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The economic state of play

The economic state of play

The Australian economy is in an unprecedented situation. We are in the middle of our first recessions since the early 1990s, driven by deliberate measures to control the spread of the coronavirus. We spoke with Belinda Allen, Director of Economics at CommBank, to hear about how the economy has performed in the first half of 2020 and share her expectations of the next financial year.

Already this year, bush fires have raged across large parts of the country, flooding followed in Southern Queensland, a ban was imposed on all visitors from mainland China, which had obvious negative implications for the tourism and education sectors, and by late March many businesses were closed because of COVID-19 related shutdowns. It is no surprise that during the March quarter. Australia saw a contraction in economic growth, at -0.3% of GDP (gross domestic product).

 

Unemployment rates:

“The labour market has deteriorated and we expect it to deteriorate further,” Belinda acknowledges. “This recession will be unlike no other, with the worst of the economic downturn to be felt in the second quarter of 2020, and the month of April will likely, in hindsight be the worst.”

In April and May there was a combined fall in employment of 835k and the unemployment rate has risen from 5.2% to 7.1%. For businesses, a rising unemployment rate has a flow on effect and can indicate lower consumer spending and lower demand for non-essential products. Belinda also comments that the official unemployment rate is being masked by the JobKeeper Package and a fall in participation rate:

  • The JobKeeper package: With the Federal Government currently paying the wages of around 3.3 million eligible workers, even employees working zero hours remain paid and counted as employed. This package is due to end in September.
  • Fall in the participation rate: Women and younger workers dropped out of the workforce in higher proportions as juggling home schooling, health fears and as employment opportunities dried up in the areas that are generally larger employers of women, casuals and younger workers - retail, tourism and hospitality. This fell from 66% in March to 62.9% in May.

 

Economic outlook:

For many businesses, recessions spark fear of hire cut backs, limited business spend, and a halt to research and development opportunities. Recessions are never easy for businesses and it’s always a good idea to pause and review your business plan, as well as:

  • Close management of delays to payments and purchases
  • Employee morale and the impact of staffing reductions
  • Marketing constraints and continuing to reach your established customer base

According to Belinda, there are four major drivers of the recession in Australia. 1. Border restrictions. 2. Social distancing requirements. 3. Changing household and business behaviour 4. Government stimulus measures.

  • Border restrictions are likely to be in place for most of this year. “This is impacting international tourism and education exports, which together make up 3% of Australia’s economy (with China the largest source of both).” Belinda said, “With two-thirds of population growth currently driven by migration over time, reduced net overseas migration could see Australia’s population growth fall to just 0.6% per annum down from the current 1.4% per annum growth. This will lower demand for housing, reduce labour supply and could have far reaching economic consequences if permanent.”
  • Social distancing measures: In addition to fear of infection, many shops and services, including restaurants, bars, beauty salons and gyms, and often bricks and mortar retail shops were closed, limiting spending. Weekly spending data on CBA credit and debit cards was down 20% on the same period a year ago in mid-April. This has recovered slowly as more parts of the economy have reopened. For the week ending 12 June, spending was 6% higher on the same week a year earlier. A transition from cash to card flatters this number as many places moved to contactless pay, while we also saw online spend rise faster than instore spend.
  • Changing household and business behaviour: According to Belinda, an attempt to build and re-shore manufacturing capabilities is not easy but the conversation will likely occur following the offshoring of high demand/short supply products (like medical supplies) during the early stages of the pandemic. It is less clear if old spending patterns will resume once the economy reopens. Will working from home become more prevalent? Will this change our demand for office space and where transport links, shops and ancillary services need to be located? Could it also reduce our collaboration and innovation and lower Australia’s investment and productivity growth?
  • Government stimulus: The government share of the Australian economy was already on the rise and was at a record high in the March quarter at close to 20% of GDP.  Government spending has been increased and this will likely continue as we recover from the recession. Government debt will be elevated as well, although this is occurring at a time of record low interest rates.

 

Overall, Belinda expects the Australian economy to recover. The CommBank Global Economic & Markets Research team anticipate the economy to grow in the second half of 2020. This means that overall they expect a contraction of around 4% in 2020 and for it to recover by around 3% in 2021. However, it will take many years for the unemployment rate to fall from the near 8 ½ % they expect it to reach in coming months.

For more information on how changes to the economy may affect your business, watch the CommBank Small Business Online Panel, view the latest economic insights reports or listen to the CommBank Global Economic & Markets Update podcast.

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