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The economic outlook in a time of great uncertainty - featured image
By Michael Yardney

The economic outlook in a time of great uncertainty

What's ahead for our economy?

What's going to happen to unemployment? How high is it going to get?

What will happen to property values? How much are they going to drop, or are they going to remain stable if the market comes to a halt?

We are all looking for some forecasts, aren't we?

We all want to try and find a degree of certainty in these times of uncertainty?


But how useful is forecasting under such extreme uncertainty?

We don't have a historical template on which to base and judgement or our forecasts?

And there are many wild forecasts being bandied around, so please be careful who you listen to.

Below is a research paper from David Plank, Head of Australian Economics at ANZ Bank which was produced for their institutional and private banking clients.

It's important to take into account their initial comments and disclaimer that this is not investment advice.

Here's what ANZ had to say:

The Australian economy is facing an unprecedented challenge as governments here and abroad put in place policies to ‘flatten the curve’ of the coronavirus.

This is, foremost, a health crisis, but it has quickly become an economic crisis that has substantial impacts on individuals and families as businesses close and jobs are lost.

There is no historical template on which to base a judgement about the economic outlook, making forecasting extremely difficult.

The federal government may have delayed the Budget until October partly for this reason.

One option is to base forecasts on what is known at the time.

These ‘status quo’ forecasts date extremely quickly. Another option is to form a judgement about how the policies to contain the virus are likely to evolveThe Disconnect Between Jobs And Wages

This is the approach we have taken with our updated forecasts.

If we look around the world, widespread shutdowns seem inevitable.

This means a large drop in activity.

We estimate that a six-week widespread shutdown in Q2 and then a progressive relaxation will see GDP slump 13% over the quarter.

Unemployment, unfortunately, will spike as a consequence, with more than a million jobs lost and the unemployment rate reaching 13%.

The economy does rebound in Q3, but the after-effects of the downturn mean the recovery after this initial rebound is quite subdued.

By the end of 2021 unemployment is expected to be around 7%.

There is necessarily a high degree of uncertainty in these forecasts.

We hope we are too pessimistic.

But we think this approach provides a reasonable benchmark against which to assess the economic outlook.

Chart of the week


Forecasting under extreme uncertainty

Just over a week ago, we published a set of economic forecasts that had GDP dropping 2% q/q in the June quarter and the unemployment rate rising toward 8% by the end of the year.

These forecasts reflected what we knew at the time: a close-down of Australia’s borders, a ban on major events and advice around social distancing.

By the time the weekend was over things had moved on considerably, with restaurants and cafes ordered to close.

ForecastSince then the rules have got even tougher.

This is likely to be the nature of things for some time.

Which makes forecasting the outlook problematic.

There are a number of different approaches to this problem.

The first is to not attempt any forecasts at all until things become much clearer.

This may be partly why the federal government has chosen to delay the 2020-21 Budget until October.

In announcing the delay, the Prime Minister said that “the idea that you can actually put together any sort of forecast around the economy at this time is simply not sensible.”

While we have sympathy with this stance, there are things we can say about the economic outlook.

What is important is to outline the key assumptions that underpin the outlook and then update it as more information comes to light.

Research Economy GrowthLast week we chose what was effectively a status quo approach.

We assumed the information at hand about the extent of shutdowns was the central case and then made some judgments about their likely duration.

The problem with this option is that is likely to require continual updating if conditions deteriorate, as has been the case.

Another approach is to try to get ahead of the status quo by making judgements about the likely evolution of measures to deal with the pandemic.

We can look to overseas experience as a guide in making these judgements.

This approach runs the risk of producing a set of forecasts that are much worse than the consensus believes at the time of publishing.

It has the advantage, however, of coming up with numbers that are not out of date too quickly, in what is a very rapidly changing environment.

Accordingly, we have decided to assume that the evolution of measures adopted to contain the virus broadly follows the pattern that seems to be emerging in other countries – a widespread shutdown of activity that is around six weeks in duration before it progressively starts to lift.

EmploymentThis necessarily means there is a big loss in economic activity for several months.

