Treasury bets on ‘relatively fast’ recovery

Treasury economists have assumed Victoria’s lockdown will not be extended beyond six weeks and outbreaks in NSW won’t trigger further restrictions.

Treasurer Josh Frydenberg in Canberra on Thursday. Picture: Gary Ramage

Treasury is betting on a “relatively fast” economic recovery based on best-case assumptions the Victorian lockdown does not extend beyond six weeks, the international border opens from January 1 and there are no delays to the staged reopening of other states and territories.

The economic and fiscal update forecasts the COVID-19 ­crisis will deal Australia’s economy its heaviest blow on record.

Real GDP is projected to plunge 3.75 per cent in this calendar year, before bouncing back by 2.5 per cent in 2021.

The jobless rate, however, will climb from 7.4 per cent in June to 9.25 per cent by the December quarter, and remain high at 8.75 per cent by the middle of next year.

Wages growth will slow from 2.3 per cent in 2018-19, to 1.75 per cent in 2019-20, and again to 1.25 per cent in 2020-21.

“The economic recovery is forecast to be relatively fast by historical standards,” the report says.

To achieve this, the Treasury economists assume Victoria will be out of lockdown by next month, before a “gradual” move to the final phase of easing restrictions by December.

The Victorian borders with South Australia and NSW are ­assumed to be reopened by ­August 19 to essential travel and freight.

“Localised outbreaks, such as those occurring in NSW, are ­assumed to be contained to the extent that, on average, they do not delay the lifting of restrictions,” the report says.

From January 1 to June 30, 2021, it is assumed that the international travel ban is lifted, but that arrivals will be required to do two weeks of quarantine.

“This leads to the resumption of arrivals by temporary and permanent migrants, but at lower levels overall than normal,” the report says.

PwC chief economist Jeremy Thorpe said the health outcomes were a “key swing variable” in any economic forecast.

 

“We have massive uncertainty around what COVID will do, and what degree of lockdowns could follow,” Mr Thorpe said.

But he said it was more likely, given Treasury’s assumptions, that the department’s forecasts would need to be downgraded than upgraded.

“What if it (Melbourne’s lockdown) is longer? What if there’s a lockdown in NSW?” he said.

Treasury officials recognised that the pandemic meant there was also “significant uncertainty around the pace and shape of the recovery, given the unprecedented nature of this crisis”.

They warned that a wider second wave of infections, which led to the reimposition of large-scale and strict restrictions across the country similar to the initial phases of the health crisis, would cost the economy at least $2bn a week.

The economy could recover more quickly than anticipated if firms were able to rapidly adjust to the post-COVID world and household spending returned to more normal levels. Alternat­ively, a bigger-than-­expected wave of business closures could mean greater lay-offs, leading to a more protracted recovery.

“The health and economic shock has changed many aspects of the way people live, including the way people work, shop and socialise, and it is unclear how large and persistent some of these changes will be,” Treasury said.