Optimistic revision of economic growth forecasts: Bill Evans

EXPERT OBSERVER

We have revised our growth forecasts in 2020 and 2021 to reflect a more resilient consumer and labour market - particularly in Victoria.

We have revised our growth forecasts for the Australian economy in 2020 from minus 4.7% to minus 3.5%.

Forecast growth in the September quarter has been increased from flat to 1.8% while growth in the December quarter is revised down from 2.8% to 2.2%.

For 2021 we have revised down growth from 3.0% to 2.5%.

The unemployment rate that was expected to reach 8.5% by the end of 2020 has been lowered to 7.8%; while the forecast end 2021 rate has been held around 7.5%.

The GDP Report this week signalled that the Australian economy had contracted by a record 7% in the June quarter. Consumption contracted by a spectacular 12.1% and hours worked fell by 9.8%. The fall in consumption explained 98% of the overall reduction in activity.

Despite that collapse in hours worked total nominal wage income “only” fell by 2.5% and total nominal household income actually rose by 2.2%.

With a sharp fall in spending and an actual increase in incomes the savings rate rose to 19.8% from 6.0%, highlighting the significant improvement in household balance sheets which would be consistent with considerable pent up demand to spend.

BILL EVANS is the Chief Economist at Westpac