Path to Economic Recovery Post COVID-19: An Uphill Battle for Australia

Summary

• With Australia’s GDP contracting by 0.3 per cent in March 2020 quarter, speculations are rife that nation’s 29-year run of economic growth phase may come to a dead-lock.
• Investors’ sentiments have mostly been skewed on the bullish side on hopes of speedier economic recovery.
• Continuation of solid fiscal support is needed to encourage consumer spending among Australians and strike a right balance.
• While anticipation of economic downturn prevails, sooner than expected economic reopening and containment of COVID-19 spread can turn the tables around.

No wonder, the ‘Black Swan’ or ‘Gray Rhino’ COVID-19 pandemic has costed businesses and consumers a great deal of time and money across the world. From sluggish economies to shredding financial markets, Global Virus Crisis has given everyone a pain in the neck.

With Australia’s GDP contracting by 0.3 per cent in March 2020 quarter, speculations are rife over the nation’s entry into recession phase amidst deeper contraction expected in June 2020 quarter. If this occurs, Australia’s 29-year run of economic growth phase may come to a dead-lock.

What’s worth noting is that despite a fall in GDP during the first quarter 2020, investors’ sentiments have mostly been skewed on the bullish side on hopes of speedier economic recovery. Sooner than expected ease in lockdown restrictions in Australia are inducing this shift, bolstering optimism around the economic outlook.

Having said that, let us discuss some trends that can shape the state of Australian economy post COVID-19:

Is Australian GDP Running Out of Road?

While latest ABS statistics revealed a contraction of 0.3 per cent in Australian GDP in March quarter, the nation observed slowest but through-the-year growth of 1.4 per cent during the period. The yearly growth reflected a robust contribution from net trade and a sluggish growth in domestic final demand.

Several events including bushfires, COVID-19 outbreak, other natural disasters and lockdown restrictions were instrumental in nation’s weak growth rate.

What’s worth noting is that despite a contraction, OECD expects Australia to outpace other countries in terms of economic recovery in case government support doesn’t lose ground.

The organisation believes solid fiscal support is needed to encourage consumer spending among Australians and strike a right balance. This came as a caution for Morrison government to retain its emergency spending and consider further stimulus measures if needed to bring economy back to its feet.

Though latest OECD and RBA’s statements provide a glimmer of home for Australia’s economic upswing, several factors play a pivotal role in determining the shape and duration of recovery. Below are some of these determinants:

• Elimination of COVID-19 disease
• Potential second wave of virus infections
• Recovery in unemployment rate and retail sales
• Government and RBA’s response to pandemic
• Resumption of international travel
• Boost in consumer and business confidence
• Complete lifting of social distancing restrictions

Will Labor Market Rise from the Grave?

As per ABS, Australia’s unemployment rate surged to its five-year high level in April this year, increasing to 6.2 per cent from 5.2 per cent in March. Besides, monthly employment and participation rate plummeted by 594,300 people and 2.4 percentage points, respectively in April in seasonally adjusted terms.

While unemployment rate exhibited its steepest monthly upswing on record in April, it was better than most economists’ anticipations of over 7.5 per cent rise. Revising down expectations of employment hit to the economy, Treasury Secretary Steven Kennedy has lately projected unemployment rate to reach just 8 per cent by September.

With Australian labor market undergoing tremendous stress amid COVID-19 mitigation efforts, great deal of uncertainty surrounds the duration of employment shock. Following factors are likely to determine the shape of recovery in labor market post coronavirus:

• Recommencement of halted mining projects
• Employers’ stance on layoffs after termination of wage support package
• Sooner or later return to work practices
• Possible second wave of coronavirus infections
• Fiscal and monetary push from government and RBA

Is Online Retailing on a Gravy Train?

Australia recorded a sharp plunge of 17.7 per cent in retail turnover in April 2020 amid closure of several physical retail stores due to social distancing restrictions, reported ABS in its latest update. The decline in retail turnover was led by clothing, footwear and personal accessory retailing (slid by 53.6 per cent) and cafes, restaurants and takeaway food services (plunged by 35.4 per cent).

While total retail turnover tumbled in April, online retail sales jumped by 26.4 per cent to $2,703 million in original terms, making up 11.1 per cent of total sales. This was significantly higher than March 2020 online sales that made up 7.1 per cent of total sales.

Though physical retail stores bore the brunt of store closures amid coronavirus induced restrictions, online retailing picked up the steam in the lockdown era backed by digitalisation shift. Whether retailers would face a temporary blow to their revenues or deeper implications depends on a range of factors, including:

• Lifting of social distancing restrictions
• Opening of cafes and restaurants
• Emergence of fresh COVID-19 cases in Australia
• Stabilisation in employment conditions
• Shift in consumer confidence and consumer spending
• Continuation of supply-chain disruptions

While the pandemic sent Australian economy into a tailspin, the nation seems to be gaining ground on the back of earlier than envisaged economic reopening and containment of COVID-19 spread, which may turn the tables around. However, how soon will the economy come back to life remains a sixty four dollar question amidst growing anticipation of a recession in the near-term.

(Note: All currencies are in AUD unless otherwise stated)