Coronavirus: Containment a $20bn boost to grim GDP forecast

Australia’s success in containing the coronavirus will save the economy $20bn in lost output this year.

Finance Minister Mathias Cormann at a Senate inquiry on Tuesday. Picture: AAP

Australia’s success in containing the spread of coronavirus and the earlier-than-expected easing of so­c­ial restrictions will save the eco­nomy $20bn in lost output this year.

Westpac chief economist Bill Evans now expects GDP to drop by 4 per cent this year, versus a previous­ estimate of 5 per cent. The hit to national output over the first half of the year will be 7.3 per cent, against Mr Evans’s earlier prediction for a 9.2 per cent fall. Based on a $2 trillion economy, that implies output will be in the order of $20bn higher than was previously forecast through 2020.

The more optimistic outlook by one of the country’s most experienced private sector economists came as Treasury secretary Steven Kennedy told a Senate committee in Canberra on Tuesday he now expected unemployment to reach 8 per cent by June, rather than the previous estimate of 10 per cent, suggesting 260,000 fewer Australians were unemployed than originally predicted.

Dr Kennedy said Treasury eco­nomists had been “steadily revising down how high the unemploy­ment rate will rise because the health scenario is continuing to improve”.

"I think the unemployment rate won't go as high as ­previously thought," Dr Kennedy said. "I think the unemployment rate by September will likely be in the order of 8 per cent. Business and consumer con­fi­dence is returning.

“Hopefully the recovery continues as we foresee and (the economy) will be accelerating through the second half of the year.

“Still, it pays to remember there is still a global pandemic at play”.

On Monday the government announced that childcare sector workers would be transitioned off JobKeeper from July 20, well before the end-of-September expiry date for the program as a whole.

With the economy opening earlier than anticipated when the JobKeeper program was designed, Finance Minister Mathias Cormann, also appearing before the COVID committee, said he would not rule out transitioning other sectors off the wage-subsidy program earlier.

Senator Cormann said any further decisions would depend on Treasury’s review of JobKeeper, which findings the Treas­urer would present in the July 23 mini-budget. “In revised economic circumstances, a program of this size might be appropriately adjusted,’’ Senator Cormann said.

‘‘The question is how we can best and equitably and fairly transition­ relevant sectors out of temporary support to business as usual on the other side.”

Mr Evans predicted that the unemployment rate would be settling at a still high 8 per cent by the end of the year as some of those on JobKeeper but without work would be tipped into unemployment when the wage subsidy ended.

“This outlook argues firmly for the government to adopt a strongly stimulatory budget in October,” he said. “Policies to boost household incomes should be the centrepiece of the budget. In that regard, the government should bring forward the personal tax cuts (legislated for July 2022) at a cost of about $14bn per year.”

At the committee hearing, Dr Kennedy also issued a mea culpa for the massive overestimation of the JobKeeper program, which was downgraded last month to a forecast cost of $70bn, rather than the $130bn cost initially estimated in early March.

"I take full responsibility for the revised estimates and all matters associated with the advice Treasury­ has provided," he said.