Australian Economy to Contract 10%, Biggest Drop Since 1931

(Bloomberg) --

Australia’s economy is poised for its deepest recession in 90 years as restrictions designed to mitigate the spread of coronavirus push firms and households to the brink, according to Bloomberg Economics.

Gross domestic product will decline by about 10% in the first three quarters of 2020 before a gradual recovery in the final three months, James McIntyre, Australia economist at Bloomberg Economics, wrote in a research report Monday. He doesn’t expect Australia to return to its pre-coronavirus level of activity for three years.

“The grim economic reality is that not all businesses and jobs will be able to be saved despite the best efforts of fiscal policy makers,” McIntyre wrote. “Fiscal measures are still essential, and worth it -- it is less expensive to assist firms and households through to an eventual recovery than to rebuild the economy after the fact.”

Prime Minister Scott Morrison pledged Monday to spend A$130 billion ($80 billion) over six months to try to safeguard jobs, in a third tranche of fiscal stimulus. The Reserve Bank of Australia has cut its cash rate to near-zero and is buying government bonds to lower yields and reduce interest rates across the economy.

McIntyre argues that stimulus measures, no matter how big, won’t prevent upheaval in the economy, but they’re key to helping firms through the crisis and rebuilding afterward. Tens of thousands of Australian workers have already been sent home as retailers and airlines all-but close and queues outside job centers lengthen.

The government has so far passed more than A$80 billion worth of fiscal support and Morrison’s announcement today brings total fiscal and monetary stimulus to A$320 billion, or 16.4% of GDP.

“The labor market dislocation will be substantial, and is likely to linger for an extended period, even though economic growth may ‘bounce back,’ McIntyre wrote. “Economies will have to ‘run hot,’ or above potential for an extended period to not only re-engage unemployed workers, but to absorb underlying growth in labor supply.”

For the full year of 2020, McIntyre expects the economy will contract by 6%. He sees labor market slack lingering, which will depress wage growth and inflation.

“Monetary policy is expected to remain on hold, with ongoing quantitative easing to contain yields amid rising issuance as fiscal packages and automatic stabilizers kick in,” he wrote.

©2020 Bloomberg L.P.