Overview

• As a result of the ongoing lock downs in Sydney and Melbourne, together with periods of disruption elsewhere, we expect to see a large hit to activity in the September quarter (down -3.5% in Q3 with only a moderate recovery of around 2% into Q4). That is very much consistent with falls of around 20% since June in our internal consumption data. The labour market is set to retrace some of its recent gains, with hours worked rather than unemployment a better reflection of the current lockdown impacts.
• This implies growth of around 0.8% over 2021, 4.3% over 2022 (the bulk of the rebound) and 2.0% over 2023. The near-term disruption also sees the unemployment rate rise to around 5.2% in late 2021, before resuming its downward trend – reaching 4.4% by end 2022 and 4.0% by end 2023.
• At a headline level, the Q2 accounts, which largely preceded the current lockdowns, showed a healthy outturn for the economy after the pre-COVID level of GDP was reached in Q1 – leaving GDP around 1.6% higher than in Q4 2019. Services consumption continued to recover, though at a slower pace, while the impact of policy was evident in several areas.
• Business investment saw another solid outturn, while dwelling construction saw further gains as the HomeBuilder pipeline is worked through. Government spending also remains important – with investment in infrastructure, both state and federal, an important boost. Government consumption will also likely be supported by the ongoing vaccine rollout.
• While a true read of the underlying pace of inflation will be difficult over the next year or so, with both transitory and policy driven impacts continuing to play out, the dip in activity sees an even longer period of spare capacity persist in the economy. The partial reversal of recent labour market gains will delay the pickup in wage growth. For policy, expectations healthy activity rebound but gradual pickup in inflation sees us still comfortable with a 2024 lift-off for rates. We continue to see QE tapered from February 2022, likely at a more aggressive pace than previously expected but still seeing a total of around $130bn of purchases from here.
• In our view, the key risks to our forecasts are the timing and pace of the easing in restrictions, determining the initial bounce in activity and pace of recovery. Further out, the underlying pace of growth also remains uncertain. While policy is expected to remain supportive for some time, the impacts of HomeBuilder and the instant asset write-off will wane over time, and potentially see activity weaken more than expected.

For further details, please see The Forward View Australia – September 2021