Australia’s fragile economic recovery rests on virus containment: Reuters poll

Australia’s economy will rebound in coming months as life returns to some sort of normal, though much depends on whether authorities can keep a lid on new coronavirus outbreaks in its two biggest cities, a Reuters poll found.

The latest Reuters poll predicted Australia’s A$2 trillion ($1.43 trillion) of annual gross domestic product (GDP) would still shrink a stark 3.8% for 2020 as a whole, and suffer its first recession since 1991.

Yet the economy is predicted to expand 1.3% this quarter and next, following an expected 7.0% slide in the June quarter when much of the economy was locked down.

Growth of 3.1% in 2021 was the median forecast in the July 13-21 poll of 35 analysts, though it will likely be a couple of years before all the COVID-19-related losses are made up.

Australia had been more successful than many of its peers in containing the virus and re-opening its economy, but suffered a setback this month when Melbourne had to be locked down again to combat a fresh outbreak.

A small number of new cases have also appeared in Sydney, threatening to stall the recovery.

Crucially, the government responded by extending key job support programmes by another six months to the end of March, so avoiding what analysts had feared would be a “fiscal cliff” for the economy in September.

“At an aggregate level the reduction in household income from job losses has been more than offset by an increase in government benefit payments,” said Gareth Aird, CBA’s head of Australian economics.

“This means there has been a positive shock to household income despite the economy being in recession. It now looks like household income will be well supported right through until March.”

The cost will be government borrowings of hundreds of billions of dollars, but so far demand for the debt has been strong and bond yields remain close to historic lows.

The Reserve Bank of Australia (RBA) is doing its part by pledging to keep rates at a record low of 0.25% for years to come, while providing cheap funding to banks.

Analysts doubt all this stimulus will be any threat to inflation, with forecasts for consumer prices more than halved to just 0.6% for 2020 and trimmed to 1.6% for 2021. In April the respective forecasts were for 1.5% and 2.0%.