Gareth Aird, head of Australian economics at CBA, has cut his GDP growth forecast to -4.2% in 2020 versus -3.8% previously due to Melbourne’s lockdown:
We have downwardly revised our outlook for Australian GDP and employment due to the six week stage 4 lockdown across metropolitan Melbourne.
We now expect GDP to contract by 4.2% in 2020 (versus 3.8% previously).
There will be a huge disparity in economic outcomes between Victoria and the rest of Australia in Q3 20.
CBA forecast revision
The Australian economic outlook has deteriorated because stage 4 restrictions have been introduced across metropolitan Melbourne. The restrictions will last for six weeks until Sunday 13 September. The direct economic impact of the stage 4 lockdown is significant and warrants a revision to our profile for GDP and employment.
We estimate that stage 4 restrictions mean 10% less Gross State Product (GSP) in Victoria over a six week period than would otherwise be the case under stage 3 restrictions. Given that Victoria’s economy is worth around a quarter of the national economy we estimate a 1¼% hit to Q3 20 GDP as a result of the new restrictions. That takes the combined impact from both stage 3 and stage 4 restrictions across metropolitan Melbourne in Q3 20 to around 2½% of GDP (i.e.$A12bn). On our numbers that is a contraction in GDP of sufficient size to take our Q3 20 forecast into negative territory (see below for our updated GDP profile).We have also revised our profile for employment based on the new restrictions. We think that nationally employment will decline by around 120k in Q320. Clearly Victoria will be the state where job losses are concentrated. Some other states are likely to post job gains over Q3 20.The level to which the unemployment rate rises will be heavily dictated by the participation rate, which we expect to now fall as a result of the stage 4 lockdown. Wild sings in the participation rate in many ways render the official unemployment rate as meaningless. Our internal data on the number of CBA bank accounts receiving JobSeeker more accurately captures changes in the true level of unemployment in the economy. The number of people receiving JobSeeker increased over July and is now expected to rise further over the next two months.
Given the unprecedented nature of this economic downturn it is worth reminding readers that no economist has a crystal ball and forecasting is an inexact science. It is a tricky art at the best of times and right now it is about as challenging as it gets. We would stress that the overall story is more important than our point forecasts and the shape of our profile is what readers should focus on. The broad message from our forecast profile is that the economic recovery has stalled at the national level due to the situation in Victoria. Economic growth does not now lift until Q4 20.
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness.
Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.
