The Commonwealth Treasurer today released the Government’s Economic and Fiscal Update which includes current forecasts of key economic and budget parameters.
The update did not contain any new major policy announcements with the JobTrainer package and JobKeeper 2.0 announced ahead of the update.
Despite the magnitude of deficits announced, the Government needs to play a very active role in boosting demand at a time where private demand has collapsed.
New economic forecasts were presented as part of the update. The forecasts reaffirm that Australia is in deep recession with the economy expected to contract by ¼ per cent in 2019-20 and 2 ½ per cent in 2020-21. GDP is forecast to have experienced its sharpest fall on record in the June quarter and is expected to pick up in the September quarter and beyond.
Employment contracted 4.4 per cent in through the year to the June quarter 2020 and is expected to grow by 1 per cent in 2020-21. With increasing labour force participation this is forecast to be insufficient to bring down the unemployment rate which is expected to be 8¾ per cent in June next year.
Dwelling and business investment are expected to fall which will contribute to weak private demand.
The deficit is expected to reach $85.8 billion in 2019-20 and $184.5 billion in 2020-21. Before COVID-19, surpluses of $5 billion in 2019-20 and $6 billion in 2020-21 were expected.
The large deficits are mainly the result of:
Net debt is expected to be $488.2 billion (24.6 per cent of GDP) at 30 June 2020 and increase to $677.1 billion (35.7 per cent of GDP) at 30 June 2021.
Not as good as unemployment rate suggests
To illustrate, if the fall in hours worked were fully accounted by fewer employed persons than remained in the labour force, the NSW unemployment rate would be in the order of 13 per cent.
About this release: This release summarises ABS data.
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The easing of COVID-19 restrictions in June saw a strong improvement in the labour market with an extra 280,000 persons entering the labour force in June. Hours worked rose 4 per cent in June, but remained 6.8 per cent lower than March.
The national unemployment rate increased to 7.4 per cent (from 7.1 per cent in May and 5.1 per cent before the crisis) while in NSW it crept up to 6.9 per cent (from 6.4 per cent in May and 4.6 per cent before the crisis).
There are 522,000 fewer employed persons in Australia compared to before the crisis (with NSW accounting for 192,000 fewer employed persons).
Note: Employment growth refers to the percentage decline in employed persons compared with the same time in 2019.