The first half of dreadful 2020 is rapidly ending. It has been a half-year shaped by pandemic and the deliberate shuttering of economies causing deep recessions around the globe, including in Australia. Even though the pandemic is still growing in many parts of the world in the second half of 2020, many countries, including Australia, will experience sharp lift in GDP growth. The second half of 2020 is likely to be much better than the first half although the improvement may not get the attention it deserves as many fixate on factors that may cause the economy to falter again in 2021.

Our view is that the Australian economy will grow strongly in the second half of 2020 and will also show modest growth in 2021.

The signs of potentially strong economic growth in Q3 are already starting to show in sharply rising consumer sentiment in May (+16.4% m-o-m on the Westpac survey) and June (+6.3% m-o-m). The current recession in the first half of 2020 is different to its predecessors in the early 1990s, early 1980s and before in that income, especially household income, has been generously supported by government programs such as Work-keeper and the doubling of Work-seeker payments.

Income likely grew in the first half of 2020 even as spending and output fell. Spending in the economy plummeted to a low point in April with retail sales down 17.7% in just one month. Without the various income support measures announced in March the sharp loss of spending in April carrying to output and job losses would have generated reduction in household income and more cuts in spending beyond April.

The Government’s income support programs acted as a circuit-breaker to what could have been a spiralling recession. Rising income (even as real GDP contracted 0.3% q-o-q in Q1 household gross disposable income rose by 1.4% q-o-q with a much bigger income program assisted rise likely in Q2) allowed households after the initial shock from covid-19 economic shutdowns and big job losses, to start spending again.

Retail sales on preliminary reading jumped 16.3% in May and in the face of labour force data showing a cumulative loss of 835,100 jobs in April and May and the unemployment rate rising from 5.2% in March to 7.1% in May, the highest unemployment rate in twenty years.

Other factors reinforcing the positive influence of income support programs and encouraging households to spend include temporary assistance with regular household bills – medical; childcare; utility charges; rent; mortgage payments – as well as the novelty of returning to shops, clubs and hotels progressively re-opening as covid-19 restrictions eased from early May.

Importantly, the key income support measures for households,  Work-keeper and double Work-seeker payment in place mostly until the end of September look set for some extension. The results of their official review to be announced in July seem likely to include extension or recasting for industries worst hit by covid-19 restrictions. It is very unlikely that these major income support programs will stop dead in September, the one factor capable of throwing in to reverse the nascent recovery in retail spending and the economy.

It is also likely that the Government will announce more spending initiatives in July aimed at building infrastructure, creating jobs and improving the flexibility of the economy to adjust to changing circumstances. In total, combined income support and economic growth initiatives while changing shape and relative contribution are likely to stay high over the next year at least (the Prime Minister warned to expect record budget deficits in 2019-20 and 2020-21). High government spending will continue to support GDP growth limiting the likelihood of a dip in GDP either late 2020 or in 2021.

The boost to household spending from the progressive re-opening of parts of the economy is subject to the most uncertainty because covid-19 infections continue to simmer at very low level with potential to flare up. The lift in covid-19 infections in Victoria over the past week is concerning. The positive feature is that the health authorities have quickly identified the main cause of the lift in infections – incidences of indoor large extended family gatherings with poor social-distancing and disregard of infection quarantining – and are re-instituting controls specific to the problem, rather than return to widespread shutdown.

Even though the Victorian acceleration in covid-19 infections is unlikely to generate a need for widespread shutdown, it does slow the previously quickening pace re-opening the economy. As a result, the likely lift in retail spending may be tempered to firm from strong, but it is unlikely to be thrown back to decline given other signs that income support programs will be extended in some form beyond September and that many other businesses, including the banks, are looking to support their most covid-19 vulnerable clients for longer.

At this stage, we see household spending rising in Q3 and Q4 supporting strong rebound in GDP off a very low base in Q2. The second half of 2020 will look much better than the recession mired first half. If as we think likely the government continues to spend more in 2020-21 extending and redefining in parts income support programs and boosting spending on infrastructure and job creation, the first flush of economic growth in the second half of 2020 rather than dipping as many fear could turn to modest and improving growth through 2021.