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Recession expected this year, unemployment of 7.8%, high government debt

Recession expected this year, unemployment of 7.8%, high government debt

This article was developed by the Global Economic & Markets Research team.

CommBank has updated its forecasts for economic activity, the labour market, inflation and the government’s budget position.

  • We expect the Australian economy to contract by 7.5% in the June quarter and by 3.4% in 2020
  • The unemployment rate is forecast to reach 7.8% in the June quarter and end 2020 at 6.8%
  • The Australian Government’s budget will likely post a $A72 billion deficit in 2019/20 and $A155 billion deficit in 2020/21

On 2 April, CommBank’s Research team updated its economic forecasts. It has put some numbers around what might happen in the economy over the remainder of the year. 

Australia in recession

A common measurement of economic activity is growth (or contraction) in Gross Domestic Product (GDP). Australia has recorded 28 years of uninterrupted growth in GDP. The coronavirus is expected to have ended that. We expect a massive contraction in GDP of 7.5% in the June quarter. Economic activity also likely contracted in the March quarter. Since a common definition of a recession is two consecutive quarters of negative economic growth, Australia will be in a recession in 2020. 

We expect growth to recover somewhat in the September and December quarters but forecast negative growth over the year of -3.4%. 

Although that is quite a deep recession for Australia, most major economies – the US, Europe and East Asia – will also likely experience a recession. China is a possible exception. In the US we expect a recession at least as deep as during the Global Financial Crisis (GFC) 12 years ago.

What’s driving the economic downturn?

Consumer spending accounts for around 60% of the Australian economy. Given people can’t leave their homes to spend money on anything but essential items, plus many household incomes are likely to be affected by job losses, we expect consumer spending will fall by 11% in the June quarter. 

Our weekly credit and debit card spend data already shows that spending on services, such as in restaurants, has fallen sharply and now spending on goods is also beginning to slow. Spending on food, alcohol and healthcare will likely be higher than usual but not enough to offset the fall in spending in other areas.

Unemployment jumps

You may have seen forecasts last month for much higher rates of unemployment but the Federal Government’s JobKeeper program (announced on 29 March) does change the outlook. The program will keep millions of workers on companies’ books even if they don’t have work to do. So, they won’t be included in the unemployment numbers.

Inflation stays low

We expect inflation of between 1.6% and 1.7% this year.

Federal Government budget takes a hit

The Federal government was previously forecast to record budget surpluses in 2019/20 and 2020/21. But due to the Federal Government’s coronavirus related stimulus packages, and lower tax revenue because many chunks of the economy are shut down, we expect budget deficits of $A72 billion in 2019/20 and $A155 billion in 2020/21. That is equivalent to 8.1% of GDP.

Source:  Commonwealth Bank of Australia, Global Economic & Markets Research report “Issues: GDP to plunge, unemployment to spike and an unprecedented fiscal deterioration”, published 2nd April, author Gareth Aird. Full Global Economic & Markets Research disclaimers can be found at www.commbankresearch.com.au.

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