The Forward View – Australia: March 2020

Soft Economy likely to be hard hit by COVID-19.  Outlook heavily dependent on severity and how long disruption effects of the virus last.

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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

  • Basically the Q4 national accounts has done little to our forecasts. The key themes of 2020 remain:
    • Weak consumer spend with wages growth poor
    • Falling investment in dwellings – albeit bushfire rebuild will help stabilise the fall in H2 2020 with the main rebuild in 2021
    • Still very weak business investment
    • Strength in public demand and net exports.
  • Essentially the economy was soft prior to the COVID-19 impact. NAB internal data suggests that the disruption effects continued through February.
  • As a result  we have increased the hit from COVID-19 in Q1 – reflecting falling consumer spend, tourist and education hits, supply chain disruption and weaker exports.  Previously we had expected Q1 to fall moderately (-0.1%). We now expect to see Q1 GDP down by around -0.3% with a weak Q2 – of around 0.3%. So even if the virus disruption is largely over by midyear we are expecting no growth in H1 2020.
  • With a rebound in H2 (at around 0.75% per quarter) that would see 2020 GDP growth of around 1.2%. Previously we had 1.5%. We expect the recovery to be more pronounced in 2021 – albeit from a lower base. Thus we see year average growth of 2.8% in 2021 (was 2.6%).
  • That includes stronger consumption and investment growth and bushfire rebuild helping dwelling construction. But relatively flat contributions from net exports and the public sector.
  • This profile sees unemployment deteriorate to 5.7% by end 2020 but move back to around 5.5% by end 2021.
  • Whether we avoid a technical recession is very much driven by the duration of disruption from COVID-19.  Our judgement is the risk has to be that the virus will be a problem for longer and hence there are downside risks.
  • We still see the RBA cutting further in April to 0.25% – followed up by the RBA using yield curve guidance and/or buying bonds.  The latter is now a central part of our forecasts. Timing will however be virus dependent.
  • The Government’s upcoming stimulus package will no doubt help.  Hopefully it will be aimed at helping SME and household cash flows.  That could include  investment allowances and delays in GST and BAS payments together with bringing forward infrastructure spend and maintenance. We still have doubts as to whether the size of the package will be sufficient. Prior to the stimulus package we thought it might still be possible to see a budget surplus this year (but would be line ball) but was unlikely to be achieved in 2020/21. The package will be announced tomorrow.

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