A more encouraging outlook amid a long recovery


National accounts data last month revealed the striking economic impacts of COVID- 19 and confirmed that Australia was in recession for the first half of this year.

It is the first recession since 1991.

The data also showed that the Australian economy shrank 7% in the June quarter, which is the largest contraction since the data series began in 1959. Annually, the economic contraction was 6.3%, which was also a record fall.

Whilst this was a record fall, it was still not as large as other major economies, including the US, Eurozone and the UK.

The biggest drag on Australian economic activity in the quarter was household spending. Household spending fell 12.1%, driven by a 25.0% decline in spending on discretionary services, as consumers faced massive uncertainty.

This decline in household consumption accounted for a major portion of the fall in GDP in the quarter. Another significant contributing factor is that business investment was also weak.

But it’s not all doom and gloom.

Turning to the future, we expect growth to return in this second half of the year. Most of Australia is already recovering and showing signs of improvement. Some COVID restrictions have eased, with further rollbacks likely, if we can maintain low or zero case numbers.

However, we can’t just flick a switch, and everything is back to normal. We expect the recovery to be unpredictable, bumpy and long.

We do not expect the level of national output to return to pre-pandemic levels until at least 2023. Until there is a vaccine, some form of social distancing is likely to stay in place, and businesses will be subject to changing regulations and guidelines.

A steady recovery will remain conditional on avoiding further waves of infections until a commercially viable vaccine becomes available. Therefore, significant uncertainty about the outlook is likely to persist.

We expect the Reserve Bank of Australia (RBA) to cut the cash rate again to 0.10% before the end of this year. The language in a recent speech by the Reserve Bank Governor, Guy Debelle, suggested more stimulus will be deployed. It would not just be limited to rate cuts. Further stimulus is warranted. The RBA’s goals of full employment and inflation in a 2-3% per annum target band are a very long way off from being met.

Fiscal support was critical in preventing a deeper recession in Australia, and we expect this fiscal support to be extended and enhanced on October 6 when the Federal Budget is handed down.

The 2020-21 Budget will be like no other. We estimate that the government will be forecasting a record-sized budget deficit of around $240 billion, representing 12.5% of GDP.

But the most important aspects of the Budget will be the policies which the government plans to adopt to help the Australian economy repair and recover.

We think the Budget should include a bring-forward of personal income tax cuts, policies to boost business investment, extensions of the JobSeeker and JobKeeper schemes, infrastructure investment, and an extension of the HomeBuilder scheme. A manufacturing strategy of $1.2 billion has already been announced this week.

Reform initiatives to boost productivity in the economy would also be welcome.

Related news & editorials

  1. Hayley Glasgow
    by      In
    More than half (55%) of Australian manufacturers with off-shored operations intend to bring them back to our shores by 2023, according to a survey of 500 senior manufacturing employees in December last year.
    This is largely being driven by market volatility caused by the pandemic and strained... Read More
  2. AMW Melbourne 2022
    by      In
    Australian Manufacturing Week 2022 (AMW), the premier manufacturing solutions event, promises a strong line-up of content and will focus on leadership, future solutions and additive manufacturing.
    AMW is owned and operated by the Australian Manufacturing Technology Institute Limited (AMTIL). which... Read More
  3. Engineering graduates
    by      In
    Graduates of Australian universities are far more likely to satisfy their employers if they hold an engineering or related degree than is the case if they hold a creative arts degree.
    Satisfaction levels are ranked at 90.5% and 78.3% respectively, according to a survey last year by Quality... Read More
  4. Conymet Duratray
    by      In
    Cranbourne Victoria will become the centre for an internationally supported manufacturing facility that will create up to 100 new highly skilled jobs.
    Minister for Economic Development Tim Pallas welcomed the decision by Conymet Duratray International to grow its current Victorian footprint by... Read More