Dip and rise revisited
In mid-February, we tried to assess what the covid-19 outbreak might mean for Australia’s economic growth prospects through 2020. Our view at the time was that soon to be released Q4 2019 GDP would be around +0.5% q-o-q, +2.0% y-o-y but that severe bushfire damage and covid-19 would reduce GDP growth in Q1 2020 to -0.3% q-o-q, +1.3% y-o-y. On a quarterly growth basis, Q1 looked like being the worst quarter because we assumed that bushfire recovery spending would be starting to flow through in Q2. Restrictions on trade with China and the entry of its citizens to Australia would also ease in Q2 on the basis that the covid-19 outbreak in China had peaked in early February and containment was in sight.
As a result of our China covid-19 assumptions and the start of bushfire recovery spending in Q2, we thought that Q2 GDP would be weak, but better than in Q1 - probably around +0.2% q-o-q. If unemployment remained comparatively low through Q1 and Q2 we foresaw a strong likelihood that stimulus measures would cause GDP growth to lift sharply in Q3 and Q4, around +1.0% q-o-q for both quarters. The twin bushfire and covid-19 disasters would lead to a “V-shaped” dip and rise pattern in GDP growth.
The question over the past three weeks has become is there any need to change this view? Should we be looking at covid-19 likely to cause a more pronounced and protracted downturn in GDP growth worsened by rising unemployment and a stalling housing market? Or should we be viewing the covid-19 economic growth threat as over-stated and look at stimulus measures prompting stronger economic growth than is widely expected currently?
It is hard to change our current view because covid-19 is an uncertain beast on so many fronts. There is uncertainty about how easily the virus spreads and how many people have contracted the virus. The incubation period before symptoms show is thought to be around 14 days and many people who contract the virus suffer no symptoms or mild symptoms implying that many with the virus will have no cause to be tested and will be unwittingly passing the virus on.
The virus is a serious illness for the elderly and those with some pre-existing medical conditions. The world-wide number who have been tested as having contracted the virus since it started in December is around 107,000 at most recent count with more than 60,000 fully recovered and 3,600 dead, mostly elderly. In Australia, around 80 cases have tested positive. More than half have recovered fully and three people have died aged between 72 and 96.
Given that covid-19 has been running for three months, the known spread of the virus and the consequences for those that have contracted it are not unduly large or severe compared with seasonal flu outbreaks around the world. What has made covid-19 different is that that there is no cure or vaccine available yet and fear that it will spread more rapidly unless contained by unusually stringent quarantining restrictions causing most of the damage to economic growth.
China, where the virus originated appears to have contained the covid-19 outbreak and is in the process of starting to relax quarantine restrictions. Factories closed during the outbreak are re-opening and the financial stress caused by the shut-down is being eased by easy lending conditions and other stimulus measures.
In Australia, developments in our biggest trading partner, China, are being watched closely with a view towards relaxing restrictions on travelers from China as soon as it is deemed safe to do so. Our view expressed three weeks ago that travelers from China would be returning in Q2 still seems valid based on positive news of covid-19 containment in China.
In Australia, measures taken so far to contain the spread of covid-19, mostly restrictions on inbound overseas travelers from covid-19 hot spots and self-isolation for at least 14 days for those who may have come in contact with the virus is directly limiting demand and adding to economic costs. There are also limited offsetting benefits to Australian growth from reduced imports of goods and services.
An indirect cost to the economy has been the heightened concern in the community reducing visits to places where contact with the virus might occur -shopping centres, cafes and restaurants and the like. Fear has also caused some temporary benefits to the economy. Stocking up at supermarkets on toilet rolls, canned food, pasta and the like will boost their sales near-term. World-wide fear surrounding covid-19 has limited fuel demand causing marked decline in crude oil prices and petrol prices. It is a back-handed benefit, but less money spent at the fuel bowsers works in much the same way as a tax cut.
Stimulus packages to try and boost demand are coming more quickly than we thought likely three weeks ago. In the US, an emergency 50bps funds rate cut to 1.25% was announced last week. The RBA cut the cash rate 25bps last week to 0.50% and the banks were virtually forced to pass the whole amount through to mortgage rates. The government demands about the responsibilities of banks in time of crisis, adding to the still very strong home buying demand.
The Federal Government is about to announce a range of spending measures this week aimed at alleviating cost pressures for businesses worst impacted by covid-19 and providing some relief for households.
Also, it is worth noting that the Australian economy entered the double bushfire/covid-19 crises in better shape than expected. GDP growth in Q4 2019 was +0.5% q-o-q, +2.2% y-o-y, a good base for sustaining employment growth and preventing unemployment from rising too far. While we cannot predict with any confidence how covid-19 plays out, there are good reasons including early growth stimulus measures and even panic buying at supermarkets to stick with our view expressed three weeks ago. Australian GDP growth still looks set for a “V-shaped” dip and rise. The worst of the growth set-back should be over in the current quarter.