By Michael Yardney July 19, 2020

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How is Melbourne’s shut down going to affect the Australian economy?

Michael Yardney's Commentary
How is Melbourne’s shut down going to affect the Australian economy?

Just when we thought we saw a light at the end of the tunnel, we are now wondering is this a train wreck heading in our direction or is it the bright sunshine as we move out of the tunnel? Recession Australia Note Money Economy Squeeze Tighten Save Saving Budget Cut 300x200

The Australian economy was in recession during the first half of 2020, which was the inevitable impact of the global pandemic.

But now the Melbourne economy has been shut down for a second time creating a $6+Billion blow to our economy.

Here's what Westpac senior economist Andrew Hanian had to say in a Westpac's July Market Outlook.

Australia was in recession for the first half of 2020...

This, the first recession since 1991, will have damaging impacts, leaving long lasting scars, most notably a sharp jump in the unemployment rate.

Output contracted by 0.3% in the March quarter, followed by a precipitous fall in the next three months, down a forecast 7%.

In July, a second wave of coronavirus infections in Melbourne and the decision to shut–down greater Melbourne for six weeks from July 9 has led us to downgrade our growth forecast for the 2020 year, from –4.0% to –4.2%.

There is a permanent loss of activity in the order of $3bn and growth over the second half of this year will be back–end loaded (a quarterly profile of 1.1% and 2.2%, revised from 1.5% and 2.0%).

For 2021, we anticipate a lacklustre expansion of 3%, leaving the level of activity at the end of 2021 still 1.3% below that at the end of 2019.

In assessing the outlook, we consider three distinct phases.

Phase I is the initial shut–down due to the restrictions around the pandemic,
Phase II is the exit path as the economy reopens (albeit a disrupted reopening) and
Phase III is the broader economic recovery.

The economy reopening has been dealt a blow...

Around Phase I there were some positives.

The initial downturn was not as deep or as long as previously anticipated.

Australia had initial success in dealing with the health aspects of the pandemic, infection rates decreased and were far lower than feared.

The rolling back of restrictions was brought forward and the economy slowly reopened.

In our June Report, these developments led us to upgrade our forecast for the June quarter slump, from –8.5% to –7%.

Melbourne is in a second shut down.

During Phase II, there is considerable uncertainty around the exit path, with the risk of set–backs. The Coronavirus Sinks The Global Stock Exchanges.

Such a set–back has been experienced with Melbourne going into lock–down, leading to the closure of the NSW border with Victoria.

These events will likely see around 25% of the national economy stall in the September quarter – with Melbourne accounting for about 20% and an additional 5% potentially aff ected (including regional areas of Victoria and into NSW, as well as interstate travel).

This expected fl at outcome across greater Melbourne for Q3 includes a 1.5% contraction during the shut–down, off a weak base, which is reversed over the remainder of the quarter.

We anticipate some catch–up of activity in Melbourne during the December quarter, albeit a partial one.

There are downside risks to our forecasts, with potential confidence impacts, particularly if there are outbreaks of the virus in other states.

Westpac has lowered its 2020 growth forecast.

As well as risks pertaining to the virus itself, another key uncertainty around the exit path and the recovery relates to policy support.

The winding back of fiscal policy stimulus measures – around JobSeeker and JobKeeper – is still a work in progress, with the Federal Government to release an Economic Update on July 23 ahead of the annual budget, delayed until October 6.

Policy support and stimulus will be needed for some time yet, in our view, to support households and overall domestic demand – particularly in light of the Melbourne shut–down.

In terms of the current growth momentum, partial indicators are mixed.

This is to be expected in the context of a gradual and uneven re–opening.

Economy-wide measures, such as the labour market and business surveys, highlight recent weakness in what remains a fl uid and fast moving environment.

Hours worked slumped 9.5% in April, at the height of the nation–wide partial lock– down, and fell further in May, –0.7%.

For June, business surveys were, on balance, weak.

The AiG PSI printed at 31.5 for June, following a 31.6 for May and an historic low of 27.1 in April.

This suggests that the service sectors contracted at a sharp rate in the June quarter, still impacted by social distancing and travel restrictions.

From July 1, restrictions were eased further in most states, with anecdotes of a resulting bounce in activity.

News around the consumer and housing is also mixed.

The home building outlook is downbeat.

Dwelling approvals for NSW and Victoria (which together accounted for near 2/3rds of all approvals in 2019) collapsed in April and May, down 24%.

These states have been impacted most by the closure of the national border, with fewer international visitors (tourists and students). risk investment market

Retail, which has experienced a wild ride, is a relative bright spot. Sales bounced in May, +16.9%, reversing the April plunge, –17.7%.

However, overall consumer spending is much weaker than this, as evident from business surveys and the abrupt stop of overseas travel by Australians.

On Phase III, we expect a number of headwinds to constrain the pace of recovery in 2021 and beyond.

There are the ongoing fragilities evident pre–COVID, notably weak wages growth, as well as the legacies from the pandemic and from the recession.

International travel restrictions will be slow to be removed, impacting tourism as well as international student numbers.

That will reduce population growth for a time, with negative spill–over effects to home building.

Confidence across households and businesses will remain fragile, after the hit to incomes and wealth, and with unemployment at elevated levels.

For businesses, we expect investment spending will be slow to recover following the recession, as is typically the case, with the with the emergence of excess capacity and as fi rms reassess their business models post–COVID.

Source: Westpac's July Market Outlook: Author -Westpac senior economist Andrew Hanian had to say in a Westpac's July Market Outlook
This is general advice, not investment advice as we don't know your personal circumstances.

Now is the time to take action and set yourself for the opportunities that will present themselves as the market moves on

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About Michael Yardney Michael is a director of Metropole Property Strategists who help their clients grow, protect and pass on their wealth through independent, unbiased property advice and advocacy. He's once again been voted Australia's leading property investment adviser and one of Australia's 50 most influential Thought Leaders. His opinions are regularly featured in the media.