The rise in unemployment is mitigated to some extent by government policy and the expected temporary nature of the shutdown, but unfortunately considerable job losses seem unavoidable – at least for a period.

The initial recovery is quite rapid as the shutdown is lifted, but there are long-lasting impacts from the economic slowdown that impact the path the economy returns to.

We hope we are too pessimistic, but only time will tell.

Activity slumps in Q2 as shutdowns broaden

Given the nature of the shutdown driving the economic outlook, we approached this forecasting exercise from an industry perspective.

Business Stop

The Government is yet to announce the widespread closure of non-essential businesses, and yet to clarify which industries will be considered “essential”.

Overseas experience shows various approaches, but we assume Australia’s shutdown will be broadly similar to the New Zealand experience.

It is already apparent that the industries hit hardest will be hospitality and arts & recreation.

These sectors are already effectively shut down, and even once a full lockdown is eased it is likely that rules around social distancing will remain in place for some time and that customers will be slow to return.

Retail is in a similar situation, but will be supported by strong sales in the supermarket sector, as well as some shift to online sales.

Construction, transport, wholesale trade and manufacturing are also likely to see double digit contractions in activity in Q2.

In contrast, the health & social assistance sector is likely to see strong gains, except in child care which we have assumed will be shut down for a period.

Other sectors that are more resilient, generally because of an ability to deliver online, are professional services and education.

We expect the mining sector will not be included in the shutdown per se, but activity is likely to be disrupted by actions taken to slow the spread of coronavirus.

Key assumptions:

  • A six-week shutdown, with activity confined to “essential services”, as well as those that keep supply chains open
  • Agriculture: negligible net impact
  • Mining: generally mining keeps going, but with some disruption, due to worker access, and containment measures
  • Manufacturing: food manufacturing remains open, some other manufacturing remains open for “essentials” and supply chain requirements
  • Utilities: remain openEmpty Workplaces
  • Construction: largely shutdown, but some major infrastructure projects continue, and any construction related to essential services
  • Wholesale trade: partial shutdown, food and other essentials open
  • Retail trade: shutdown, apart from supermarkets, bottle shops and pharmacies
  • Hospitality: full shutdown, including takeaway
  • Transport: not shutdown, but private transport usage will be sharply lower
  • Information media & telecommunications: some services to benefit, but some services shutdown, net effect expected to be modest net fall
  • Finance: essential financial services still open, some other financial services shutdown, net effect expected to be modest net fall
  • Rental, hiring & real estate: some areas shutdown
  • Professional services: largely delivered, with some disruption
  • Administrative services: largely delivered, with some disruption
  • Public administration and safety: largely delivered, with some disruption
  • Education: largely delivered, with some disruption
  • Health: mostly open, but some sectors like child care shutdown
  • Arts & recreation: full shutdown
  • Other services: some areas shutdown.

GdpOur analysis suggests that GDP will fall 13% in Q2.

We expect a partial recovery in Q3, with GDP rebounding 9%.

That, however, will still leave GDP well below the levels of Q4 2019.

Negative feedback loops, not least from the massive hit to household incomes, will weigh on activity for some time.

Some sectors, like construction, may take time to regain momentum.

Many businesses will not restart.

Moreover, high household debt is likely to amplify the hit to the Australian economy.

Mortgage HolderWhile mortgage relief will help to ameliorate the problem in the short term, we expect that the shock to household incomes will see borrowers reassess their appetite for debt over the medium term.

This sort of balance sheet repair will come at a price.

One downside risk to our medium term growth outlook is that households actively move into a deleveraging phase and the return to trend growth is pushed out further.

Fiscal and monetary policy will remain loose for some time.

We have assumed further fiscal stimulus over coming months as the Government attempts to cushion the economic impact of the virus.

It will help, but it won’t be enough to prevent a sharp downturn and a relatively gradual recovery to more normal levels of activity.


Unemployment to hit 13%

Under the six-week shutdown scenario, we expect the unemployment rate to surge to 13% in Q2 from its current 5.1%.

UnemploymentMore than 1.1m workers could lose their jobs, which could push the number of unemployed towards 1.8m.

We assume that some degree of labour hoarding will occur – firms holding on to staff even if there’s not enough work, so it will be easier to restart or ramp up operations when the shutdown ends.

