Original published on the Financial Review

The market’s leading economists are counting on a rebound this quarter to lift the economy out of recession followed by a stronger performance in the December quarter, implying the historic contraction confirmed this week represents the worst of the COVID-19 toll.

A sample of 12 economists are pencilling in a median result of 0.35 per cent growth for the third quarter, rising to 1.4 per cent for the fourth quarter of 2020.

Those forecasts depend on a resurgence in consumer spending, specifically the confidence to put a dent in the huge spike in savings that accumulated from March to June, as Melbourne exits stage four restrictions.

Consumer spending tumbled more than 12 per cent in the second quarter and spearheaded the massive 7 per cent GDP contraction, according to Westpac chief economist Bill Evans.

“It really is explained by consumer spending and the government policies around lockdown,” the veteran economist said. Worried consumers hoisted the savings rate up to nearly 20 per cent in what Mr Evans called “a different kind of recession”.

“We had to restrain households from activity and providing services and labour for their own benefit. The outcome is predictable in that sense: you end up in recession,” said Stephen Anthony, chief economist at Industry Super.

About 70 per cent or more of the national economy is now open for business compared to the second quarter, according to ANZ.

The path out

Restoring consumer faith is the clearest path out of recession. “The key is for people to feel confident enough to go out and spend the income provided by the government,” said Commonwealth Bank chief economist Stephen Halmarick.

Commonwealth Bank is still expecting a slight contraction in the third quarter, given that Melbourne remains in lockdown for most of it. Westpac and National Australia Bank are forecasting a flat result, which they are reviewing.

ANZ is not expecting to change its forecasts for the rest of the year and is predicting a better outcome, for a 0.6 per cent improvement quarter-on-quarter.

There was uncertainty about how the situation evolves in Victoria, ANZ chief economist David Plank said. “The big question is about the December quarter,” and the policies in place to support the economy, he said.

“We think that it makes sense to offer direct support to households in the form of cash payments,” and tax cuts may be brought forward, the ANZ economist expects.

Mr Halmarick was heartened to hear Treasurer Josh Frydenberg talk about tax cuts. “We think that’s an effective way of supporting spending.”

The transmission of COVID-19 also matters. Westpac is expecting Victoria to move to stage three restrictions in the September quarter, and stage two in the December quarter.

It is expecting a contraction of 9 per cent in the September quarter for Victoria, 2 per cent growth for New South Wales, 3 per cent for Queensland and 4 per cent for Western Australia, comprising its flat quarterly overall result.

The outlook improves to 2.8 per cent growth in the fourth quarter and 3 per cent growth for 2021. Victoria is expected to rebound to show 6 per cent growth in the December quarter, when the other states should be recording roughly unchanged output from September, on Westpac’s numbers.

Forced saving

The downturn resulted from a period of forced savings, said Mr Anthony.

“Usually when you lift restrictions there is an elastic bounce-back,” he said. “We would expect that to be true across the west and the north of the country.”

What happened in NSW and Victoria were the key uncertainties.

The second quarter was marked by developments that would not have previously seemed feasible to economists, such as a profit share larger than the share of wages.

Broadly, the country’s economic fundamentals were sound, said Matthew Peter, chief economist at QIC.

“We need to remember that the fall in economic activity was due to a lockdown of consumers and businesses,” he said.

“The government’s income support schemes have generated a spending war chest for households, who due to lack of opportunity built their rate of savings to 20 per cent. This gives households plenty of spending firepower over coming months as our economy is reopening.”

There will be growth from “low-hanging fruit” in the next quarters as people left their homes, said Alex Joiner, chief economist at IFM Investors.

But he cautioned that the matter of state and international borders had not been resolved yet. That would likely lead to a gradual recovery over an extended time frame. “There’s no quick fix.”

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