Westpac's Bill Evans optimistically revised 2021 unemployment forecast

EXPERT OBSERVER

Westpac has lifted its economic growth forecasts for 2020 and 2021 from –3.0% and 2.8% to –2.0% and 4%, respectively. Our growth forecast for 2022 has been lowered from 3.5% to 3.0%.

As a result of this substantial near term boost to the growth forecasts we have also lowered our forecasts for the unemployment rate by December 2021 from 7.0% to 6.0% and 6.3% to 5.2% by December 2022.

Under these forecasts we expect that the level of consumer spending and the level of GDP will return to the “end 2019” levels by the June quarter 2021.

By end 2021 GDP will be around 2% above the end 2019 level but still around 3% below the level of GDP that would have been expected in the absence of covid.

These revisions follow the stronger than expected print for GDP growth in the September quarter (3.3%) compared to our forecast of 3.0% and our revised forecast growth rate in the December quarter of 2020 from 1.6% to 2.3%.

The dominant message from the September quarter national accounts was the 7.9% surge in consumer spending, including 9.8% for services and 5.2% for goods.
Consumer spending actually contracted by 1.2% in Victoria while it lifted by 11% in the other states.

As the Victorian economy (around 25% of the national economy) reopens in the December quarter and momentum remains positive in the other states we expect consumer spending to lift by a further 5% in the December quarter.

The key to the revision for 2021 is the expectation that the recent lift in Consumer Sentiment to a seven year will be sustained; the increased momentum in the housing market will continue; a likely commitment by the government to continue to target a lower unemployment rate in the 2021 Budget; the huge boost to markets and global growth prospects with the advent of vaccines; the significant buffer of savings that will accommodate a large fall in the savings rate; ongoing reopening momentum; a likely upward revision to the government’s currently overly pessimistic net migration forecasts.

The headwinds from deferred loans and the tightening of insolvency laws are now seen to be less threatening for the economy as the economy has gathered such momentum in the second half of 2020.

BILL EVANS is the Chief Economist at Westpac