Australia’s GDP likely to drop by $10b following extended COVID-19 restrictions

The economic cost of the current COVID-19 restrictions in New South Wales (NSW) is expected to be slightly greater than in Victoria, reflecting the fact there are different economic structures and population sizes between the two jurisdictions.

Given the breadth of supply side restrictions now in place KPMG estimates the cost for NSW is expected to be around $220 million per day, while the economic cost to Victoria in lost economic output is likely to be around $150 million per day.

Understanding the economic impact of the current lockdowns is very difficult, and comparing to past lockdowns is useful, but only to a point.

The longer the restrictions continue, the greater the impact (as deferred expenditure becomes lost rather than delayed), but if the lockdown is extended like Victoria’s in 2020, then behaviour changes and workarounds are found.

With that in mind, the June quarter 2020 is probably most like the current situation in terms of how to consider the spending behaviour changes likely to be undertaken by household consumers and businesses.

The June quarter 2020 saw $37 billion wiped off gross domestic product (GDP), including -$60 billion in taxes & subsidies, -$5 billion in lower salary and wages and +$28 billion in higher profits and mixed income.

This mix was driven by the significant support programs in place, JobKeeper and Jobseeker, plus other support through rent relief and deferred loan repayments.

In the context of the current lockdowns, government support is lower and less generous (JobKeeper was paid after lockdowns finished, whereas the new arrangements are just for the period of disrupted hours), so the negative impact on taxes and subsidies should be lower.

Salary and wage losses should also be lower and profit increases should be more subdued.

If the NSW and Victoria restrictions continue for 40 and 10 days respectively output will be reduced during this period by around $10 billion. However, given the resilience shown in the domestic economy from previous lockdowns some of this “lost” output is likely to be transferred to higher-than-normal spending later in the September quarter and into the December quarter.

From a GDP (income) perspective the impact of these lockdowns will affect the national accounts differently to how the June quarter 2020 was impacted; most of this hit will come through lost wages and lower profits, with some fall in tax receipts rather than an increase in subsidy costs for government.

From a GDP (Expenditure) perspective, increased savings will enable a continuation in spending for some, so consumption fall is likely to be minimal, but investment and taxes will probably bear the majority of the expenditure reduction, with some disruption to net exports as well.

KPMG’s most recent macroeconomic forecasts (set prior to these rounds of lockdowns) suggested the September quarter would grow by around 1 percent, which equates to $5 billion.

However, given the breadth and length of the current lockdown we now expect Australia will instead experience a quarter of negative growth of around -0.5 percent.

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