While the decline in short-term GDP estimates and relatively subdued improvement in the unemployment rate this year may be a counterintuitive reaction to the record wage subsidy package, Tony Morriss, chief economist for Australia for Bank of America, said economists could not ignore what was happening in the rest of the world.
“We went to negative 4.4 per cent [in Australia for calendar year 2020] with our big global forecast downgrade last week because our American numbers went from negative 0.8 [per cent] to negative 6 [per cent] and Europe went negative 1.7 [per cent] to negative 7.5 per cent. It was part of the recognition that the shutdowns were having a massive rolling impact around the world.
“We did want to highlight that the impacts are going to be longer-lasting than people believe even if restrictions start to lift and we see a peaking in cases. There has been such an impact from social distancing, on international travel, on tourism,” the economist said.
“A shock like this and reallocation of resources in the economy takes its toll.”
Nonetheless, the economist underlined the importance of the Australian government’s stimulus measures in helping to keep a lid on an expected lift in unemployment and supporting the economy.
“Before the stimulus package came out a lot of people were trying to forecast much higher levels of unemployment. When the government came out with their package, it just gave us confidence that if the unemployment rate did get above 10 per cent, it wouldn’t be by much and it wouldn’t stay there long.”
For example, Westpac’s veteran chief economist Bill Evans was forecasting a 17 per cent unemployment rate by the end of June before the stimulus package but after the package his forecast was lowered to 9 per cent.
Despite the slightly downgraded GDP forecasts, Australia is in a better place than most to weather a COVID-19 economic downturn, Mr Morriss said. Including RBA support, the stimulus targeted at the Australian economy adds up to about 16 per cent of GDP.
In contrast, the US is at just above 10 per cent “but a quarter of that is from the Federal Reserve”. The eurozone is a stand-out but Canada has only just stepped up stimulus and the UK is well below other countries, Mr Morriss noted.
“Australia’s fiscal response looks very good when making comparisons internationally, which also means that we won’t see as high an unemployment rate as we are seeing in the US,” said Mr Morriss, who is expecting the American jobless rate to hit 15 per cent.
The economist said there was going to be a phase where economic data was going to start coming out and the numbers were “going to be really bad”.
But he acknowledged that economic data and forecasts needed to be taken with a grain of salt at this time of economic turmoil. “We are economists, this is a health crisis,” he said.
The uncertainty over the path of economic growth and unemployment has been reflected many economists issuing forecasts on a weekly basis during this exceptional period, he said.
“I don’t think anyone can have great confidence in their point forecasts for GDP,” he said. “The other difficult thing for forecasting is that because of the nature of this crisis, so much depends on the duration of the crisis.”