Coronavirus fallout could take Australian economy decade to recover from, KPMG says

Coronavirus fallout could take Australian economy decade to recover from, KPMG says

Updated

April 06, 2020 15:50:08

Australia’s economy could take almost a decade to recover from the coronavirus fallout even after being cushioned by the Federal Government’s $17.6 billion stimulus, according to a report out this morning.

Key points:

KPMG said in the best case scenario, Australia’s economic growth would decline by 0.9 per cent in 2020This, even with the Federal Government’s stimulus measures, amounts to a $17 billion hit before slowing recovering in 2021Businesses will be unable to operate at capacity because of coronavirus, and will continue to pull back their orders

Modelling by the advisory firm KPMG warns the potential for a fully blown global economic crisis, while not imminent, “is now very real”, with the public health crisis spilling over into economies of every nation.

“The economic damage will continue for some time and in all likelihood will escalate in intensity,” the report said.

“Despite evidence of households engaging in stockpiling and the recent heavy falls in financial markets, we believe the probability of a pandemic resulting in a full-blown panic scenario remains low.”

KPMG said in the best-case scenario with last week’s emergency stimulus, Australia’s economic growth would decline by 0.9 per cent in 2020, amounting to a $17-billion hit before slowing recovering in 2021.

Chief economist Brendan Rynne told the ABC’s AM program business and consumer confidence was being rocked by shoppers stockpiling toilet paper and hand sanitiser, something fuelled by social media.

“There now does appear to be quite a lot of panic in the community with regards to how the coronavirus is going to play out within Australia,” Dr Rynne said.

“That panic in the community will translate into disruption within the economy. “

“There does need to be calm. History tells us that pandemics are not unique but ultimately they pass.”

Businesses and consumers lose confidence

Although the report is based on no further surprises on the spread of the virus, it warns businesses and consumers will lose confidence if the pandemic is more acute and long lasting.

“Markets could be disrupted by irrational behaviour and the economic consequences could be more severe,” the report said.

“In the extreme, businesses and households can lose confidence to such an extent that panic ensues in financial markets with investors over-reacting, resulting in asset prices collapsing and credit drying up.”

“COVID-19 creates a fundamental risk to the wellbeing of our society.”

“We need to look after our family, friends, the community that we live in and importantly ourselves.”

While KPMG supports the stimulus measures, the report says consumers and businesses need to be convinced the package is credible and can be scaled up or extended if required.

“Without this package, GDP in 2020 would be significantly lower with recession highly likely,” the report said.

“The policy package will … ensure that we don’t descend into a more acute and protracted economic downturn because businesses and households lose confidence.”

KPMG worries the initial “supply” disruption sparked by frozen production in China will become a demand-side risk as businesses unable to operate at capacity pull back their orders to deal with the new economic reality.

Your questions on coronavirus answered:

“This downward spiral has the potential to gain momentum, leading to even greater reductions in consumer spending and threatening the viability of otherwise sound businesses.”

KPMG’s warning came as the US Federal Reserve slashed interest rates by a full percentage point to nearly zero.

The Reserve Bank of New Zealand also made an emergency 0.75 percentage point interest rate cut to 0.25 per cent.

In a statement, RBNZ said the negative economic implications of COVID-19 continue to rise and the “negative impact on the New Zealand economy is, and will continue to be, significant”.

Air New Zealand is ramping up its flight capacity cuts with an 85 per cent reduction on international routes with long haul flights to Los Angeles and London suspended.

Topics:

business-economics-and-finance,

economic-trends,

federal-government,

australia

First posted

March 16, 2020 10:33:40

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