The Australian economy stabilised through the September quarter. Health restrictions were eased, income support flowed and many businesses were able to reopen – but the recovery has been uneven, especially in Victoria. To date the greatest impact is on the young, females, small businesses and sectors like tourism directly impacted by restrictions.
The latest forecasts from Treasury are for the Australian economy to shrink by 3.75 per cent in 2020, and then rebound by 4.25 per cent in 2021. This strong rebound still leaves the economy smaller at the end of 2021 than it was at the end of 2019. While this may sound like a ‘V’ shape recovery, it’s not. The most likely recovery profile remains a ‘saw-tooth’ – its peaks and troughs dependent on the unfolding health crisis, fiscal response and border openings and consumer and business confidence.
The outlook for households remains challenging. After peaking in July, the unemployment rate has fallen, but momentum in job recovery is slowing. Unemployment is expected to rise from the current level of 6.9 per cent, to a peak of around 8 per cent by the end of the year. Further job losses are also likely going into 2021 as JobKeeper winds down.
Excess capacity in the labour market is expected to linger for some years, weighing on already weak wages growth. Constrained households have benefited this year from direct support payments, early access to superannuation and loan repayment deferrals. This support has not only enabled households to meet living expenses, but also to pay down debt and boost savings. However, in the December quarter, households will receive $20 billion less in direct support than the September quarter, with further tapering over 2021.
With the rise in disposable income in the June quarter unlikely to be repeated, households will have to adjust to lower incomes. The question is, will they plug the gap with savings and smooth consumption, or pare back spending and continue to build financial buffers? Consumers appear to be reining in spending. September’s retail trade data showed the second consecutive monthly decline in spending. Payroll data also suggests that, as companies lose direct support, insolvencies may rise over the year ahead, especially in small businesses.
Credit data also suggests firms are sitting back and taking stock. Non-financial business credit contracted for four consecutive months between May and August, with firms boosting deposits and shoring up cash flow.
The RBA has made it clear that record low interest rates are unlikely to rise in the next three years. The RBA appears to be more comfortable with the prospect of lower interest rates driving up asset prices, particularly house prices, with RBA Governor Lowe arguing this can help financial stability by reducing the likelihood of problem loans.
In general, house prices have remained resilient throughout the crisis. After falling for five consecutive months, national dwelling prices turned in October and are now just 1.7 per cent below April levels and 2.0 per cent below their 2017 peak. This, in conjunction with low interest rates, supported first home buyers and encouraged high quality borrowers to draw down on credit. However, falling net-migration is reducing demand for housing, and the long construction lead time on new housing, particularly units, means new supply is still coming to market. Meanwhile, investor interest in residential property has fallen in the face of rising vacancy rates and falling rents.
Loan deferrals have temporarily supported the housing market but, as they come to an end, default concerns rise. Banks have assessed that around 15 per cent of deferred loans are at risk of not being able to resume repayments when the deferral period ends.[1]
While the near-term outlook for the Australian economy is uncertain, the Government has plenty of scope of for additional fiscal support. Importantly, medium-term prospects remain positive, particularly once borders open. Although population growth is expected to be weak this year and next, Australia remains a desirable destination for skilled migrants. The rise of Asia’s middle class, not just China’s, will continue to support demand for high-quality Australian goods and services.
New Zealand
In New Zealand, where each of the major Australian banks has operations, the economy contracted by 12.2 per cent over the June quarter. This was the largest quarterly contraction on record, marking the start of a technical recession. Economic activity has since recovered as restrictions have eased and Government support has cushioned the blow. Indeed, household spending has been quite solid while demand for housing and house prices have continued to accelerate.
Like Australia, New Zealand is facing a number of challenges, the unwinding of income support, as well as the need to safely open up international borders and allow for the return of tourists and importantly migrants. The labour market held up well over the June quarter, supported by the government’s wage subsidy program, however the latest figures for the September quarter show unemployment has risen by 1.3 percentage points to 5.3 per cent. Moreover, net migration, which has been supported by New Zealander’s returning home has started to slow.
The prospect of negative interest rates set by the Reserve Bank of New Zealand are likely to be on the table for next year. Whilst negative interest rates are intended to support both the currency and domestic demand, those settings present a challenge the banking system may have to grapple with over the course of 2021.
Despite these challenges for the next year or so, New Zealand’s medium term prospects remain positive, particularly as a desirable destination for skilled migration and tourism and given New Zealand’s deep comparative advantage in agriculture.