While the positive coronavirus case trajectory in Australia may limit the economic downturn relative to other countries, this may not result in a significantly faster recovery.
With the number of new COVID-19 cases having dropped significantly over the past few weeks in Australia, the focus is increasingly turning to the easing of lockdown measures. This suggests at least in the near term that the peak level of lockdown, and therefore economic impact, has likely been reached.
While much still remains uncertain around the trajectory and disruption of COVID-19, calibration is becoming more feasible. Regular macro data are still very limited, but the release of more timely data has begun, providing more detail on the continuing lockdown's impact on activity and the labour market. Most of these have been survey-based measures, but there are also some real-time private data. Some key results are:
Business confidence in March fell to its lowest level ever, with the assessment of current conditions the worst since the 1991 recession.
Consumer confidence fell to its lowest level since the 1991 recession, with particularly sharp deterioration in spending intentions and the housing outlook.
A business survey conducted by the ABS suggests that 10% of businesses were no longer operating (5% of those with more than 200 workers) and 47% had made changes to their workforce.
A household survey conducted by the ABS suggested that the share of people with jobs fell 8%, although the bulk of these were stood down rather than let go.
Weekly payrolls data from the ATO suggest around 800,000 workers lost their jobs in the first week after the lockdown measures were put in place.
Location tracking data from Google suggest that retail visits are down around 40%, significantly less than some other countries, which are down more than 90%.
Broadly, while we can expect the positive virus case trajectory in Australia will limit the downturn relative to other countries, it is unlikely the trajectory will result in a significantly faster recovery.
The initial, partial re-opening
In the view of Morgan Stanley Research, the initial recovery will be very much medically driven. The first stage of the recovery will be some easing of lockdown measures, in industries that can comply with social distancing and based on the testing, tracing, and medical capacity of the government to limit the scope of outbreaks.
This stage of recovery could show a portion of the lost output coming back online relatively quickly. Morgan Stanley Research expects demand to mostly cover the increased supply, as the significant policy support provided by the government means that the income degradation over the past few months should be relatively limited.
Importantly, however, Morgan Stanley Research predicts only around 33% of the lost output will be recovered in the third quarter during this stage, with a slight increase in the fourth quarter of 2020. Key constraints are the ability of some industries to be compliant with social distancing and operate at previous capacity, as well as consumers' willingness to engage socially.
The balancing act
The second stage of recovery is likely to be slower, balancing medical capacity and output expansion until a more permanent medical solution is available, estimated to be around mid-2021.
Once the "low-hanging" recoveries have been made, Morgan Stanley Research believes it will become much more challenging for further activity to return quickly. Rather, it is expected that the economy will hold at reduced capacity for several quarters, weighing the balance between the economic support and risks of outbreaks. The economy is likely to still grow in this period, but only slightly above trend and significantly below its previous output path.
The third stage is after the disruption of the virus, and may be helped by more traditional policy stimulus and reform but also challenged by structural adjustments facing the economy.
Morgan Stanley predicts that the virus disruption will have mostly eased by the middle of 2021 – but that the economic consequences will be much longer-lasting.
In particular, there will be:
businesses that have permanently gone defunct during this disruption,
workers who will not return to the labour market, and
preference shifts that will require industry reallocation – which will take several years to conclude.
Overall, Morgan Stanley Research does not expect a large acceleration in growth once virus concerns recede. Growth is likely to remain well below the pre-virus path for several years to come. At the end of 2021 it is predicted activity will be 6% below where it would have been if it had followed its decade-average growth rate.
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