The Forward View – Australia: November 2020 Updated

Stronger activity and a smaller hit to unemployment in the near term.

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Overview

We have upgraded our near-term forecasts for GDP and unemployment ahead of the national accounts Q3 GDP release in early December. We now expect GDP growth of around 4% in Q3 driven by a strong rebound (around 7.5%) in consumption. We also see a smaller hit to the labour market with the unemployment rate to peak at 7.4% in late 2020, down from 8% (in early 2021). The key driver of our forecast upgrade has been a marked improvement in high frequency data, in particular, NAB’s transaction data have shown a rapid rebound across states once restrictions are removed.

However, we have downgraded our growth outlook from late 2021 onwards. Despite expecting a stronger near-term rebound, the private-sector weakness that was in place pre-virus will likely reassert itself. In particular, high unemployment will weigh on already-weak income growth and this, in combination with weak population growth, will see consumer spending slow into 2022. As such, at the end of 2022 we expect unemployment to remain around 0.5ppt higher than its pre-COVID level despite GDP having recovered a year earlier. Inflation will therefore remain weak at 1.7% – a little below the RBA’s target. The outlook remains highly uncertain and the pace of recovery could be uneven.

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