Recession fears loom as Australia battles new COVID outbreaks

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July 22 2021
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The Australian economy is expected to shrink over the September quarter, with lockdowns reversing economic gains over the last six months, top economists have revealed.

Recession fears loom as Australia battles new COVID outbreaks

Australia’s economic health is set to be put on life support, as Sydney and Melbourne – which contribute about 44 per cent of GDP – are put on ice to stop the spread of COVID-19.

As such, Australia’s economy is set to fall, with Westpac, Commonwealth Bank and AMP all pointing to a negative September quarter.

Westpac chief economist Bill Evans and senior economist Andrew Hanlan have now revised estimates for Australia’s GDP growth, with the pair opining the economy could contract by 0.7 per cent over the September quarter.

“For NSW, output is estimated to contract by around 3.1 per cent in the September quarter, and even with a bounce back in the following quarter there is a net loss of output, relative to our earlier baseline, of 0.9ppts (from 2.25 per cent to 1.35 per cent)”, the economist said.

“For Victoria, output is estimated to edge into contractionary territory, declining by 0.1 per cent in the September quarter, with a net loss of output over the second half of 2021 relative to the previous baseline of 0.3ppts (from 2.2 per cent to 1.9 per cent).”

While not putting a figure on the expected GDP drop, Commonwealth Bank confirmed to nestegg that Australia is sure to see a fall in economic activity over the September quarter.

However, both Westpac and CBA are predicting Australia might just avoid a recession on the assumption the vaccine rollout is successful.

AMP Capital’s chief economist, Dr Shane Oliver, was less optimistic, noting the current lockdowns in Victoria, South Australia and Sydney will cost a combined $12 billion.

“We had already revised down our September quarter GDP forecast to flat, but this will likely now take it negative at around -0.7 per cent,” he said.

“But, of course, this assumes the lockdowns outside NSW are short and NSW’s lockdown ends by mid-August after which activity rebounds.”

The economist now predicts a 1.8 per cent rebound in the December quarter, meaning growth through during the course of 2021 would sit at 3.3 per cent year-on-year, which is a generous revision down from AMP’s previous forecast of 4.8 per cent.

Unconventional policy set to continue

Casting an eye over to the RBA, Westpac is confident the current lockdowns will see the Reserve Bank of Australia continue to usher support into the economy but via lowering rates.

While the bulk of the financial support is tipped to come through fiscal measures, Mr Evans believes the RBA will continue to support the economy, through its unconventional policy of buying up bonds.

“With interest rates at the lower bound, the RBA sees its bond buying program as its effective policy instrument until the conditions are in place to begin raising rates,” Mr Evans said.

According to Mr Evans, there is a possibility that a decision could be made to lift purchases from the week of 10 September to $6 billion per week with a review in November.

“Lifting purchases to $6 billion per week would send the right signal that the board was prepared to use its new flexible policy tool to respond to changing economic conditions,” he continued.

“If our forecasts prove to be correct, a September decision to lift purchases on a temporary basis would be entirely reasonable.

“A lift in purchases from the $5 billion to $6 billion would mean an additional purchase program of a modest $10 billion out to November but would be an effective signal that the RBA is prepared to use its policy tools flexibly to address any unexpected economic developments,” the economist concluded.

About the author

Cameron is a journalist for Momentum Media's nestegg and Smart Property Investment. He enjoys giving Aussies practical financial tips and tricks to help grow their wealth and achieve financial independence. As a self-confessed finance nerd, Cameron enjoys chatting with industry experts and commentators to leverage their insights to grow your portfolio.

About the author

Cameron is a journalist for Momentum Media's nestegg and Smart Property Investment. He enjoys giving Aussies practical financial tips and tricks to help grow their wealth and achieve financial independence. As a self-confessed finance nerd, Cameron enjoys chatting with industry experts and commentators to leverage their insights to grow your portfolio.

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