The Forward View – Australia: June 2020

A small fall in GDP in Q1 expected to be followed by a very large fall in Q2 – followed by an extended period of recovery.

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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

  • The Q1 national accounts – which showed a decline in GDP of 0.3% – suggest that Australia has all but ended its 29-year run without a ‘technical recession’. The result was slightly weaker than we had expected in the lead-up to the release and showed a more significant impact of COVID-19 than we had expected, with a notable decline in the household services consumption.
  • In addition to the softness in services consumption, non-mining business investment and dwelling investment declined. Overall, this was a very weak outcome for private domestic demand which subtracted 0.8ppt from growth. Key offsets were government spending and a strong contribution from net exports (where a fall in exports was offset by a larger fall in imports).
  • The large decline in services consumption was notable with the most significant lockdown restrictions only occurring the last two weeks of the quarter. Travel and accommodation and food services saw a large decline, while health services also softened.
  • Following the integration of the Q1 national accounts our near term forecasts for growth in 2020 are broadly unchanged. We still expect a large fall in activity in Q2 – a decline 8.5% q/q, before an  earlier and stronger than previously expected pickup H2 2020 and continued recovery in 2021. We have also included forecasts for 2022 for the first time (around 2.8% expected).  That said we still don’t have the level of GDP exceeding the level of Q4 2019 GDP until mid 2022.
  • We have revised lower our forecasts for the measured unemployment rate. With labour force participation temporarily impacted by definitional changes to Jobseeker payments and the impact of JobKeeper in supporting jobs it is likely that the unemployment rate will now peak at a much lower rate – around 8½%. Nonetheless, the impact on the labour market has already been large with underutilisation rising to exceptionally high levels and hours worked declining sharply in April. The unemployment rate is expected to remain elevated for sometime, despite the rebound in growth. This reflects the time it will take to fully recover the level of GDP to pre-COVID levels following the large expected fall in Q2.
  • While Australia has achieved a better than expected outcome on the health front and restrictions have been eased much sooner than expected we expect the economy will continue to require ongoing support from policy makers – particularly as existing measures naturally end. This will likely come from ongoing fiscal support while we expect the RBA to keep rates very low for an extended period.

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