Economic forecast: mixed outlook for 2020/21


The Australian government today unveiled its Economic and financial outlook, outlining how COVID-19 has impacted Australia’s economy and the country’s finances. In short, it paints a sobering picture of the state of the Australian and global economies.

The huge levels of government support injected into the Australian economy from March could only limit the negative fallout from the pandemic, not prevent Australia from emerging from the recession.

The Outlook forecasts the Australian economy to shrink 2.25% in 2020/21. For the calendar year 2020, the government forecasts a contraction of 3.75% in economic activity, before increasing by 2.5% in 2021.

The government predicts that the unemployment rate will rise to 8.75% in 2020/21, from 7.4% in June 2020 (predicting that unemployment will peak at 9.25% in December).

The government says unemployment would have been much higher without support measures such as the JobKeeper wage subsidy. He estimates that these payments have prevented about 700,000 additional job losses, which would have been equivalent to an unemployment rate about five percentage points higher than the current rate.

However, others have a more pessimistic view. The OECD recently predicted that the Australian economy would shrink 5% in 2020 (at best from a single wave of COVID-19 infections), or decline 6.3% if there was a second wave of infections.

In this double-barreled scenario, the OECD predicts that the economy will grow by just 1% in 2021.

The OECD said consumption in Australia would be tempered due to “lost income, higher unemployment levels and continued caution”, while “squeezed demand, weaker finances and uncertainty” weigh on business investment.

Regarding the level of unemployment benefits and the environment, the OECD said that “the authorities should also ensure that the social safety net is adequate and consider further investments in improving energy efficiency”.

For those looking to do scenario analysis for budgeting purposes, CEDA, in his Macroeconomic policy: avoiding the cliff edge (see page 7) produced the following graph showing how the single wave and second wave scenarios can impact the Australian economy:

In the scenario where Australia experiences a second wave of infections, the economy does not return to where it was in December 2019 until 2022, at the earliest.

Globally, the Australian Treasury predicts that:

  • China to grow 1.75% in 2020 and 8.25% in 2021
  • United States to decline 8.0% in 2020 and increase 4.75% in 2021
  • Japan to shrink 6.25% in 2020 and grow 2.75% in 2021
  • India to decline 4% in 2020 and increase 4.25% in 2021
  • The euro area will contract by 8.75% in 2020 and increase by 5% in 2021.

In other economic forecasts, the government expects wage growth to be very low in 2020/21 to 1.25% in 200/21, the same rate as inflation, which means that growth real wages will be zero.

Budget outlook

The government says it has provided A $ 289 billion in fiscal measures and balance sheets to the economy, which is equivalent to around 14.6 percent of GDP. The tax assistance includes the JobKeeper wage subsidy, the JobSeeker Bonus Payment and the Cash Flow Boost.

The balance sheet measures include the guarantee scheme for bank loans to SMEs. Direct budget support amounts to around 9 percent of GDP, one of the biggest packages of any country

These large expenditures will have a significant impact on the country’s finances, with the underlying deficit expected to rise to AUD 85.8 billion in 2019-2020, or 4.3% of GDP. In 2020-2021, the deficit is expected to reach AUD 184.5 billion, or 9.7% of GDP.

Australia’s net debt is expected to grow from A $ 373.6 billion in 2018-19 to A $ 488.2 billion in 2019-2020 and to A $ 677.1 billion in 2020-2021. However, as a percentage of GDP, net debt (35.7% of GDP in 2020-2021) is still low compared to many other advanced economies, giving the government the “fiscal space” to do more if needed.

As Australia’s budget deficit and debt “exploded”, the OECD said “Australia’s vast fiscal space allows for a strong response to a second outbreak”. He suggested that “extended loan guarantees, coupled with accelerated insolvency processes, could reduce the scars for entrepreneurs and facilitate a more dynamic recovery.”

Policy announcements

Most of the tax and pension measures announced in the update have already been announced or implemented. The most recent announcements include:

The extension of the JobKeeper wage subsidy
The JobKeeper payment, which was originally scheduled to expire on September 27, 2020, will continue to be available to qualifying businesses and nonprofits until March 28, 2021.

The payout rate will be reduced from $ 1,500 biweekly for eligible employees and business participants to $ 1,200 per biweekly starting September 28, 2020 and $ 1,000 biweekly starting January 4, 2021.

Starting September 28, 2020, lower rates of pay will apply to employees and businesses who have worked less than 20 hours per week.

Starting September 28, 2020, businesses and nonprofits will be required to reassess their eligibility based on their actual GST revenue during the June and September 2020 quarters. They will need to demonstrate that ‘they have passed the relevant revenue decline test in these two quarters will be eligible for the JobKeeper payment from September 28, 2020 to January 3, 2021.

Extension of the COVID-19 SME Guarantee Program
The Coronavirus SME Guarantee Program has been implemented to help small and medium-sized enterprises (SMEs) affected by COVID-19 access working capital. The system will be extended from September 30, 2020 to loans taken out until June 30, 2021.

Under this program, the Australian government will provide a 50 percent guarantee on new loans issued by eligible lenders to SMEs.

Extended application period for temporary early access to retirement pension
The government allowed those affected by the financial impacts of COVID-19 to access up to $ 10,000 of their superannuation during the 2019/20 income year and an additional $ 10,000 during of income year 2020/21 tax-free.

The application period for the 2020/21 income year will be extended from September 24, 2020 to December 31, 2020.

Increased wage subsidy for apprentices and trainees
The wage subsidy to support apprentices and trainees will be extended. The initial wage subsidy provided small business employers with 50 percent of an apprentice or trainee’s salary for nine months, capped at A $ 7,000 per quarter.

The grant, which is due to end on September 30, 2020, will be extended until March 31, 2021 and will be extended to medium-sized businesses from July 1, 2020.


Leave a Reply

Your email address will not be published.