The Forward View – Australia: April 2020

Unprecedented sharp recession coming as a result of COVID-19. Sharp deterioration in employment and prolonged high unemployment.

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Our podcast series to accompany the NAB Forward View – Australia continues, giving you a 10 minute summary of our key forecasts this month.  Listen now.

Overview

  • As set out in our note of 27th March it is becoming increasingly clear that efforts to contain the COVID-19 virus are having a very sharp impact on the economy.  Just how serious was highlighted by yesterday’s NAB Monthly Business Survey.  Already business confidence has plummeted to record lows (around twice as bad as the bottom of the 1990 recession).  Similar un-precedented results were reported for falls in forward orders and the level of capacity utilisation.  While not quite at record lows, business conditions also collapsed – and no doubt will fall further from here. It is worth stressing that the declines really only dated from mid-March.
  • Clearly the extent of the falls will depend on how long the virus takes to get under control, the extent of the containment measures and the timing of the phasing back to normal.  Given the risks of a second phase of the virus we are expecting a conservative approach by the authorities.  Our forecasts essentially adopt the assumption that the economy will be turning the corner by the fourth quarter and bounce back very strongly in growth rate terms.
  • As noted above, the Business Survey and other internal NAB data has caused us to revise down our forecasts from those published on 27th March.  While the Government has now spent around 10% of GDP trying to cushion the economic hit from COVID-19, the reality is that the economy has suffered a massive hit already.  The packages – especially the so called “JobKeeper” package – will help avoid a “depression type result” and will help very much on the “other side”.
  • We still see Q1 GDP as likely to be a small negative (around -0.3%) with supermarket retail hoarding helping to offset losses elsewhere in services and hospitality. The big hit is in Q2 where we can easily see GDP falling by around 7% (we had previously speculated on a 5% fall) and then falling by another 1% (again further than expected) before bouncing back by around 4% in Q4.
  • That type of pattern would see a peak to trough fall of nearly 8% over three quarters and a fall in 2020 GDP of around 4.3%.  That would put the economic hit to Australia a touch below that likely to be experienced by countries such as the USA, UK and Europe, but similar to Canada and Japan (our full global forecasts are out tomorrow).
  • For 2021 we are expecting a recovery in the order of 7% in the year to Q3 2021 and year average GDP of around
    3½%.  It is important to stress that even so, these forecasts would still see the level of GDP recorded in Q4 2019 not exceeded till early 2022.
  • Also, as stressed previously, the usual lag from growth to unemployment is likely to disappear in current circumstances.  Rather, the impact on unemployment is likely to be immediate – and show up first in the April labour market statistics.
  • With the fall in GDP quite extreme, unemployment could normally be expected to rise further.  However we expect that the “JobKeeper” package will help to contain unemployment at around 11¾% by mid year with little improvement in the back half of 2020.  With a weaker growth profile (and longer time to return to previous growth levels) and the expiry of some fiscal packages (e.g. JobKeeper after 6 months, and short term business incentives) we would now see unemployment still at around 7½% by end-2021 (previously around 7%).
  • Another important dynamic is that in the forecast environment it is very difficult to see anything much in the way of wage pressure.  We now expect wages growth to slow to around 1.3% through 2020 and around 1.5% through 2021.  That in turn feeds into a lower rate of inflation.  Thus we now expect core inflation to be around 1.5% in the year to Q4 2020 (broadly similar to current forecasts) but a more substantial drop to only 0.2% in the year to Q4 2021.
  • That in turn causes some problems in the recovery path, as effectively while nominal rates remain unchanged at 0.25% the real effective rate rises significantly from around -1.25% at present to broadly flat.  That suggests that the Government may need to do more on the fiscal front to help the recovery in 2021.
  • While we expect the economy to recover in a cyclical sense over time, it is likely that a downturn of the magnitude expected will see ongoing fallout and also structural change in some sectors.
  • The commercial property sector is an area likely to see a structural shift. With large corporates making significant investments in technology to enable remote working, it is likely that remote working could become more prevalent. This would serve to reduce the demand for office space. Similarly, the retail segment may be affected with retailers reducing their footprint in CBD areas (though potentially increasing stores in suburban areas).
  • Both domestic and international business travel could also see an adjustment with remote meetings taking the place of physical travel. This would see an ongoing reduction in demand for air travel as well as accommodation for business purposes.
  • In the near term, the recovery in tourism is likely to be more protracted with restrictions only likely to be gradually removed as the virus is contained worldwide. This is a sector we see taking longer to recover. However, an increase in domestic travel as a substitute for international trips could offset some of this weakness.
  • Education exports will also likely be hit in the short-term with both direct containment constraints as well as secondary impacts from slower global income growth. That said, a weaker exchange rate will offset some of this impact. Further out, it is likely the sector will focus on diversifying its student base as well as a renewed focus on online learning options. This will also impact the sectors demand for commercial property space.

For further details, please see The Forward View – Australia April 2020