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The economic outlook
July 2020 Economic and Fiscal Outlook
On 23 July 2020, the Government released the July Economic and Fiscal Outlook for the Australian economy. COVID-19 has seen the single largest disruption to our way of life and economy since the Second World War. And this is reflected in the figures released by the Government.
The official forecasts for growth in the economy have been revised down sharply. Real Gross Domestic Product (GDP) is expected to have fallen by 0.25 per cent in 2019-20, below the 2.25 per cent rise forecast in the Mid-Year Economic and Fiscal Update (MYEFO) published in December 2019. The economy is then forecast to contract by 2.5 per cent in 2020-21 as ongoing efforts to control the spread of COVID-19 and weak consumer and business confidence weigh heavily on activity.
The unemployment rate is expected to peak at around 9¼ per cent in the December quarter of 2020. Unemployment tends to increase faster than it decreases. As a result, the unemployment rate is likely to remain above pre-COVID-19 levels for several years. The loosening of conditions in the labour market will place downward pressure on the already sluggish wage gains, which in turn will see little growth in inflation over the next year.
July 2020 Economic & Fiscal Outlook
Containment measures have slowed the spread of COVID-19 in Australia but have led to large falls in employment. The number of Australians employed fell by around 872,000 in April and May, followed by an increase of approximately 211,000 in June. Employment fell most sharply for younger people and those in industries that were most affected by government restrictions such as arts and recreation, and accommodation and food services. The labour force participation rate also dropped sharply, returning to the lowest levels seen since 2001. Many people who remained employed saw significant reductions in the number of hours worked, with a 9 per cent fall in the number of hours worked in the Australian economy over the year to May 2020.
The Australian Government’s policies have successfully protected many jobs and businesses that would otherwise have been lost. It is estimated that the unemployment rate is 5 percentage points lower than would have otherwise been the case, preventing the loss of some 700,000 jobs.
The centrepiece of the government response has been the JobKeeper and JobSeeker payments. The Government has announced a tapering of these payments from 28 September 2020 to 28 March 2021 (see our review of the changes). The maximum payments available will be reduced and eligibility criteria will be tightened.
The extension of JobKeeper and JobSeeker brings the total cost of Australian Government measures announced since March to $162 billion in 2019-20 and 2020-21 – equivalent to 8.2 per cent of 2019-20 GDP.
The combination of a plunge in government revenue as a result of the weaker economy, together with an unprecedented amount of government spending sees a large hit to the government budget. The underlying budget balance was a deficit of $85.8 billion in 2019-20 compared to an estimate of a $5.0 billion surplus in MYEFO.
Net debt is estimated to be $488.2 billion at 30 June 2020, an increase of almost one quarter on the levels expected in MYEFO. Net debt is forecast to increase by almost two fifths in the current financial year, reaching $677.1 billion at 30 June 2021.
While this is a remarkable change from Australia’s typically low deficits and low levels of public debt, it is affordable and the right thing to do given the challenge being faced. It is worth remembering that a large share of the increase in public debt over the next few years isn’t due to emergency measures, it is because the weak economy leads to losses in revenue. Since MYEFO, parameter and other variations have reduced tax receipts by $91 billion over 2019-20 and
2020-21 – led by falls in personal income tax, company tax and the GST. That means that the best way to fix the budget is to fix the economy. As the economy grows the debt gradually shrinks relative to the size of the economy.
Even with the remarkable amount of government support provided to date, many families are struggling with the terrible trio of high debt, high unemployment, and low confidence.
The household struggle stems from the challenging environment facing businesses across a large number of sectors.
The good news is that many of the hardest hit businesses (including accommodation and food services, and arts and recreation) are showing early signs of recovery. But international borders remain closed, and the usual sectoral victims in a recession will be weakening further. That will be true of:
- Growth-dependent sectors such as construction and parts of manufacturing,
- Pipeline-dependent sectors such as construction and professional services, and
- Discretionary sectors such as entertainment and parts of retail.
At the other end of the scale, some sectors are largely recession-proof, including the public sector, large parts of education, health and the utilities, as well as food and grocery retailing and wholesaling. These will do the heavy lifting for Australia over the next few months – bolstering employment outcomes while providing for our daily needs including food, power, shelter, education and good health.
The eventual recovery in the Australian economy will hinge upon our ability to contain the spread of COVID-19. The greater Australia’s success, the sooner we can transition out of emergency measures for many families and businesses, and the less expensive that new and ongoing measures will be.