Daily Commentary BY THE CURVE TEAM –

Treasury Expects Big Hit to Economy

July 24, 2020

The long-term impacts of Covid-19 on the economy exposed as Treasury releases their updated budget and forecasts.

At the July Economic and Fiscal Outlook yesterday, Treasurer Frydenberg released economic forecasts for the year ahead. They painted a dire picture for the economy over the 2020/21 fiscal year. Although they are partly politically motivated and the forecasts remain highly uncertain as they are contingent on the spread of the virus, they provide a loose guide of what to expect and will be a reference point going forward.

Treasury estimates that GDP will fall 3.75% in 2020 and interestingly 2.5% in the 2020/21 fiscal year. This means even excluding the initial impact of Covid-19 in March-June this year, the economy is expected to go backwards for the next 12 months. Accordingly, unemployment is expected to peak at 9.25% in December and the budget deficit is set to go to $180 billion (around 9% of GDP) in 2020/21 as tax receipts fall and government spending increases.

Further to the weak outlook from the Treasury the NAB quarterly business data for the second quarter also alludes to the potential long-term damage to businesses. Business confidence for the quarter was -15, and business conditions for the next 12 months was -18.

The NAB data and Treasury forecasts suggests there will be long term damage to the economy. RBA Governor Phillip Lowe on Tuesday cited his concerns for the future employment prospects for those that lose their jobs during this period. It is also clear that businesses and consumer confidence has and will continue to be hit as long as Covid-19 affects our daily lives.

The extent of the damage means a recovery may be lagged. Those that become unemployed may not instantly be able to find jobs if the virus is eradicated, businesses may not instantly be able to invest in projects, and consumers may not instantly regain their confidence.

Josh Stewart

Client Relationship Manager