April 07, 2020 05:06:36
Six weeks ago, Treasury officials were estimating the coronavirus outbreak was only going to dent Australia’s economic growth in the first three months of this year before the economy rebounded.
Treasury initially estimated COVID-19 would shave 0.5 percentage points off March quarter growthNow the economy is in controlled “hibernation” with a $130 billion wage subsidy planBut economists still expect a huge contraction in the June quarter
But since then, a global pandemic has been declared, the Morrison Government has announced the largest peacetime stimulus packages in Australia’s history, the Reserve Bank has stepped in to stop the financial system collapsing, and economists have warned of an unemployment rate jumping above 10 per cent.
Documents obtained under freedom of information by ABC News show how quickly the coronavirus pandemic has overwhelmed Australian policymaking in recent weeks.
The documents show that by the end of February, Treasury’s best estimate of the impact of the yet-to-be-declared pandemic on Australia’s economy was that it was going to shave 0.5 percentage points off GDP growth in the March quarter, and the economy would rebound “in subsequent quarters”.
Treasury officials were still informing Treasurer Josh Frydenberg that the coronavirus impact wouldn’t be too big, though they emphasised their estimates were uncertain.
“On current information the Treasury advise me that the coronavirus could detract around half a percentage point from growth in the March quarter, and that some bounce-back in growth is expected in subsequent quarters,” said a draft statement prepared for Treasurer Josh Frydenberg by an unnamed official.
“But they too would emphasise the uncertainties associated with these estimates.”
How the lower growth forecast rapidly shifted
The first recorded case of coronavirus in Australia occurred on January 25.
Treasury’s then-estimate of a 0.5 percentage point hit to GDP in the March quarter was the same estimate used to justify the Morrison Government’s first stimulus package, worth $17.6 billion, announced on 12 March.
Just eight days later, Treasurer Frydenberg said the May budget would have to be delayed until at least October, admitting Treasury had no way of accurately forecasting the hit to the economy.
It was the first time the federal budget had been delayed outside of an election since 1975.
“Forecasting for budgets is difficult at the best of times, let alone when we’re in the midst of a global pandemic,” Mr Frydenberg said at the time.
“I understand the States are making similar arrangements and it’s important that we’re able to deliver a budget at a time where there is more certainty about the economic environment.”
Two days after that, on March 22, the Government was forced to release a second stimulus package, worth $66.1 billion, conceding the size and design of the first package wouldn’t be enough to support businesses and workers when steps were being taken to deliberately close parts of the economy to prevent the virus spreading.
Since then, the government has moved to put Australia’s economy into a controlled “hibernation”, unveiling a $130 billion wage subsidy plan on March 30 to try to help Australian businesses and workers get through the next six months.
In recent weeks, hundreds of thousands of Australians have lost their jobs and applied for the government’s emergency JobSeeker payment, and half a million businesses have registered for the Government’s wage subsidy scheme in less than a week.
Further economic contraction inevitable
Economists say despite the size of the government’s stimulus packages – worth $213 billion in total – Australia’s economy will still suffer a huge contraction in the June quarter.
The Reserve Bank board will meet on Tuesday to discuss the state of the economy.
Last month it cut interest rates to their lowest level in history – 0.25 per cent – and began pumping billions of dollars into the economy by purchasing Government bonds.
At the time, RBA governor Philip Lowe said: “While it was not possible to provide an updated set of forecasts for the economy given the fluidity of the situation, it [is] likely that Australia [will] experience a very material contraction in economic activity, which [will] spread across the March and June quarters and potentially longer.”