Key insights from the week that was.

The decision statement from the July RBA meeting showed some optimism, the Board noting that “it is possible that the depth of the downturn will be less than earlier expected”. However, as was the case in June, the outlook was described as “highly uncertain”. Almost immediately, evidence of the significant risks faced by Australia was seen, with Melbourne forced into a 6-week lockdown to stop a surge in COVID-19 cases across a number of suburbs. Soon after, NSW then Queensland closed their borders to Victorians.

Our initial assessment of the economic effect of the Melbourne shutdown suggests that, while a heavy burden for Melbourne and its surrounds, for full-year national GDP growth, the direct cost will be marginal. Greater Melbourne is home to around 20% of Australia’s population. Recognising others will also be affected, we assume the shutdown impacts a quarter of Australia’s population.

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Assuming demand snaps back after the lockdown ends, we forecast this section of the economy will stall through Q3. This brings our 1.5% national growth forecast for Q3 down to 1.1%. Around half of this loss is consequently assumed to reverse in Q4 on pent-up demand, leaving annual growth at -4.2%, from -4.0% previously. Note our 2021 forecast of 3.0% is unrevised, resulting in a small permanent loss of activity equivalent to 0.2% of GDP.

The key risks to these forecasts stem from the potential spread of the virus to other regions and the shock to confidence. On the latter, consumer and business sentiment will be keenly assessed in coming weeks to investigate the immediate impact on Victoria as well as how sentiment responds in the other states.

This week’s developments also highlight the risks around the rolling back of Federal Government stimulus at end-September. Before this new outbreak, we believed there was already a need to extend JobKeeper and JobSeeker and to provide broader support for household incomes – the latter best achieved by bringing forward tax cuts from 2022 and providing a one-off payment to low income earners. With this additional shock now in play, there is even more cause to extend support.

Today sees the release of our July Market Outlook. One of the key callouts this month is the revisions we have made to our global growth forecasts. The rapid increase in the US case count and associated risks has led us to take 1ppt off our 2020 growth forecast for the US, taking it down to -6.6%. Together with large downward revisions to India and numerous other emerging markets, our world growth forecast for 2020 has been reduced to -4.5%, from -3.0% previously.

At +0.1%, the 2020 growth outlook for China is a jarring contrast. This is also the case for 2021 and beyond. Whereas potential for the US and Europe is around 1.5%, with downside risks, assuming China is successful in managing a sustained acceleration in private investment as it intends, China can grow around 5.5% annually.

Also included in this edition of Market Outlook are our latest views on Australia’s economy and currency, commodity prices and the evolution of the global COVID-19 outbreak.

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