The Forward View – Australia: September 2020

VIC virus & reduced Government support means flat H2 2020. Larger falls through 2020 mean better 2021. But recovery still tough & long.

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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. If listening on a mobile device, click listen in browser.

Overview

  • The larger than expected fall in Q2 GDP has obviously affected our forecasts, but in many ways the big picture remains. That is, we have had a massive recession. The near term outlook has been further complicated by Virus issues in Victoria and the scheduled reductions in Government support – albeit we expect a highly stimulatory Budget with personal tax cuts, accelerated infrastructure spending and attempts to move the focus from “support to survival”. On the basis that state lockdowns are finished by end 2020 we now see the prospect of faster growth through 2021 but the labour market outcomes have deteriorated in the near term and will remain very challenging into the medium term.
  • As highlighted by yesterday’s Business Survey, while the pace of recovery in July was impressive, conditions deteriorated in August. Thus capacity utilisation turned down a touch (and is still 4% below pre-virus levels) as did business conditions and forward orders.  While in trend terms Victoria remains the weakest state, the falls in Queensland activity are noticeable – and may point to state border closures as an issue.
  • Our own internal data on consumption activity also points to a reasonably strong July but as August continued, the size of the falls in Stage 4 lockdown areas mounted and there was a more general weakening in other states.  The following chart is important in understanding the dynamics of the current situation.
  • The above combination suggest that the Victorian virus impact may be spread over both Q3 and Q4 GDP.  That also is important given the context of reduced income support and the possibility of faster near term deterioration in the labour market and the probability of more firms (and possibly consumers) defaulting in Q4.
  • As a result we see Q3 as likely to record a small positive GDP read but Q4 could well go moderately backwards (around -0.7%).  That would mean that the fall during 2020 in GDP could be around 7.6% (we had previously expected declines of around 5.7%). That would also lead to higher levels of unemployment by early 2021  (around 10.0% was 9.6%).
  • Provided virus developments are as expected (i.e. state borders opened by year end but international borders not until this time next year) and there is a strong stimulus in the October Budget we would expect that the kick up in activity during 2021 would be much stronger than previously expected – an increase of over 4.5%.
  • In year average terms that would see GDP falls of around -4.7% (was -1.8%) and around 1.3% in 2021 (was 1.6%).  While the out year of 2022 has also been revised up to around 3% (was 2¾% ). That said, these forecasts imply that we don’t return to the levels of GDP reported in late 2019 till mid 2023. The hit to private demand in our forecasts (as shown by the chart opposite) are unprecedented in the post WW2 era.
  • Also the damage to the labour market is even worse given the lower starting point for growth.  Thus unemployment peaks at around 10% in early 2021 but unemployment is still around 8% by end 2021 (was 7.8%) and 6.8% by end 2022 (was 6.6%)
  • Clearly that set of forecasts means that wages growth will remain lower for longer and inflation equally lower.  For inflation by end 2021 we have around 1% in core terms and 1.4% by end 2022. A higher AUD is also not helping but will probably not be as negative as would normally be the case given current circumstances.
  • At this stage we still see house prices falling by around 10-15% as a result of the current downturn and much more substantial falls in commercial property prices – especially in retail & office in Sydney / Melbourne CBDs.
  • Finally, much still depends on the virus and the confidence effects of non-Victorian states.  As well as the size of the upcoming Budget stimulus. While the RBA will look to do anything that can help, the main game will be fiscal policy, and in the longer run, structural policy.
  • Finally the extra hit to unemployment is likely to have further complications for already struggling firms (the so called zombie firms).

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