Via Bill Evans at Westpac:
Westpac has revised its growth forecasts for the Australian economy in 2020 to take into account the expected impact from the Coronavirus. The numbers are based on a “no fiscal stimulus package” basis. The Government is set to announce its policy response later in the week and it will be necessary to adjust the numbers according to our assessment of the impact of the policies.
We expect the Australian economy will grow by 1.6% (in the year to the December quarter 2020) although growth momentum will be in two halves with the first half showing a contraction of 0.6% and the second half growing by 2.2%.
On a quarterly basis we expect the economy will contract in both the first and second quarters by 0.3% and 0.3% respectively to be followed by a rebound of 1.4% and 0.8% respectively in the third and fourth quarters.
That growth profile constitutes a technical recession but given the expected recovery in the second half of the year it is much more realistic to characterise the situation as a “major disruption” to growth rather than the style of recession that Australia has experienced in the past. Indeed, recall that in Australia’s last two recessions the unemployment rate lifted from 6% to around 11%.
We expect the unemployment rate to hold below 6% through this period.
Furthermore, there is much greater uncertainty around these forecasts due to the unpredictable course of the outbreak.
In discussing this profile it is probably best to consider the growth dynamics through each of the quarters in 2020.
The first point to note is that the economy will be dealing with the impact of the virus when it is in a relatively fragile state with growth in 2019 at 2.2% compared to potential of 2.75%.
In particular, consumer spending has been insipid with the annualised pace running at only 1% in the second half of 2020.This means that consumer spending is likely to be less resilient to shocks than if momentum had been robust.
Whereas exports (tourism; foreign students; agriculture; resources) and inventories (disrupted supply chains) will explain the major shocks in the March quarter given their exposure to the Chinese economy, the June quarter contraction will be dominated by Australia’s and the rest of the world’s exposure to the virus and the lagged effect of China’s recession in the March quarter. In particular the impact on the rest of the world has already been affecting financial markets which is likely to puncture confidence more widely.
We anticipate the economy will contract by 0.3% in the March quarter.
That contraction will be highlighted by a 10% contraction in services exports – education; tourism; transport; a 2% reduction in goods exports; a run down in inventories to address the supply chain disruption; a slowdown in consumer spending, particularly near the end of the quarter to 0.2% growth; and a 3.5% contraction in good exports.
Before taking into account the impact of any Commonwealth Government stimulus package we forecast that the economy will contract by another 0.3% in the June quarter.
Of most importance will be a contraction of 1.2% in consumer spending in the June quarter. The impact of the virus will differ significantly across categories of consumer spending.
The most vulnerable components of consumer spending (hotels; restaurants and cafes; recreational services; and air travel) are forecast to contract by 2% in the March quarter to be followed by a 13% contraction in the June quarter (this contraction is unlikely to be distributed evenly across the nation with a larger impact on the major cities than in the regions); purchases of consumer durables
are expected to contract by 1.0% in the March quarter followed by a further 3.0% in the June quarter.
On the other hand, we expect increases in consumer spending on food and other essentials, including health, partly reflecting the stockpiling we are currently seeing in super markets – March quarter up 1.4% and June quarter up a further 3.4%.
Other consumer goods and services (including rents – actual and imputed; education; utilities; fuel; day care) are likely to hold around trend.
Additional corrections in the June quarter will be a fall of 0.5% in new business investment while we do not anticipate any changes to our dwelling construction cycle forecasts.
We expect a partial recovery in education exports in the June quarter of 3.5%; while tourism is expected to fall by a further 5%. More students are expected to resume their studies although, globally, tourism is expected to weaken further. A recovery in Chinese tourism is unlikely given that Australia, with its own exposure to the virus, is unlikely to represent an attractive destination for Chinese tourists.
Our figuring is on the basis that by the September quarter the direct impact of the virus and the policies required to contain it will have eased significantly. We expect that development on a global basis providing a significant boost to financial markets.
That would lay the foundation for an 11% recovery in the most exposed sectors of consumption; a 2% boost to durables; partly offset by a 2.5% fall in “stockpiling” and health.
Overall consumer spending is expected to lift by 1.2%; education and tourism by 5%; goods exports by 2.2%; while business investment will remain weak, contracting by 0.5%, in lagged response to the drag on sales in the June quarter.
Overall GDP is expected to be boosted by 1.4% in the September quarter to be followed by a solid 0.8% lift in the December quarter.
Based on this growth profile we expect that the unemployment rate will increase to a peak of 5.8% in the second half of 2020; that will be marked by a period of no new jobs growth, followed by outright job losses, to be followed by a sequence of months with jobs growth beginning to recover in the fourth quarter. Partly easing the pressure on the unemployment rate will be a fall in the participation rate as workers become discouraged by the deteriorating jobs market.
The Stimulus Package
As discussed these forecasts are not based on the expected impact of a stimulus package.
The most important objective of the package should be to support jobs rather than avoid a technical recession. Recall that since the GFC when the unemployment rate bottomed out near 4% were never been able to achieve that rate again over the subsequent 12 years.
Various estimates of the size of the package have been mooted, with recent estimates pointing to as much as $10 billion (around 0.5% of GDP).
Policies to lift business investment through temporary subsidies are unlikely to have any short term impact as businesses will be concerned about the state of demand limiting their appetite for investment.
Policies should be focussed on supporting; incomes; spending and jobs.
Even income boosts may have a limited short term impact on demand if cautious households choose to save the proceeds.
Only a lift in specific government spending programs or payments to those groups such as pensioners and the unemployed who have a high propensity to consume can be certain to lift demand in the very near term.
Support for businesses and their workers who are particularly hard hit by the crisis are likely to be considered. Efforts to hold on to workers until the crisis passes might be encouraged in the package but it will probably be difficult to incentivise businesses to maintain temporary workers. In particular, those industries we identify as “most exposed” are major employers of temporary workers.
The Prime Minister has emphasised the temporary nature of the components of the package seeking to avoid the pitfalls suffered by the ALP during the Global Financial Crisis where the stimulus lasted long after the crisis had passed.
Westpac believes that now that the Government’s focus on achieving a fiscal surplus has passed the structural need to lower personal taxes should be addressed. As noted, the economy is entering this crisis with little momentum. That is largely due to the cautious consumer. Weak consumer spending is attributable to slow after tax income growth.
The Government has already legislated personal tax cuts to begin in 2022. Bringing forward those tax cuts in the May Budget would greatly assist households to boost demand at a time when the economy will be emerging from a very difficult time.
Sorry to say it but that is far too bullish. The Australian economy is virtually going to shut down until October as the virus takes hold.