On the path to recovery: KPMG responds to economic update

The Treasurer’s MYEFO statement today presents a rosier picture of Australia’s path to economic recovery than what was presented only 10 weeks ago when he announced the 2020-21 budget.

Even during this short period, we have witnessed the further containment of the coronavirus with very limited amounts of community spread, which has enabled the further lifting of restrictions and the broadening of economic activity across all industries, sectors and regions.

The improvement in the ‘supply side’ of the economy has been broadly matched by underlying demand, more so within the household consumption, but investment and government consumption have also positively contributed to the recovery.  We have seen this play out in the labour market, where employment has risen by 270,000 since mid-September, with total employment now only about 1 percent lower than what it was prior to the commencement of the pandemic.

Economic growth is now forecast to be 0.75 percent and 3.5 percent, revised from -1.5 percent and 4.75 percent, respectively for this financial year and the next.  The pandemic-induced recession was driven fundamentally by a fall away in household consumption, and now this ‘bounce’ in economic activity is also being propelled by household consumption activity.

The unwinding of some pent-up consumer demand and a relaxation in the cautionary approach to spending adopted by Australians during the bleakest part of the pandemic has seen about half of the decline in final household consumption expenditure that occurred in the June quarter of 2020 return in the September quarter.

This strengthening in the economy, and especially within the labour market, has enabled the Treasurer in his MYEFO Statement to revise down Australia’s budget deficit for 2020-21 by nearly $16 billion to (still an eye watering) $197.7 billion.  About $11 billion of this decline reflects lower JobKeeper payments, while company tax and GST receipts are $7 billion higher.

The economic forecasts contained within MYEFO suggest that while public final demand is strong and household consumption looks to be returning, buoyed by high levels of consumer confidence – also driven largely by expectations that the successful vaccine discoveries will mean an end to this pandemic in the near future – investment activity and net exports will remain weak during the next two years. Since the Budget the Government has also introduced several spending measures to provide further targeted health and economic support to the community, with the largest item being the extension of the coronavirus supplement to income support benefits including JobSeeker (worth about $3.2 billion).

Australia’s current political and trade tensions with China are recognised in MYEFO as a downside risk to our economic recovery, but it also recognises these challenges impact a relatively small proportion of total exports.  At an aggregate level, trade with China remains very strong, with Australian exports to China increasing by $16.6 billion during 2019-2020, albeit the value of iron ore exports alone rose by $21.2 billion during this period.

The current strength in iron ore prices has seen the government change its assumption in MYEFO and push out to the end of the September quarter 2021 as the date when the price of iron ore will return to US$55 per tonne.  This still appears to be a very conservative assumption, given it was around 2015 when the annual average price for iron ore was last around US$55 per tonne.

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