Australia has escaped a “technical” recession for nearly three decades and threatens two in just over a year.
The technical definition of a recession is that the economy shrinks two quarters in a row.
The thing that could ironically save Australia is that the current September quarter could be so bad that the three months leading up to Christmas will be tough to get any worse.
Even so, economists concede that there are scenarios where Australia could plunge into recession again this year.
Retail comes to a standstill at first
There are concerns that the latest round of bans will kill some retailers who have struggled through previous disruptions. (
ABC News: John Graham
The first official confirmation of the economic troubles came in the middle of last week when the Bureau of Statistics released its June retail trade report.
Retail was down 1.8 percent for the month – much higher than market expectations of a slight decline, with grocery retailing being the only sector to spike as people stopped eating out and instead cooked at home.
Unsurprisingly, the biggest drop was in Victoria (-3.5 percent), which was lockdown through early June, but even NSW sales fell 2 percent with greater Sydney lockdown at the end of the month.
So is retail shrinkage the canary in the coal mine?
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EY Chief Economist Jo Masters believes this and states that it is “very likely that the economy will contract in the September quarter, with strict lockdowns in New South Wales, Victoria and now South Australia”.
“The closure of construction in Greater Sydney and South Australia means the economic impact will be greater than previous closures.”
Bau warns of impending “disaster” if the Sydney lockdown is extended
There are warnings that construction companies with thousands of jobs will go under if NSW’s lockdown is extended beyond July 30th.
Commonwealth Bank Australia’s chief economist Gareth Aird says lockdowns inherently stall many economic activities.
“When you tell households and businesses to stay home and stop doing things, by definition you are getting less production,” he notes.
He expects the gross domestic product (GDP) to shrink by 0.7 percent in the September quarter, while the unemployment rate is likely to rise in July.
However, he also predicts a renewed spike in economic activity as restrictions ease and people venture back into shopping malls.
“We’re going to have a significant drop in GDP in the September quarter, but to meet the criteria for a technical recession you’d have to have another drop in the December quarter, and I think that’s not the right one right now.” call, “he explains.
“I can’t imagine we’re in a lockdown [in the three months to December] this year as we are at the moment. “
National Australia Bank’s chief economist Alan Oster says his team also anticipate “a negative” [September quarter]”.
The bank assumes that the economic contraction could actually be more than 1 percent.
Again, he does not currently forecast a recession, but admits that it is “difficult to say how long it will take the virus to get under control”.
The lockdown assumption
Economists have many numbers to consider when predicting economic growth (or lack thereof) in the months ahead.
The vast majority of economists now expect a negative September quarter, followed by a recovery in December.
An important assumption that many make in order to arrive at this forecast is that the current locks will not be extended significantly and that there will be no other major locks later this year.
The epidemiology chair at Deakin University Catherine Bennett thinks that is a rosy assumption.
“I think it’s optimistic that we won’t have any more bans after that,” she warns.
“It’s just something we have to be prepared for.
“We can reduce the likelihood of bans by increasing our vaccination rates.”
“This is how the country comes out of COVID”
NAB chief Ross McEwan says a “double-dip” recession is unlikely, but warns that some of the bank’s unemployed clients may need to consider selling their homes.
This is in line with what Dr. NSW’s chief health officer, Kerry Chant, said Friday regarding a big surge in vaccination rates as the most effective and permanent way out of current restrictions.
It is now clear that the delta coronavirus strain outbreaks have created a direct link between the number of Australians who will be vaccinated in the coming weeks and the intensity of the economic downturn we are now feeling.
There is also the possibility that we are already in a recession.
If overall economic output, or GDP, has shrunk in the three months to June (which we won’t know until September) then it is virtually certain that we are now in a recession.
The “baseline” forecast from AMP Capita is that the Australian economy grew 0.4 percent in the June quarter.
However, chief economist Shane Oliver admits that it is “possible” but not “likely” that the economy is already in recession.
An economic tracker compiled by AMP shows the effect of repeated bans on activity.
Pushing the June quarter aside, CommSec’s economic research team points to the potential for a double-dip recession as the economy won’t recover later this year.
“With roughly half of Australia’s population and economy now under tough lockdowns, the country’s ‘V’ shaped economic recovery could quickly turn ‘W’ shaped if persistent COVID-19 outbreaks are not brought under control,” he wrote Online brokers in a note.
Answer of the directive
If the economy turns south because businesses and consumers do not contribute to GDP, the government can of course follow suit with increased spending (fiscal policy).
Prices held at record lows
The Reserve Bank governor says Australia is likely to maintain record-low interest rates longer than other developed countries due to weaker wage growth.
Governments have so far provided around $ 5 billion in disaster relief payments to businesses and households to offset the recent blow to workers and their employers.
By the end of last week, Prime Minister Scott Morrison confirmed that Services NSW alone had received over 518,000 requests for financial assistance.
It is becoming more and more likely that Reserve Bank policy makers will decide not to “cut” or “cut back” the bank’s bond-buying program (which is designed to drive interest rates down), as announced recently.
There is even a possibility that the RBA may actually expand its stimulus policy.
EY’s chief economist Jo Masters wrote this:
“A key question is whether there is enough fiscal support to keep household and corporate spending recovering at the same pace as it was during previous lockdowns.”
The good news
When looking at the strength of an economy in terms of GDP, the international sector (exports and imports) must also be taken into account.
The good news is that Australia’s trading position remains robust.
Earn more than we spend
For the first time since the early 1970s, Australia consistently earns more than it pays off the rest of the world.
Last week, the Bureau of Statistics reported that “the value of goods exports rose 7.5 percent in June to a record high of $ 41.3 billion.”
“The merchandise surplus reached a record high of $ 13.3 billion in June, with the value of imported merchandise up 8.2 percent for the month to $ 28.0 billion.”
The export sector will continue to dampen the economy in the coming months.
Where is that for us?
The economy is being hit again by the coronavirus and its impact on lives and livelihoods.
There are a significant number of uncertainties that forecasters face.
To put it simply, if Australia saw a huge spike in vaccination rates, achieved herd immunity and more permanent easing of restrictions in the next few months, we would likely see a nasty spike in the history of the coronavirus economic recovery, but that’s it.
However, this scenario is becoming increasingly unlikely.
The bottom line is that if the Delta Tribe stays in the NSW parish, the longer the restrictions are likely to last and the greater the economic damage (since NSW is the largest contributor to national economic output).
Commsec economist Ryan Felsman sums it up:
“Longer and more frequent closures – due to the highly contagious COVID-19 Delta variant – could put company balance sheets under pressure at a time when labor costs are already rising.”
The hard-to-swallow truth is that we are once again exposed to the credible risk of yet another Australian recession.
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