Uncertain outlook for Australian economy but recovery on track

The economy is expected to contract by four per cent in 2020, a CEDA audience heard when Westpac Chief Economist, Bill Evans, recently discussed the national economic outlook.

Australia saw a -0.3 per cent decline in the first quarter of 2020 followed by a minus seven per cent decline for the June quarter, plus an expected 1.5 per cent growth in the September quarter and two per cent growth for the December quarter.

“The key driver of activity in the economy is the hours that people work and hours worked is down by about 10 per cent in April and May, so that will channel into a very substantial fall in the economy in the June quarter,” Mr Evans said.

“Early May when we announced that the Westpac Consumer Sentiment Index had rebounded by 16.4 per cent, having fallen by 20 per cent in March and April, we saw another six per cent rise in June, so the losses that we've seen in March and April were pretty much wiped out by the recovery.

“The five-year outlook for the economy index is 50 percent higher than it was during that 1990s recession.

“Unlike the last recession when there was despair, no one really knew how the recovery was going to come about, and in fact my view is that the recovery really only started to take place after the December 1993 announcement that Sydney had won the Olympic Games.

“This time people can see the other side, they can see that governments are easing their restrictions.

“The biggest story for recessions is always around the labour market. 

“If we look at the early 1980s recession it took six years for the unemployment rate to get back to the pre-recession level, in the early 90s recession it took 15 years to get back to the pre-recession level and even in the GFC which wasn't a technical recession, but it was obviously a contraction in one quarter and very weak world economy, after 12 years we still hadn't got back to that four per cent unemployment rate.

“So the big concern with this recession is that, will we have this long painful period where the unemployment rate remains elevated?

“Our forecast is that the unemployment rate will peak at around 8.4 per cent in August, eight per cent by the end of the year, but still holding at seven percent by the end of 2021.

“We're only expecting the economy to rebound by around three per cent and what that will mean is that by the end of 2021 the economy will still be operating at a level which is going to be lower than we saw at the end of 2019.”

Mr Evans said that in the last few months there has been a reduction in jobs of 830,000, but that 623,000 people also left the labour market in that time – which would otherwise have raised the unemployment rate to 11.3 per cent.

He said that the next big challenge for the economy will be unwinding the JobKeeper and JobSeeker packages.

“If we look at some of the sectors that have been not particularly significantly affected such as construction, finance, agriculture, mining, government, health, education, they all explain around six million workers out of the thirteen million total workforce,” he said.

“Some of the sectors that are really badly affected such as arts, food, accommodation, they've had a 30 percent fall in employment before we look at how many jobs they’ve been able to keep with JobKeeper.

“So I think the key thing for the unravelling of JobKeeper is going to be that those industries that are going to be affected by the ongoing restraints of foreign travel and social distancing, they're going to need to be assisted for a lot longer than just after September.

“The key for me is going to be the October budget and the October budget has to  be one that will boost demand because the stronger demand is in the December quarter. We're  predicting a two per cent lift in GDP in the December quarter, that's an eight per cent annualised pace, so that's quite respectable.

“The stronger demand, the more we'll be able to smooth this transition out of Jobkeeper and out of Jobseeker.”