While COVID-19 will cause permanent disruption in many markets, it’s stranglehold on GDP may not last much longer, according to one expert.

Australia’s second quarter GPD figure, to be revealed in September, will almost certainly depict a sharp contraction.

But in recent weeks COVID-19 restrictions gradually unwound – ahead of the six-month period Prime Minister Scott Morrison warned Australians would have to put up with restrictions.

This has led economists to be a bit more bullish on the economy, to the point where some believe the biggest threat is not opening fast enough.

Bloomberg’s James McIntyre believes GDP will now only witness a 2 per cent decrease on an annualised basis. He then predicts a rebound to 2.5 per cent growth in 2021.

An upside scenario with a trans-Tasman bubble and long-term success of fiscal policy could restrict the annual contraction to just 1.2 per cent, followed by 3.3 per cent growth next year.

Even McIntyre’s current extreme downside scenario is just a 3.3 per cent contraction this year compared to the previous baseline case of a 6 per cent contraction.

McIntyre said the COVID-19 shock “may prove to be Australia’s shortest business cycle downturn”.

“Australia’s better-than-expected virus containment has driven an upgrade to our growth outlook,” he said.

“Its recession is already over, and the economy has begun recovering as social distancing restrictions are unwound.”

He pointed to research by the Melbourne Institute which found the average downturn in Australia’s business cycle since the 1960s had lasted three quarters, but McIntyre believes activity bottomed out in May.

 

The keys to recovery

While McIntyre says there is still the potential for the economy to fare even better than expected, he also warned it could also go the other way.

The biggest risks are another nation-wide lockdown, along with the potential negative impact on business when measures such as JobKeeper expire at the end of September.

McIntyre believes targeted measures for specific sectors needing ongoing support, such as tourism, will replace broad measures.

But it came with a word of caution.

“Just averting a fiscal cliff won’t do the job. Policy needs to be
sufficient enough to stimulate an economy recovering from recession,” he said.

 

The benefit of a Trans-Tasman bubble

The establishment of a Trans-Tasman bubble between Australia and New Zealand “could result in a stronger and and earlier recovery for both economies”, McIntyre says.

This would involve Australians and New Zealanders being able to travel freely between the two countries without the need for quarantine. But both countries would keep their borders closed to the rest of the world.

While a bubble is unlikely to happen as long as there is community transmission in Victoria, Australians and New Zealanders holidaying at home would help both countries’ economies even before a “bubble”.

The Australian Bureau of Statistics estimates for every $1 of spending by international tourists in Australia, $1.50 is spent by Australians overseas.

“The retention of spending at home is likely to provide some boost to the domestic economy,” McIntyre said.

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