Global and domestic economic outlook never been more uncertain: Bill Evans

EXPERT OBSERVATION

I have never seen a more uncertain economic outlook than we currently face both domestically and globally.

Nevertheless it is important to try to set out a framework for assessing the outlook. In this note we take the unusual approach of looking at the prospects of the states and build the national picture up from the individual states.

Victoria has entered Stage 4 lockdown which is likely to continue until mid-September.

Developments in Victoria have been rapid. When the government released its economic forecasts on July 23 the underlying assumption was that Stage 3 lockdown in Victoria would ease from mid-August.

That assumption was in line with our original figuring where we assumed that activity in Victoria had lifted by 1.5% with the gradual reopening of the economy between early June and the renewed lock down in early July. We expected that the renewed lock down would "lose" that 1.5% through July and August.

Using the same underlying assumption as the government, which assumed a reopening by mid-August we expected growth to lift in the second half of the quarter by 1.5% for a flat growth result for Victoria.

Hours worked data subsequently indicated that, both in Victoria and nationally, the recovery in June was indeed faster than that 1.5% estimate – nearer 4%.

Hours worked had collapsed by 12% in April/May highlighting the impact of the original lock downs across the country.

The introduction of Stage 4 restrictions in Melbourne and regional Victoria (Stage 3) can be expected to see activity fall below the April/May levels ("only" Stage 3 across the whole state) losing that 4% gain in July plus a further 5% through the September quarter (this forecast is based on the official guidance that jobs affected over that six week period will total around 250,000 – or around 10% of the existing workforce).

In total we now expect the Victorian economy to contract by 9% in the September quarter.

Note that the base fall of 12% in April/May represents the extreme initial response to a shutdown from "normal" activity levels.

This forecast is consistent with activity in the Victorian economy contracting by 16% over the June and September quarters. (7% in the June quarter and 9% in the September quarter) taking activity below that low point in April/May.

With the Stage 4 restrictions now likely to stay in place for most of September Victoria's recovery will be delayed until the December quarter when we expect the 9% loss in the September quarter to be partially reversed (growth of 6%) as the state moves from Stage 4 through to Stage 2.

Bill Evans is Westpac's economic spokesman and the head of economic research