Australia’s economy could contract by 6.3 per cent this year if there is a second wave of coronavirus infections, according to the OECD’s latest economic outlook.
- The OECD’s latest economic outlook makes predictions for growth and jobs based on two scenarios
- If a second outbreak of coronavirus occurs, Australia’s growth will fall by 6.3 per cent this year, and global growth will fall by 7.6 per cent
- The report calls for further stimulus including extending JobKeeper, but some economists question whether there’s been too much stimulus already
The report urges the Morrison Government to introduce further policy measures to support households and businesses, including extending income support payments, such as the $70 billion JobKeeper wage subsidy, and building social housing.
Despite Australia hitting its first recession in 29 years, the report said Australia’s economy has been relatively spared, so far, from the COVID-19 outbreak.
Macroeconomic policy support including JobKeeper had limited the economic damage, it said.
JobKeeper changes are on the way
After the Government announced that payments to workers in the childcare sector would end this month, other businesses could face the same fate.
While shutdowns and social distancing restrictions are being eased, the report warned that a possible second wave of COVID-19 infections would detract from growth more sharply.
“Should widespread contagion resume, with a return of lockdowns, confidence would suffer and cash flow would be strained,” the report said.
“In that double-hit scenario, gross domestic product (GDP) could fall by 6.3 per cent in 2020.
“Even in the absence of a second outbreak, GDP could fall by 5 per cent in 2020.”
Reduced consumer demand and uncertainty weighing on business investment could lengthen the time it takes to recover.
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“These headwinds are larger in the double-hit scenario [a second wave of infections] due to prolonged financial stress, together with greater uncertainty,” the report warned.
“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.”
It said in the best-case scenario, Australia’s unemployment rate would hit 7.4 per cent this year and 7.6 per cent next year.
And in the “double-hit” scenario, it would hit 7.6 per cent this year and 8.8 per cent next year.
Prime Minister Scott Morrison is being urged to introduce further policy measures to support households and businesses amid the coronavirus crisis.(ABC News: Ian Cutmore)
Global growth could fall by 7.6 per cent in 2020
The OECD suggests if a second outbreak occurs, triggering a return to lockdowns, world economic output is forecast to plummet 7.6 per cent this year before climbing back 2.8 per cent in 2021.
At its peak, unemployment in the OECD economies would be more than double the rate prior to the outbreaks, with little recovery in jobs next year.
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“In many advanced economies, the equivalent of five years or more of per capita real income growth could be lost by 2021,” the report said.
If a second wave of infections is avoided, global economic activity is expected to fall by 6 per cent in 2020 and OECD unemployment will climb to 9.2 per cent.
The economic impact of strict and lengthy lockdowns would be particularly harsh for some countries.
Euro area GDP is expected to plunge by 11.5 per cent this year if a second wave breaks out, and by more than 9 per cent even if a second hit is avoided.
GDP in the United States will take a hit of 8.5 per cent and 7.3 per cent respectively.
US President Donald Trump is being warned by the OECD that GDP in the United States could take a hit of 8.5 per cent.(Reuters: Kevin Lamarque)
The report said governments and monetary authorities had reacted “remarkably quickly” to the crisis, reducing the spread of the virus and preventing an even larger economic and financial collapse.
In Australia, between March and May, federal and state governments announced direct fiscal support amounting to over 8 per cent of 2020 GDP. The JobKeeper wage subsidy was equivalent to over 3.5 per cent of GDP.
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But the OECD said Australian authorities should be considering further stimulus after September.
“Extraordinary policies will be needed to walk the tightrope towards recovery,” OECD chief economist Laurence Boone said.
“Higher public debt cannot be avoided, but debt-financed spending should be well-targeted to support the most vulnerable.”
While the JobKeeper wage subsidy was helping keep official unemployment figures low, job losses had been wide and especially harsh in hospitality and entertainment.
“In particular, some income support measures may need to be extended beyond their September expiry date,” the report said.
It suggested the “scarring effects of unemployment”, especially for young workers, be alleviated through education and training, and that firms continue to be supported with longer loan guarantees.
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The report also suggested more government investment in social and physical infrastructure.
“The authorities should also ensure that the social safety net is adequate, and consider further investment in energy efficiency improvements and social housing,” it said.
Have policymakers already gone too far with stimulus?
ANZ chief economist Richard Yetsenga said it is possible that policymakers had gone too far with the stimulus measures.
“The risk is rising that policymakers have delivered an easing that presupposes more severe outcomes than the pandemic has caused in most economies to this point,” Mr Yetsenga said in a research note.
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During the global financial crisis, policymakers waited for economic and financial sector weakness to unfold before they moved.
This time around, policymakers had moved ahead of the data and easing had been widespread globally, including in emerging markets.
“The fiscal stimulus is about triple that of the GFC, according to the IMF,” Mr Yetsenga said.
“As well, because interest rates in many economies were very low before this crisis began, central banks and governments have stepped up with direct lending schemes.
“These can negate any hesitancy on the part of commercial banks to lend in an environment where they might become more cautious about risking capital.”
While some sectors, including airline travel, international tourism, international education, the arts, some restaurants and retail, were in trouble, these sectors tend to be large employers, often for women or young people, and at less than full-time hours.
“Investment in these sectors is likely to be correspondingly weak,” he warned.
He said the pandemic has also tended to impact ethnic minorities and migrants disproportionately.
“The one important legacy of this crisis may be a discrete deterioration in inequality,” he said.
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