$100 billion on the line if second COVID-19 wave takes hold
While Victoria’s deputy chief medical officer Michael Kidd has said that Victoria is yet to reach a second wave, the number of those affected continues to rise along with the death toll.
Overnight, Victoria recorded 127 new cases. The highest number in the state since the pandemic surfaced in the early months of 2020. Two further deaths have also been recorded in the state. The impact of this current rise is more devastating than it has been previously, with suburbs now in lockdown and residents in several commission housing estates not even able to leave their flats.
The economic effects of this current lockdown will be felt for some time to come, as will the broader economic impact on Australia if the trajectory in Victoria continues.
In Victoria specifically, gross state product is expected to fall 1.6 per cent in 2020-21. Victoria was already on track to be hit the hardest of any of Australia’s states, despite the most stringent lockdown laws in the country. Its vulnerability is due to a heavy reliance on migration and foreign student activity.
Construction activity has also been hit, especially construction in inner city areas as people reconsider how safe it is to live in high-density areas.
The silver lining is the planned infrastructure work by government that is overhauling the transport system.
Deloitte Access Economics partner Chris Richardson has forecast that even without a second wave the Australian economy would struggle to recover.
Deloitte claims the cost of a second wave would be upward of $100 billion.
“A genuine second wave would be a disaster – whether or not it was accompanied by substantive second waves in other nations,” chief author Chris Richardson wrote as Deloitte economists released their quarter business outlook.
“On livelihoods, the lost national income would be over $100 billion in the next couple of years alone, and there would be ongoing damage in both jobs and joblessness. The stakes are really, really high,” Richardson said.
Deloitte has predicted that even without a second wave, Australia’s economy will contract by 0.1 per cent in 2020 and by 0.4 per cent in 2021 – the longest contraction since recession in the 1980s.
Unemployment is set to average 8.2% over the next 12 months, with Deloitte analysts predicting it will remain high and will not drop back to 5.1 per cent before 2025.
The economy is being hit by what Deloitte terms as a “toxic trio of high debt, high unemployment, and low confidence.
Possible second wave outcomes
The rise in new COVID-19 cases in Victoria and subsequent lockdowns pose a risk to the timing of the recovery, including how quickly Australia can recover.
There is a recovery on the horizon, it is just how quickly it comes. Deloitte suggests robust national economic growth of 5.3 per cent in financial year, 2021-22.
This potential second wave has also reinforced Reserve Bank of Australia (RBA) governor Phillip Lowe’s call for economic stimulus packages to continue.
Mr Lowe warned of a post-coronavirus shadow over the economy in May, saying the JobKeeper wage subsidy program should be extended or tapered to support the recovery.
The government, which has thus far refused to make a call on any stimulus extension, may now have to revisit its position.
Interest rates cannot go much lower, which means government support will be required for some time.
Even if it is not in the form of JobKeeper, Deloitte believes a ‘cheaper, more complex form of stimulus could be introduced.
“It doesn’t say, ‘stop all spending’, but it does very much say, ‘spend differently’ – you might want to add social housing, you might want to do more around infrastructure,” Mr Richardson said.
“One clear thing you shouldn’t do is have lots of stuff end at once.”
Along with a second wave comes a hit to consumer confidence, which means a V-shaped economic recovery is now out of the question.
There are some industries that will benefit further, mostly those in digital services.
If nothing else, Australia’s economy, in line with the global economy, has shifted to a digital world.
That’s great for those running digital businesses. However, the cost cutting associated with digitisation and the hit to employment, will also have be factored into the government’s response.
We don’t necessarily know yet what the impact of a second wave will be, however should this prediction ring true, a $100 billion hit will be a significant blow and will take several years to overcome.
This update is not financial advice. This article is general news and information.
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