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Growth Rate Slashed – RBA Should Respond

Following the stubbornly high Victorian case count and the associated decision by the Victorian government to abandon the zero case objective we have reviewed our growth forecasts for the Australian economy.

The Growth Numbers

Our forecasting process is based around using our estimates for growth in hours worked in the states which rolls up into the national numbers. This approach gives allows us to cross check our estimates against previous Lock Downs while also taking into account the proprietary information on credit and debit card usage with our Card Tracker Index.

We have lowered our forecast for GDP growth in the September quarter from –2.6% to –4.0%.

We have lowered our growth forecast in the December quarter from 2.6% to 1.6%.

We have lowered our growth forecast for 2021 from 2.4% to 0%.

We have increased our forecast for growth in 2022 from 5% to 7.4%.

For the September quarter we maintain our forecast that NSW will contract by 8.3% but now expect Victoria to contract by 5.7% – recall Melbourne went into Lock Down on August 6 and is now forecast to stay there until the end of October.

The forecast recovery pace in NSW in the December quarter has been lowered to 2% while the Victorian pace of recovery is forecast at 1.9%.

Recognising this weaker near-term growth outlook will mainly impact the labour market through falls in hours worked and the participation rate we have retained our forecast unemployment rate by end October at 5.8% while the slower recovery in the December quarter sees the unemployment rate down to 5.4% in December compared to 4.9% in our earlier forecast.

With a strong recovery expected in 2022 we have retained our target unemployment rate of 4% by end 2022.

The Background

Our most recent set of forecasts was released on August 16 and was underpinned by the assumptions that the NSW Lock Down would continue until early November but the Victorian Lock Down would be eased in early September.

On August 16 NSW reported 478 cases while Victoria announced 22 new cases.

Today NSW reported 1431 new cases and Victoria reported 208.

As Victoria has struggled to contain the virus in the intervening weeks it became clear that extensions to the Lock Down would be necessary but we have waited for more concrete guidance from the Government. That guidance was delivered this week with Premier Andrews abandoning the zero cases target in favour of a vaccination target.

Our new forecasts assume that Melbourne will remain in Lock Down until the end of October, although there will be some easing in the Victorian regions.

Our assumptions around NSW and the rest of the country (no significant Lock Downs) remain unchanged from the August 16 estimates.

We have also reviewed our assumptions about the shape of the recovery in the months of November and December once the NSW and Melbourne Lock Downs are eased.

The early stages of the recovery are now expected to be much more restrained than earlier expected as state borders remain closed and the NSW and Victorian governments, despite achieving the 80% vaccination targets, are cautious about overwhelming already stretched hospital systems in the early stages of a reopening.

The openings in both NSW and Victoria are now expected to be in the context of ongoing heavy case loads.

The current pace of vaccination in Queensland and Western Australia points to the 80% vaccination rate in those states not being reached until well into December making it highly likely that these states will continue to close their borders to NSW and Victoria.

A report in the Australian Financial Review recently quoted statistics from NSW Health that in the four weeks to August 14 of the 6480 positive cases reported in NSW only 2.7% were fully vaccinated, compared to around 30% fully vaccinated in the community.

This statistic best summarises the power of full vaccination and as we move into 2022 when the nation is set to reach 80% vaccination (16 and above, with the 1.2 million children in the 12–15 age groups also rising quickly) and likely to move to 90% (surveys show that only around 10% of the population are opposed to vaccination) allowing the economy to recover quickly.

That will be underpinned by a large boost in federal government stimulus as the federal election draws near; the reopening of NSW and Victoria after a “slow start” in the December quarter of 2021; a strong household balance sheet (household savings rate likely to start the year well above 10%); the reopening of all borders including the foreign border (by mid-year); a booming housing market and a strong world economy.

It is worth noting the 9.6% growth rate in the Australian economy in the year to June 2021, as printed in this week’s national accounts, reflected the benefits of the previous reopening.

In that context our 7.4% for 2022 seems achievable.

Also note that our forecast of a 1.4% fall in the unemployment rate in 2022 compares with the 3.0% fall we have seen in the last year.

While there seems little doubt that the Australian economy will contract sharply in the September quarter the recovery profile carries much uncertainty.

We have already highlighted some issues for the near term while the medium-term outlook carries even more risk.

Low levels of vaccination in the developing world raise the prospect of new vaccine resistant mutations. Questions about the duration of the efficacy of the current vaccines have been raised with the prospect of regular boosters on the horizon. Vaccine hesitancy, particularly in the “zero case” states may be higher than currently estimated – delaying the reopening of borders or risking the problems we see in the US where the rate of vaccination varies widely across states leading to crises in those states with low vaccination.

Domestic risks centre around potential scarring in the business sector as policy support for business in these Lock Downs is much less generous than JobKeeper, especially in Victoria where there has been a patchwork of support measures compared to the Job Saver package in NSW.

We expect that now that the Victorian picture is clearer ther