The Forward View – Australia: August 2020

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

• Virus closedown in Victoria and fears of further spread has led to significant downgrading of our economic outlook. And a modest recovery into 2021 –unlike the RBA’s quick bounce-back forecasts (again).
• Interestingly both our internal data and yesterdays NAB Monthly Business survey suggest that consumption and the broader economy was maintaining its recovery momentum until late July. That said capacity levels were still down 4% from late last year, forward orders did not really improve in July and confidence retreated significantly –all before the Victorian stage 4 restrictions.
• While it is very difficult to forecast the impact of Victorian announcements, our analysis suggests that Victorian output could well fall by 15% in Q3 (with further spill overs into Q4). Nationally that would take around 3 percent off Q3 GDP -pointing to only a small increase in Q3 and a relatively flat Q4. That level of activity would also lead to a significantly worse unemployment outcome.
• Over the course of 2020 we now see output down around 5.7%, including a fall of 6.25% in Q2. In year average terms we expect a decline of 3.8% (previously we were expecting -1.8%). This would see unemployment rising to around 9.2% by year end but peaking closer to around 9.6% in early 2021.
• Given that outlook and the withdrawal of current fiscal stimulus in early 2021 we don’t really see a rebound in growth till mid 2021. As a result we see GDP rising by around 3% through 2021 –but less than 1 per cent in year average terms. In financial year terms that sees a fall in GDP of around -3.5% in 2020/21 (the Government had forecast -2.5%). Finally for 2022 we have kept growth at around 2¾%.
• These forecasts imply that we don’t return to the levels of GDP reported in late 2019 till early 2023. Also unemployment stays higher for longer. By late 2021 we now see unemployment at around 7.6% (RBA is at 8½%) and 6½% by end 2022.
• Clearly that set of forecasts means that wages growth will remain lower for longer and inflation equally lower. For inflation by end 2021 we have around 1% in core terms and 1.4% by end 2022. A higher AUD is also not helping but will probably not be as negative as would normally be the case given current circumstances.
• At this stage we still see house prices falling by around 10-15% as a result of the current downturn and much more substantial falls in commercial property prices –especially in retail & office in Sydney / Melbourne CBDs.
• Finally, much still depends on the virus and the confidence effects of non Victorian states. Also the hit to unemployment is likely to have severe implications for already struggling firms (the so called zombie firms).

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