared without taking into account your objectives, financial situation or needs
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