Now that the first wave of covid-19 infections has passed its peak and reduced to a trickle in Australia attention has turned to steps to revive the economy. The necessary social distancing and shut down measures that were taken by the Federal and State Governments to suppress the spread of covid-19 are cautiously being relaxed. The three-stage relaxation plan announced last Friday is a flexible road map that the State and Territory Governments can pick and choose to adopt at their own pace according to their differing experiences with infection rates within their borders and the best medical advice in each jurisdiction. In a best-case scenario, all three stages would be implemented in all States and Territories by the end of July.
Even in this best-case scenario where all three stages are implemented by July there will still be restrictions. Social distancing, the 1.5 metre space requirement between people, is likely to stay until a covid-19 vaccine is widely available, probably at least another year and more likely much longer. Social distancing will mean that many activities based on people crowding in spaces – sporting and theatrical events; travel; shops; restaurants; pubs; clubs and many more – will operate at restricted customer capacity for the foreseeable future.
Some economic activity, such as general international travel, misses the three-stage relaxation plan and realistically cannot restart until covid-19 is far better contained internationally than it is currently. It is hard to see how travel to many parts of the world, including the United States, Europe and much of Asia, can be considered “covid-safe” until 2021 at earliest.
Even a best-case scenario where parts of the economy re-start soon and other parts re-start in restricted form and other parts such as international travel wait much longer presents a very tricky forecasting framework. Adding to the trickiness of the forecasting framework it is hard to assess accurately how the abrupt slowing of economic activity has impacted the willingness and ability of households to spend rather than try and pull in their horns and save.
The various and very generous income and subsidy support measures introduced by the Federal and State Governments should help to counter some of the precautionary saving that households and businesses try to adopt when faced by difficult economic circumstances. Although uncertainty about how long the support measures will last may temper the suppression of the precautionary saving impulse.
The RBA provided its best forecasts in the Quarterly Monetary Policy Statement released last Friday. Its baseline forecast is that real GDP will fall by 8.0% y-o-y in the first half of 2020 with the decline concentrated in Q2. The fall in GDP moderates to -6.0% y-o-y in the second half of 2020 (implying positive q-o-q GDP growth in Q3 and possibly Q4) before lifting to +7.0% in the first half of 2021. Because of the uncertainties surrounding social distancing changes and behavioural changes by businesses and households the forecast is subject to a greater than usual degree of uncertainty. The RBA also provided a more positive and more negative forecast GDP growth trajectory.
This week the Federal Treasurer, Josh Frydenberg, will also present Commonwealth Treasury’s latest economic forecasts. These may differ from those presented by the RBA. They will have the advantage of taking account of the Government’s three-stage easing restriction plan that was only loosely framed at the time the RBA produced its forecasts.
The official forecasts from the RBA and Treasury this week provide as good a view as any of how the economy may perform. The near-term part of the two sets of forecasts through to end-Q2 2020, showing annual GDP growth declining from 2.2% y-o-y in Q4 2019 to around –8.0% y-o-y with the unemployment rate lifting to around 10% in June are likely to be close to accurate. We have a reasonable amount of information to judge how deep the hole in the Australian economy dug by covid-19 restrictions is likely to be. The hole may prove to be less deep than the holes in the economies of the US and Europe looking at worse than –10% y-o-y falls in GDP mid-2020 and unemployment rate well above 10% (already 14.4% in the US).
The climb out of the hole is far harder to forecast. There are some tentative signs that Australia may manage the RBA’s baseline forecast and perhaps better. The western and northern part of the country including Western Australia; South Australia; Northern Territory; and Queensland are experiencing no new covid-19 infections and are positioned to transition more quickly through the three-stage plan reducing restrictions and ramping up to new normal” covid-safe” economic activity before July.
Even in the populous South-East corner states there is some evidence of underlying support for freer spending given the opportunity. The crowds returning to shopping centres for Mothers’ Day purchases is both a health concern but also sign of pent-up desire to spend.
The return of on-site house auctions in New South Wales at the weekend saw a jump to 70% clearance rate admittedly on low numbers of houses offered for sale.
In Australia we can say at this stage that the near-term hole in GDP growth although big is not as large as feared a few weeks ago. The Unemployment rate may not lift above 10% as feared recently. Providing – and it is a big providing – the three-stage plan re-opening much of the economy for business by the end of July progresses without set-back the economy will be starting to grow again in Q3 and Q4 slowly filling the hole in GDP.
How the various key economic agents react in the new “covid-safe” economy – households, businesses and governments – is still hard to forecast with any confidence making it hard to assess the durability or relative strength of the economic recovery beyond covid-19. It is also hard to predict when we will be beyond the negative influence of covid-19. We all watch and hope that the easing of restrictions is accompanied by only isolated and containable covid-19 spot fires and not a new second-wave inferno of infections causing renewed restrictions and much deeper and longer economic downturn.