The Forward View – Australia: November 2020

NAB Forecasts fundamentally unchanged – but large uncertainties remain.

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This month we continue our podcast series to accompany the NAB Forward View – Australia. It’s a short, 10 minute podcast, designed to give you a quick summary of our key forecasts this month. Listen to the full podcast now. If listening on a mobile device, click listen in browser.

 

Overview

  • Melbourne’s long lockdown has ended as Victoria’s second wave is controlled. This will kickstart the recovery in Australia’s second largest economy.
  • However, the recovery in other states is slowing, where NAB’s business survey and other timely data show little improvement over the past month.
  • We have made few changes to our forecasts since the October Federal Budget.
  • But large uncertainties remain. On the positive side a vaccine may be close.  But unemployment will rise and businesses will need to be convinced of a sustainable recovery before increasing investment and hiring.  Further fiscal support will be needed.

NAB’s forecasts are little changed from last month. GDP is expected to rise by around 3% in the September quarter, following the large 7% fall in Q2. From there we expect a gradual recovery in output, reaching its pre-COVID level only by early 2022. We still see unemployment rising to a peak around 8% by early 2021. From there, the labour market is expected to recover slowly, with unemployment at around 6% at the end of 2022.

With the labour market remaining well below full employment levels, wage growth will likely remain very soft over the next few years. This will see ongoing weakness in domestic inflationary pressures with stronger competition and weaker demand also a factor.

Weak inflation and significant spare capacity in the labour market will see the RBA hold its exceptionally easy policy stance for an extended period. Indeed, we (and the RBA) do not expect the cash rate to rise for at least 3 years – and probably longer. To the limited extent it can help we see the RBA extending its $100bn QE program.

There are a number of key risks around our forecasts. We assume that state borders are opened by the end of the year (but international borders remain closed until mid-2021) and that future outbreaks of the virus domestically are able to be contained without large scale shut downs. At present it appears this is on track.

A bigger uncertainty is the strength of consumer and business confidence – especially at a time of reduced fiscal support and rising unemployment. With uncertainty remaining high, confidence will likely remain fragile and see restraint in spending by both business and the consumer. For this reason, the evolution of fiscal policy will be important for the speed of the recovery. To date, fiscal policy has been very important in supporting the economy and, while the government has turned its focus to supporting business in the recovery phase, we still think that more will need to be done.

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