Australian Economy Set to Shrink Based on Treasury, RBA Estimates

(Bloomberg) -- Australia's economy is likely to suffer a quarterly contraction for the first time in nine years, based on an initial estimate of the coronavirus's impact from the nation's Treasury and Reserve Bank.

Both told a parliamentary panel in separate hearings that they expect half a percentage point cut from gross domestic product in the first three months of the year. Treasury head Steven Kennedy said the effects may spill into the second quarter, but Treasury wasn't forecasting a recession.

“The economic impact of COVID-19 is likely to be deeper, wider and longer when compared to SARS,” Kennedy told lawmakers Thursday, referring to the 2003 epidemic. “It will create more risk of a prolonged downturn and fiscal support will be needed to accelerate the recovery of the economy.”

The government is expected to release a fiscal “boost” for the economy in coming days, though it has tempered expectations about its scale. Prime Minister Scott Morrison said the package will be measured and targeted and not in the league of the huge stimulus deployed by the Rudd government in 2008-2009.

Josh Williamson, a senior economist for Australia at Citigroup Inc., projects it will be A$3-A$5 billion ($2-$3.3 billion) “at most,” equivalent to about 0.1% of GDP. “Such a package would be designed to offset the expected loss of output, rather than deliver a material boost to activity that closes the negative output gap that existed prior to COVID-19.”

Commonwealth Bank of Australia, the nation's biggest lender, said Thursday that a contraction in the first quarter is “a distinct possibility.” Citi is also seeing a negative result, as are other forecasters.

The RBA sees exports of tourism and education -- which account for about 5% of GDP -- falling around 10% this quarter. Deputy Governor Guy Debelle cautioned that the situation is evolving rapidly and the bank's estimates didn't include supply chain disruptions.

“We are hearing about that in the construction and the retail sector,” he said. “But how long-lasting and how severe that is, we're just not in a position to tell.”

The central bank cut interest rates by a quarter percentage point to 0.5% Tuesday and traders are pricing an 85% chance it will do so again in April. That would take the cash rate to its effective lower bound and open the door to unconventional measures.

Kennedy similarly said Treasury's estimate didn't include supply chain disruptions or broader sentiment-related impacts.

The Treasury secretary said of the budget, which until recently had been forecast to return to surplus, that “allowing fiscal policy to temporarily deteriorate as a result of this shock” was a sensible response.

Meantime, PWC released a report looking at worst case scenarios, such as the economic consequences of coronavirus escalating to a global pandemic. In such a scenario, 50% of the global population would be infected with the disease.

The economic result would be a 1.3% cut to both global and Australian GDP over the course of a year. At an international level, that's well below the peak of the financial crisis, when global GDP slumped by 5.2%.

To contact the reporter on this story: Michael Heath in Sydney at mheath1@bloomberg.net

To contact the editors responsible for this story: Paul Jackson at pjackson53@bloomberg.net, Alexandra Veroude, Jason Clenfield

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