The Melbourne Shutdown has lowered our growth forecast for 2020 from minus 4% to minus 4.2% – the risks are to the downside centred on confidence and, of course, developments with the virus.
The shutdown in Melbourne has altered our growth profile for the Australian economy and we have slightly lowered our annual forecast for 2020 from a contraction of 4.0% to -4.2%.
We retain our forecast for growth in 2021 of 3.0% recognising that this shutdown will represent a permanent loss of activity out to end 2021, in the order of $3bn.
We have been forecasting 1.5% growth for GDP for the September quarter to be followed by 2% in the December quarter.
Following the 0.3% contraction in the March quarter and our forecast 7% contraction in the June quarter we have expected a 4% contraction in GDP over 2020.
Yesterday the Victorian Premier announced a full shutdown of greater Melbourne for six weeks in response to the recent wave of coronavirus infections.
This area covers around 20% (by population) of the Australian economy. For the purposes of our forecasts we expect that other parts of the Australian economy will be disrupted, particularly around the NSW border; regional Victoria; and interstate travel – which adds a further 5% of the economy to be affected.
We are forecasting that the Australian economy contracted by 7% in the June quarter.
Hours worked contracted by 9.5% in April and fell by a further 0.7% in May so, although we have not yet seen hours worked data any “recovery” in June is likely to be very mild compared to the collapse in April. Accordingly, for Melbourne (and the other areas discussed above), the base from which to calculate the impact of the latest shutdown is still going to be quite weak.
Say that the recovery through June was 1.5% (proxied by hours worked) then with the economy relapsing to “shutdown” pace again we can argue a 1.5% contraction over the next 4-6 weeks.
So, if we look at the September quarter for Melbourne (and regions) – a contraction of 1.5% over the next six weeks is forecast to be followed by an expansion of 1.5% (equivalent to the reopening effect we assess for June) over the second half of the September quarter.
That means that while we forecast that 75% of the national economy will grow by 1.5% in the September quarter the other 25%, centred on Melbourne, will stall.
That reduces our growth forecast for Australia to 1.1% in the September quarter from 1.5%.
The unknown variable will be the impact on national confidence of this unexpected development.
Arguably, that will depend on whether there is a relatively quick outbreak in the virus elsewhere.
Given that the original source of Victoria’s outbreak has been attributed to the management of overseas returnees, scrutiny across the country around the international borders and visitors will be intense.
For the December quarter our base growth forecast is 2.0% contingent on no further significant shutdowns and the sustained reopening of Melbourne.
The note earlier this week around the fiscal outlook we have factored in some constructive policy response. Recall that JobKeeper and JobSeeker are scheduled to terminate at the end of September.
For the December quarter we are forecasting an extension to JobKeeper (for around a third of the current 3.3 million recipients) and a reduction in JobSeeker payments of around $300 – not the currently budgeted $550 per fortnight.
With Melbourne showing a degree of “pent-up demand” we expect that Melbourne and regions (25% of the economy) will grow by 2.7% in the December quarter compared to 2% for the rest of the country.
That implies overall GDP growth of 2.2% for the December quarter.
Overall our original forecast of a 4% contraction in the Australian economy in 2020 has been downgraded to -4.2%, with a somewhat weaker September quarter to be followed by a stronger December quarter.
As discussed the events in Melbourne highlight the risks to this scenario around the containment of the virus; other shutdowns; and the inevitable savage loss in confidence were that to occur.
