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Goldman Sees Deepest Australian Downturn Since Great Depression

Malcolm Scott

(Bloomberg) -- Given the rapid deterioration in the Australian economic outlook as the coronavirus causes the closure of borders and restrictions on movement, Goldman Sachs Group Inc. now forecast the sharpest annual GDP contraction since the great depression of the 1920s.

The Australian economy will shrink 6% in 2020 versus last year, economists led by Andrew Boak wrote in a report dated March 20. Most of the contraction is expected to be driven by a collapse in ‘social’ consumption, with an assumption that spending at hotels, cafes and restaurants will fall more than half, while spending on many discretionary categories will drop by up to one third.

‘As more people work from home, higher spending on food and utilities will provide a modest offset, but investment activity and exports are also likely to contract,’ the economists wrote.

“There has been a severe deterioration in the outlook for the Australian economy over the past week as the COVID-19 outbreak has intensified,” they wrote. “Looking ahead, the global experience suggests social-distancing and broader containment measures will intensify further over the coming weeks.”

As the economy contracts, unemployment will rise to 8.5%, the Goldman economists estimate, from 5.1% in February. The possibility that some workers leave the labor market while some businesses cut back hours, but retain staff, make the jobless rate tough to estimate.

Policy Stimulus

In a bid to cushion the economic fall out, Australia’s central bank on Thursday joined the international fold with the announcement it will enter the government bond market to lower yields, having exhausted its remaining conventional policy ammunition.

Reserve Bank Governor Philip Lowe will aim to keep three-year government bond yield at 0.25%, having cut the cash rate to 0.25%. The RBA also announced a term funding facility of at least A$90 billion ($52 billion) for the banking system, with particular support for credit to small and medium-sized businesses.

In a complementary program, Australia’s government will invest up to A$15 billion to allow smaller lenders to support consumers and smaller businesses during the virus outbreak. Prime Minister Scott Morrison is also developing a follow-up spending package to expand on the A$17.6 billion program announced last week.

Those measures “deliver a sizeable positive stimulus to growth,” Boak wrote.

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