The Forward View – Australia: May 2020

Our forecasts are broadly unchanged – we still expect a fall of 8.5% in GDP in H1 2020 before a rebound in growth in Q4.

By

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

  • In aggregate our forecasts are broadly unchanged this month albeit with some small tweaks for the release of Q1 CPI and the release of quarterly volumes for retail sales. Internal data suggest the pace of decline in spending across industries has slowed but overall remains very weak. Our estimates of unemployment benefit recipients also points to a significant increase in the unemployment rate over the month.
  • We still expect a small decline in GDP for Q1 (-0.2%)  – where the ramp up of coronavirus measures came late in the quarter. For Q2 we expect a much larger decline of 8.4% with a much broader impact of containment measures touching most parts of the economy. This sees a total fall in quarterly GDP of around 8.5% over the first half of 2020.
  • Our outlook for the labour market is also unchanged. Unemployment is expect to reach 11.7% by mid-year and stay around that level until end-2020. Alongside the rebound in growth we expect the unemployment rate to track lower through 2021 – reaching 7.2% by the end of the year. Therefore, we only see a partial recovery in the labour market by the end of next year reflecting the fact that the level of GDP is not fully recovered until early 2022.
  • Overall these outcomes reflect a recession in Australia of unprecedented speed and magnitude. While the removal of containment measures will see a fairly instantaneous bounce back in activity it is likely that there will be some ongoing fallout given the large hit to both business and consumer confidence, weaker wage growth and some possible structural changes with slower population growth and impacts on commercial property. Also as per previous forecasts we don’t see the level of GDP returning to the level achieved in late 2019 till early/mid 2022.
  • Of course there are risks around this outlook. Australia appears to have been successful in containing the virus, and while the economic impact has been significant – the support from policy makers has also been fast and large. Our forecasts are predicated around the coronavirus remaining contained in Australia and a gradual easing in restrictions from here. Any secondary spread of COVID-19 and a new round of restrictions would see further disruption to economic activity and a different pattern of growth.
  • We think it is also likely that in addition to rates remaining low for an extended period that the government will need to provide some ongoing fiscal support as existing measures are wound back and while confidence remains weak. In the medium-term sense there is also likely to be a renewed focus on longer-term structural reforms with a focus on productivity.

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