Some employers will reduce workers’ hours rather than lay them off – so workers become underemployed, rather than unemployed.

This will help slow the rise in unemployment.

But the extent of labour hoarding and reductions in hours will depend on how much certainty firms feel about the length and range of the shutdown.

Extensions or inconsistent communication regarding the shutdown could see permanent business closures and progressive layoffs worsen.

As it currently stands, we do not think the fiscal support package provides strong enough incentives for businesses to retain staff.

Migrant JobAlthough this is the intention of the “Boosting Cash Flow for Employers” measure, we do not think it is large enough or being delivered quickly enough, with first payments not due until 28 April.

Wage subsidies could be more effective, but the size of the subsidies and speed of delivery would be crucial to their success in slowing the rise in unemployment.

And we are already seeing job losses and stand-downs escalating daily.

Workers in the hospitality, tourism, arts and recreation, and retail industries have been hit hardest so far.

But layoffs and stand-downs across a wider range of industries will also worsen as demand falls more broadly – not only due to social distancing, travel bans and shutdowns of non-essential services, but also as households lose employment and income.

There is some uncertainty around how this will be reflected in the labour market statistics.

To be classified as “unemployed” in the ABS’ labour force survey, one would need to:

  • not be employed for one hour or more during the reference period
  • actively look for work, and
  • be available for work.

This becomes more complicated when employees are stood down rather than laid off.

Businesspeople Waiting For Job InterviewThey can be classified as employed, unemployed or not in the labour force, depending on how long they’ve been stood down for and whether they’ve received any wage/salary over that period.

These uncertainties also affect the participation rate which has a considerable influence on the unemployment rate.

Any changes to mutual obligations required to receive the JobSeeker Payment (and therefore the Coronavirus Supplement) could also impact this.

Once the assumed six-week shutdown ends and activity gradually begins to recover, we expect the unemployment rate to drop quite quickly in the near term, falling below 10% in Q3 and to 8% in Q4.

As restrictions on movement are lifted and demand revives, many businesses will need to rehire quickly and on a large scale.

We think that about half of the employment loss in Q2 could be recovered in Q3.

But some businesses will have permanently closed and some industries will be a lot slower to recover.

Australia’s borders will likely remain closed for a much longer period than the domestic shutdown, delaying the recovery in international tourism and education.

Through 2021, we expect that improvement in the labour market will be a lot slower.

History tells us that the unemployment rate takes a lot longer to fall following economic downturns than it does to rise during them. Businesses may be wary of expanding operations and workforces if the risk of COVID-19 remains – domestically and/or globally – or may try to use their workforce more efficiently.

But crucially, many households will have lost employment and income, while still remaining highly indebted. So after the initial rebound in demand for goods and services, household spending growth may slow, limiting growth in labour demand in turn.

Hence, we expect the unemployment rate will still be around 7% by Q4 2021.


Data previews

We expect monthly credit growth to remain unchanged from the previous month.

Business credit growth is forecast to drop back after the sharp rise in the previous month.

Offsetting this is an anticipated increase in housing credit growth which reflects further strong increases in housing finance in January.


COVID-19 and related shutdowns on building approvals are unlikely to show up in the February data, but the conversion from February approvals to building activity might be lower than usual.

The economic impacts of COVID-19 and lockdowns may put downward pressure on the housing market and discourage developers from starting building developments in the coming months.

Auction clearance rates in March were much lower than previous months in Sydney and Melbourne, signalling a housing slowdown.


If not for panic buying, the early effects of COVID19 on the retail sector, including travel bans and rising unemployment expectations, may have led to a negative result for retail.

But the strong impact on sales of elevated demand for supermarket and grocery store products (which usually account for around 35% of retail sales) was enough to push growth into positive territory.

Intensifying lockdowns and rising unemployment is set to damper retail expenditure eventually, even with current government stimulus measures.



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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Source: Research paper from David Plank, Head of Australian Economics at ANZ Bank which was produced for their institutional and private banking clients.

It's important to take into account their initial comments and disclaimer that this is not investment advice.

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.
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