OECD Economic Outlook, Volume 2020 Issue 1

Australia

Economic activity collapsed in the second quarter of 2020, as lockdown measures to fight the pandemic required many businesses to suspend activities and consumers to stay home. However, confinement has been less strict than elsewhere thanks to the relatively mild virus outbreak. Massive macroeconomic policy support, including a temporary wage subsidy, is limiting the economic shock. Most economic restrictions are planned to be unwound by July. However, should widespread contagion resume, with a return of lockdowns, confidence would suffer and cash‑flow would be strained. In that double‑hit scenario, GDP could fall by 6.3% in 2020. Even in the absence of a second outbreak, GDP could fall by 5% in 2020.

There is ample fiscal space to support the economic recovery as needed. The scarring effects of unemployment – especially for young workers – should be alleviated through education and training, as well as enhancing job search programmes. Firms should continue to be supported, including through expanded loan guarantees, accompanied by expedited insolvency procedures. The authorities should be considering further stimulus that may be needed once existing measures expire at the end of the third quarter 2020. Such support should focus on improving resilience and social and physical infrastructure, including strengthening the social safety net and investing in energy efficiency and social housing.

Australia has been relatively spared, so far, from the COVID‑19 outbreak

Australia’s first cases were identified in two eastern states on 25 January. Infections rose sharply during the first three weeks of March. However, testing expanded quickly and the number of new cases appears to have peaked in late March. Demands on the health system have been manageable, helping to contain the number of deaths at comparatively low levels.

Australia: Two scenarios of real GDP and labour market

Source: OECD Economic Outlook 107 database; and OECD Short‑Term Labour Market Statistics.

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Australia: Demand, output and prices (double-hit scenario)

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Initially, containment measures limited travel to Australia from specific countries. However, by 20 March, only residents and immediate family members were allowed entry, with self‑isolation requirements. Several states discouraged interstate travel and remote indigenous communities closed entry to protect their more vulnerable populations. As the virus spread during March, distancing measures ramped up. By 29 March, gatherings of more than two people (except households) were forbidden and some non‑essential business activities and places of public gathering were closed. Some states imposed stricter conditions. To support the health system, governments provided additional funding, reoriented service delivery methods and entered into partnerships with private healthcare providers. In late April, a voluntary app was launched to help track and trace infections. In May, governments began relaxing earlier measures with the aim of removing most economic restrictions by July.

Activity has contracted sharply due to the pandemic

The virus struck an economy experiencing slower investment and the effects of severe drought and catastrophic bushfires, ending a 29-year economic expansion. Business and consumer sentiment plunged, beyond the depths of the global financial crisis, but appear to have partly recovered with the easing of restrictions in May. New temporary wage subsidies – the “JobKeeper” programme – are stemming unemployment. Nevertheless, job losses have been considerable, particularly in hospitality and entertainment. The measured official unemployment rate surged to 6.2% in April, accompanied by a significant drop in the participation rate. Services exports – including tourism and education ‑ have fallen particularly sharply in recent months.

Australia: Demand, output and prices (single-hit scenario)

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Expansionary macroeconomic policies are supporting households and firms

Between March and May, federal and state governments announced direct fiscal support amounting to over 8% of 2020 GDP, concentrated in the second and third quarters of 2020. The JobKeeper wage subsidy is equivalent to over 3½ per cent of GDP. Cash‑flow assistance for firms and a doubling of the value of unemployment benefits with expanded eligibility are also supporting incomes. Other announcements include increased health spending, loan guarantees for small businesses, moratoriums on evictions and easier access to retirement savings. The central bank cut its policy rate by 50 basis points during March, to 0.25%, and introduced a target for the yield on 3‑year Australian government bonds of 0.25%, alongside other measures. The financial services regulator eased prudential regulations, enabling banks to offer 3‑6 month loan payment holidays to affected SMEs and households.

A fast recovery is possible but damage will remain

Economic restrictions are assumed to continue to unwind gradually and income support measures to expire in September. In the double-hit scenario, the reinstatement of restrictions is assumed to be accompanied by further income support and other policies at a reduced scale. Continued restrictions on international travel throughout 2020, together with Australia’s geography, imply that a second outbreak could be smaller than elsewhere.

The economic contraction is concentrated in the second quarter. Activity recovers as restrictions ease and consumers’ options expand. However, lost earnings, higher unemployment levels, and ongoing caution temper consumption. Reduced demand, more fragile finances and uncertainty weigh on business investment. These headwinds are larger in the double-hit scenario due to prolonged financial stress, together with greater uncertainty, whereas confidence aids a faster recovery in the single‑hit scenario. Consequently, 2020 GDP is projected to fall by 6.3% in the double‑hit scenario and 5% in the single‑hit scenario. In both scenarios, waivers of childcare and other fees, together with lower fuel prices, are temporarily lowering consumer prices. The underlying inflation rate will remain subdued. A key risk to the outlook is that high household indebtedness results in debt‑servicing problems, potentially amplified by a housing market downturn, and derails the recovery. On the other hand, the recovery would be faster if sentiment rapidly rebounds.

Further policy measures would help secure the recovery

Australia’s ample fiscal space permits a strong response to a second outbreak or if the recovery falters. In particular, some income support measures may need to be extended beyond their September expiry date. To bolster employment growth, the government plans to improve the skills training system and encourage industrial relations reform. It could also further promote reskilling and upskilling through adult education and enhance job search programmes. Expanded loan guarantees, coupled with accelerated insolvency processes, could reduce scarring for entrepreneurs and facilitate a more dynamic recovery. The government has recently announced plans to support particularly hard‑hit sectors, including a stimulus package for construction. The authorities should also ensure that the social safety net is adequate and consider further investment in energy efficiency improvements and social housing. Continuing efforts to test, track and trace, as well as promoting digital means of accessing healthcare, could improve outcomes and enhance preparedness for further outbreaks.