COVID-19 economic crisis not Great Depression: CBA

Commonwealth Bank of Australia’s (CBA) head of Australian economics, Gareth Aird, said that Australia’s economic recovery would be “faster and stronger” than previously expected.

Mr Aird revised the profile for gross domestic product (GDP) in an analysis released last week.

While he still expects GDP to contract by 3.3 per cent in 2020, he now expects to see a much “stronger recovery” in 2021, with a GDP growth prediction of 4.2 per cent in 2021 (up from the previous estimate of 2.5 per cent), and 3.8 per cent in 2022.

Mr Aird also noted that comparisons were made with the Great Depression when GDP and employment collapsed in Australia over the second quarter of 2020 but largely dismissed the comparison.

“We had not seen such a sharp deterioration in economic data since the 1930s. But the similarities between the Great Depression and the COVID-19 pandemic from an economic perspective only pertain to the Q2 20 activity data,” Mr Aird said.

“There is not much about the Australian economy in 2020 that is analogous to the Great Depression, particularly the huge monetary and fiscal support injected into the economy.

“The government’s fiscal support packages were designed to keep as much of the economic furniture intact so that when restrictions were eased, activity could rebound swiftly. It is clear that the economic data at the national level has improved since the middle of the year. Indeed, we expect a decent bounce in GDP over the second half of this year to show up in the Q3 20 and Q4 20 national accounts.”

Mr Aird said that he was “optimistic” about the strength and duration of the economic recovery, adding that there was “plenty of evidence creeping into the data that signals strong outcomes next year are more likely than not”.

“Provided transmission of COVID-19 in Australia remains low, particularly community transmission, the strength of the economic recovery in 2021 will surprise many,” he said.

“We believe the metaphorical ‘bridge’ has been built very well and sets Australia up for a prosperous next two years.”

Following the Reserve Bank of Australia’s (RBA) cut to the official cash rate to 0.1 per cent in November on Melbourne Cup Day, the central bank released its quarterly statement on monetary policy, in which it stated that GDP is expected to increase by around 5 per cent over 2021 and 4 per cent over 2022.

It added that this would bring it back to its end-2019 level by the end of 2021, but leave it “well short of the path expected prior to the outbreak of the pandemic”.

According to the Australian Bureau of Statistics’ Labour Force data for October 2020, seasonally adjusted employment increased by 178,800 people – or 1.4 per cent – between September and October, while hours worked increased by 1.2 per cent.

Commenting on the figures, ABS head of labour statistics Bjorn Jarvis said: “This strong increase means that employment in October was only 1.7 per cent below March, and reflects a large flow of people from outside the labour force back into employment. 

“Encouragingly, the rise in employment was also accompanied by a strong rise in hours worked, particularly in Victoria, where hours increased by 5.6 per cent.”

Since restrictions eased in Victoria in October, the state’s employment increased by 81,600 people (2.5 per cent). However, employment and hours worked in Victoria remained 4.1 per cent and 9.0 per cent below March (compared to 1.7 per cent and 3.8 per cent for the rest of Australia).

However, seasonally adjusted unemployment also increased across Australia in October by 25,000 people, and the participation rate increased by 0.9 percentage points.

This strong rise in participation resulted in a slight spike in the unemployment rate, rising 0.1 percentage points to 7.0 per cent.

Speaking of the figures, Mr Jarvis said: “The number of people actively looking for work and who were available to start work increased in October.

“Coupled with a strong increase in employment, the participation rate increased by almost a whole percentage point in October to be just 0.1 percentage points below March.”

[Related: GDP to rise by $9.4bn a month: Treasury]