Melbourne-based NAB chief economist Alan Oster has been in the profession for more than 40 years and he’s seen a fair few economic crises in his time, but nothing compares to this.
- NAB warns there is a 50-50 chance the recession Australia is in will extend to the end of September. Others warn it may last all year
- Victoria is likely to see a further 10-15 per cent blow to its economy from the new, tougher lockdowns. The state accounts for nearly a quarter of Australia’s GDP
- Grattan Institute CEO Danielle Wood says the closure of childcare and schools will force many people out of the workforce
He can’t even visit his son who lives more than 5 kilometres away.
“In terms of sharpness in the decline in activity, this makes the recessions in the 80s and 90s look like child’s play,” Mr Oster says.
“Unemployment did get to 11 per cent in the 1990s recession, but it took two years to get there.”
National Australia Bank will update its forecasts next week after the results of its latest business conditions survey.
But Mr Oster already knows what to expect.
“I would expect conditions, or certainly confidence, to go deeply south compared to where it was,” he says.
Recession could last ‘whole calendar year’
It’s generally accepted that Australia recorded two successive quarters of negative growth in the March and June quarters, even though the latest National Accounts numbers won’t be unveiled for another month to confirm it.
But now, NAB’s number crunchers aren’t sure the recession will end at June.
NAB had already downgraded its September quarter GDP forecast from 3 per cent growth to 1 per cent after the Federal Government’s July Budget update.
It now thinks the blow to Victoria, which accounts for nearly a quarter of Australia’s GDP, could be between 10 and 15 per cent in the three months to September.
The likelihood of that prolonging the national recession is 50-50, according to Mr Oster.
“A bigger hit to the construction sector in Victoria could prolong the recession. We could have three quarters of negative growth,” he warns.
“That is not our current forecast, but it could well and truly happen.”
The Grattan Institute’s Danielle Wood is even more certain of a prolonged recession because of the events in Victoria.
“There was already talk that the December quarter could be negative anyway because of the withdrawal of government support, and I think that’s even more likely now,” she says.
Deloitte Access Economics partner Nicki Hutley agrees.
“We’ll go in harder and deeper. It’s important to hear that the economy will recover but we’re really in a perilous position.”
The last time Australia’s economy went backwards for four consecutive quarters was between September 1982 and June 1983, which ultimately sealed the fate of the Fraser government, ousted in early 1983 by Bob Hawke.
Government support ‘keeping the economy alive’
Both Ms Hutley and Ms Wood see events in Victoria underlining the importance of maintaining adequate government support beyond September and extending the current level of assistance to Victoria at least.
“The support measures are working,” Ms Hutley says.
“We know from the bank data that all these support measures are being spent. They’re keeping the economy alive.”
In July, the Federal Government forecast a six-week lockdown in Melbourne would be a $3.3 billion hit to the national economy.
According to NAB, a three-and-a-half-week extension would increase the loss to $5.2 billion, or 0.3 per cent of GDP. But it could be worse because the restrictions have been tightened and there are indirect impacts from an extended lockdown.
It’s the psychological impact which Mr Oster worries about most.
“If we get signs [in our business survey] that it’s affecting confidence and forward orders etc outside Victoria, that could prolong the recession,” he says.
“It’s people saying, ‘This could happen in New South Wales too.’
“That’s the sort of second-round effects that you just can’t be sure of.”
Sydney-based Ms Hutley agrees it isn’t just the virus that’s highly contagious.
“The effect on confidence is huge,” she says.
Melbourne is also home to the country’s biggest container terminal and Australia’s major transport and logistics hub.
While activities there will continue, the tighter restrictions on travel will slow down the process and add to supply delays on a whole range of products headed to businesses across the country.
The Australian Industry Group’s chief economist Julie Toth says: “For example, most of the workers at Port Melbourne probably live further away and they’ll be caught in the travel-restriction bottlenecks across the city as they attempt to get to work.”
“In practical terms, the movement restrictions slow everything down.”
Closed childcare will slash working hours
The decision to close childcare will also significantly hamper Victoria’s ability to service the rest of the nation and its own economy, according to Ms Wood.
“Employees relying on that care work 25 to 30 hours a week on average. Now parents are going to have to find that time in their week to look after their children,” she says.
“Most people can’t rely on grandparents because of the health restrictions. If both parents are working they’re probably going to have to cut back on hours.”
Ms Wood can see people dropping out of the workforce over and above what might happen because of the recession.
Strangely enough, it might help keep a lid on unemployment, she adds, “but it’s not a great outcome from an economic perspective”.
In its July update, the Federal Government forecast a peak unemployment rate of 9.25 per cent by December, but Mr Oster thinks that now looks far too rosy.
Although, the NAB chief economist is reluctant to provide his own estimate, given the uncertainty around the situation.
“I would suspect unemployment will go pretty high and probably not peak until the March quarter,” is as far as he will go.
In April, as the lockdowns were in full swing, RBA governor Philip Lowe delivered an extremely optimistic narrative about the economy’s future, but he did also warn that if there was a second wave all bets would be off.
Even though the second wave is so far only hitting one state, even if it remains confined, there is a danger Victoria will drag the nation’s economy along with it in a renewed tide of pessimism.