A recession in Australia during the first half of this year is inevitable, a leading economist says.
In an online presentation delivered on Tuesday, BIS Oxford Economics Chief Australia Economist Sarah Hunter declared that it was no longer plausible to expect that Australia could avoid a recession in the first half of this year brought about by dislocation associated with COVID-19.
“Given the size of the dislocation that we are looking at, we now think that even with the government’s stimulus package announced last week and the support that this will provide, we don’t think it is going to be possible for the economy to avoid a recession,” Hunter said.
According to Hunter, the economy will contract by around 0.5 percentage points in the current quarter amid a loss of income from students and tourism along with the hangover from the bushfires.
In the second quarter, she said precise forecasts are difficult as the impact depends on the extent of any lockdowns.
Nevertheless, Hunter said prospects for this quarter are ‘very negative’ notwithstanding government stimulus measures.
According to Hunter, the fallout from the virus globally and in Australia will come both from supply chain disruption and lower demand from both business and consumers.
On the former point, she says supply chains are being affected by the disruption of activity in China.
This is particularly happening with electronics, textiles, non-metallic materials and rubber and plastics along with items of capital equipment such as heavy machinery.
Regarding demand, Hunter said the virus will affect both business investment and consumer spending.
On the former issue, BIS expects private sector investment to drop by around five to six percent in both 2019/20 and 2021 as investment plummets in machinery and equipment and continues to be negative in both housing and non-residential investment.
On consumer spending, Hunter sees a ‘very big negative shock’.
This is borne out, she says, not only in metrics which BIS tracks such as restaurant bookings but also generally emptier streets, shops and cafes.
More encouragingly, Hunter says prospects are brighter toward the latter half of the year and into 2021.
Worldwide, she says infections are expected to peak at around May to June – albeit with Australia facing greater difficulty as winter approaches.
With that in mind, Hunter says the economy is likely to return to very subdued levels of growth in the third quarter followed by quarterly year-on-year growth rates of five percent or greater in the final quarter and extending into early 2021.
This will be supported by government efforts worldwide to restart economic momentum.
“We are going into the worst in terms of disruption and dislocation,” Hunter said.
“But we will come out the other side we would expect by the end of this year and things will get better.”