The Forward View – Australia: July 2020

Extent of the fall in Q2 GDP revised sharply down – as is 2020. But pain still large and long lasting. With new virus uncertainties.

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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

  • While the economy was massively hit by virus and associated lock downs in March / April, activity has rebounded more quickly than expected. Our internal consumption data now suggests that consumption in late June is already back to early 2020 levels. Also, the NAB Monthly June survey saw big improvements in business conditions, forward orders and confidence (which even turned positive). Also the evidence suggests that the worst of the job shedding is probably behind us.
  • That suggests that Q2 GDP might now fall by around -5% compared with our previous expectations of an -8.5% fall. Normally that would see Q3 expectations revised up but now we are trying to take on board the extent and length of the Victoria lock down. We are expecting a bounce of around 3% in Q3 (4% without the Victorian virus return).
  • As a result our new forecast for 2020 GDP is around -1¾% (revised from -4.3%). For 2021 we are expecting growth of around 1.6% (but 2½% through the year) while 2022 forecasts are unchanged at around 2¾%. That means that GDP gets back to pre-COVID levels by late-2021.
  • That also sees a lower peak unemployment rate this year of a touch over 8% but still around 7% by late 2021 and a touch below 6% by late 2022. Nominal wages growth is still expected to be around 1% next year and inflation still around 1½% by late 2022 – and the RBA on hold.
  • We continue to expect a gradual phasing out of JobKeeper (or a replacement targeted at poorer performing industries). Also we don’t see JobSeeker payments fully scaled back to “Newstart” levels. We also see the October Budget being centred at increasing household incomes (via tax cuts) and increased infrastructure spending (brought forward and increased maintenance). We also assume the banks will continue to act as shock absorbers.
  • Obviously much still depends on virus and policy developments. However, we see major structural challenges for some industries – especially as we don’t expect international borders to be opened meaningfully until mid-2021 at the earliest. That means population growth will halve to around 0.7% with obvious ramifications for industries such as construction, education, and international travel-related. We also see house prices falling by at least 10% and commercial property much more – with flow on challenges to related SMEs in CBDs.
  • While recent developments in Victoria are concerning, Australia still remains much better placed that other countries (eg the USA) to reopen its economy. Clearly we will continue to monitor the Victorian situation closely.

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