Support for businesses to hold on to workers should be prioritised over cash handouts for households, according to Deutsche Bank, which forecasts Australia’s economy will fare better than most with a contraction of only 0.1 per cent in 2020.
It comes as the federal government is reportedly considering a higher rate of unemployment payments for people who lose their job in the months ahead because of the COVID-19 pandemic.
Deutsche Bank’s numbers predict a short and sharp recession for Australia, with GDP growth to recover to 2.9 per cent next year.
Unemployment will nonetheless rise to be 7.5 per cent by the end of the year, the bank said.
“Our forecasts for unemployment are 'better' than simple correlations with GDP growth would suggest,” the bank said.
“This is because we assume stimulus measures outlined already (and more are likely on the way) by Australia and New Zealand do what they are intended to do: keep more people employed than the underlying economy would usually deliver.
“Essentially, 'labour hoarding' funded by the taxpayer.
“As this crisis evolves, it is increasingly clear that strategies that provide incentives for businesses to hoard labour ought to be the primary objective of government support.
“To this end, monetary and fiscal authorities need to focus stimulus efforts (preservation might be a better description) on the real corporate sector.
“Primarily, small and medium sized businesses in industries directly affected by social distancing.
“If our global economics team is right, and this shock proves to be v-shaped for growth (encouragingly, the early evidence from China suggests this might indeed be the case), 'labour hoarding' will minimize the long-term economic costs far better than cash handouts to mobility-constrained households.”
Overnight
The Dow Jones Industrial average fell 6.3 per cent last night to be 19,898 points at the close, down 33 per cent since a February peak.
Deutsche Bank’s global research, released in the US overnight, shows some sobering numbers.
The report projects real GDP will fall 24 per cent in the Euro Area in the June quarter, and 13 per cent in the US.
“As we have noted, these numbers are significantly beyond the range of modern historical experience,” the bank said.
“The largest quarterly declines in GDP in the US during the great recession of 1980 and the great financial crisis of 2008-09 were on the order of 8 per cent, and the previous record was a 10 per cent drop in 1958Q1.
“Over the past week we have seen a dramatic rise in social distancing in the US with closures of schools and universities; widespread shifts to work-from-home arrangements; shuttering of restaurants, bars and malls in major US cities; and cancellation of all major sporting events.
“On top of this, travel has been restricted from Europe and the UK, in addition to existing travel restrictions from Asia.
“Financial conditions have also reached their tightest levels since the global financial crisis, and concerns have risen about credit and liquidity shocks.”
