The financial destruction of the “once in a century” crisis caused by the coronavirus pandemic is forcing leading economists to shift the goalposts for the looming recession.
Australia is now forecast to suffer three consecutive quarters of retractions to its GDP, according to Westpac’s April market outlook released this week.
The report heaps praise, however, on the federal government’s fiscal response, revising its expectation for unemployment from 17 per cent down to 9 per cent for the middle of the year due to the eye-watering $130 billion JobKeeper package.
But the positive sentiment drawing from the Morrison Government’s willingness to splash cash won’t last, the report warns.
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Australian stocks have surged in value this week and closed nearly 3.5 per cent higher at the close of trade on Thursday but the heavy losses inflicted since mid-February will resume.
“Markets are currently buoyed by governments’ stimulus packages,” according to the report from Westpac’s chief economist Bill Evans.
“But as we move through the June quarter and stimulus packages fade into the background, the economic damage and the pessimism around the virus will dominate markets.
“Prospects are now for a deep recession in 2020, with output to contract in the March, –0.7 per cent, June, –8.5 per cent, and September quarter, –0.6 per cent.”
Westpac then expects the bounce to come, rising more than 5 per cent in the December quarter and limiting the year’s loss to 5 per cent on the whole.
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The initial expectation was the coronavirus would stall trading for a short period, resulting in a major hit to Australia’s gross domestic product in the second quarter, and then bounce back in the three months after.
But the extended closing of society now being proposed by medical experts will likely impact the nation’s economy for two quarters at least.
Leading independent economist Saul Eslake told news.com.au this would lead to the already eye-watering cost of the pandemic blowing out exponentially.
He said the federal government had so far committed more than $200 billion in stimulus packages, the state governments have coughed up close to $50 billion, and all have missed out on at least $100 billion in taxes because of the crippling disruption to business and trade.
Given almost all of the relief measures have a shelf life of six months, extending the support beyond two quarters would cost federal and state governments at least $500 billion, Mr Eslake said.
“There could be pent-up demand (for some industries),” he said.
“But the holidays that aren’t taken, the meals that aren’t eaten, the visits to the cinema or the theatre that aren’t done can’t be replaced.
“So there are permanent losses.”
AMP Capital chief economist Shane Oliver said he expected the government to relax its shutdown in the coming months.
Such an elongation to the shutdown in society, he said, would result in “real damage” to the broader economy.
“The bottom line will feed into construction and manufacturing, whereas at the moment it’s mainly service industries that are being heavily affected,” he told news.com.au.
Dr Oliver said a longer period for industries being crippled by the virus could lead to a loss to GDP of 20-25 per cent, which would be greater than the loss inflicted during the Great Depression.
“As you get further and further out, all the contractions that will occur will just start flatlining,” Dr Oliver said.