December 9, 2020

The Forward View – Australia: December 2020 Updated

Stronger near-term recovery in activity and a lower peak in unemployment.


• NAB upgraded our forecasts two weeks ago to expect a stronger near-term recovery in activity and a lower peak in unemployment.
• Driving our change in view has been the continued strength in NAB’s transactional data and the solid turnaround in business conditions and confidence recorded in the NAB survey. Our outlook now resembles the best-case scenario we outlined at the start of the pandemic.
• That said, while we expect activity to return to pre-virus levels by the end of 2021, it will take years for unemployment to recover, even in this best-case scenario. Further, large uncertainties remain, even with a vaccine seemingly close to being rolled out. As such, federal and state fiscal support will be key for a sustained recovery, while monetary policy will assist, at the margins, by keeping the cost of credit low.

NAB recently upgraded our near-term outlook for growth and unemployment. Timely NAB transaction data suggests consumer spending remains strong, after the large rebound in Q3. We expect another strong consumer-driven increase in activity in Q4, where we forecast a rise of 2.1% q/q. Beyond this initial rebound, we forecast growth to moderate but the level of GDP to have fully recovered pre-virus levels by late 2021.

Given the strong near-term outlook, we expect the unemployment rate to peak at 7.4% in Q4 2020, before steadily declining from there to 5.7% at the end of 2022. Even with our strong outlook for activity, unemployment remains well above the pre-virus low of 5.2% to the end of 2022. This high unemployment points to weak wages and inflation. We continue to expect core inflation to stay below the RBA’s target of 2 to 3% for the next couple of years, reaching just 1.7% by the end of 2022. These forecasts broadly align with the best-case scenario we outlined at the start of the pandemic. Since then, the containment of the virus and large fiscal stimulus have seen downside risks fade, while a vaccine seems likely to be rolled out in 2021. As such, our outlook is notably more optimistic and more confident than 3 to 6 months ago.
However, in the medium term, we expect consumer spending growth to moderate and business investment growth to remain soft, returning to pre-virus trends. In particular, for consumption, high unemployment, record weakness in wages and a sharp slowdown in population growth will be significant headwinds. As such, we expect further stimulus, with the RBA likely to extend its $100bn 6-month QE program. This support will be helpful, but marginal compared to large fiscal stimulus at both the federal and state level, although at present fiscal stimulus is set to be scaled back in 2021/22.

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