Question

In: Economics

Economic forecasting is difficult at the best of times. It is even harder at times like...

Economic forecasting is difficult at the best of times. It is even harder at times like this when we are experiencing a once in a lifetime event. Given this, I don't think it makes sense at the moment to focus on forecasts to the nearest decimal point, as we often do. Instead, I would like to focus on two broad issues:

  1. the immediate outlook for the economy
  2. the nature and speed of the recovery.

The next few months are going to be difficult ones for the Australian economy.

One very obvious consequence of the efforts needed to contain the virus is that many normal activities are restricted or not permitted. This means that, for as long as these restrictions are in place, we don't have the jobs and incomes that come from these activities. On top of this, there is a high level of uncertainty about the future, which means that many households and businesses are holding back their spending and investment.

The result of both the restrictions and the uncertainty is that over the first half of 2020 we are likely to experience the biggest contraction in national output and income that we have witnessed since the 1930s.

Putting precise numbers on the magnitude of this contraction is difficult, but our current thinking is along the following lines:

  1. National output is likely to fall by around 10 per cent over the first half of 2020, with most of this decline taking place in the June quarter.
  2. Total hours worked in Australia are likely to decline by around 20 per cent over the first half of this year.
  3. The unemployment rate is likely to be around 10 per cent by June, although I am hopeful that it might be lower than this if businesses are able to retain their employees on lower hours. The unemployment rate would have been much higher than this without the government's JobKeeper wage subsidy.

These are all very large numbers and ones that were inconceivable just a few months ago. They speak to the immense challenge faced by our society to contain the virus.

[...]

Inevitably, the timing and pace of this recovery depend upon how long we need to restrict our economic activities, which in turn depends on how effectively we contain the virus. So it

is difficult to be precise and it makes sense to think in terms of scenarios. Consistent with this, the Bank will discuss some possible scenarios in the Statement on Monetary Policy in a few weeks' time.

One plausible scenario is that the various restrictions begin to be progressively lessened as we get closer to the middle of the year, and are mostly removed by late in the year, except perhaps the restrictions on international travel.

Under this scenario we could expect the economy to begin its bounce-back in the September quarter and for that bounce-back to strengthen from there. If this is how things play out, the economy could be expected to grow very strongly next year, with GDP growth of perhaps 6-7 per cent, after a fall of around 6 per cent this year. There is though quite a lot of uncertainty around the numbers, with the exact profile of the recovery depending not only upon when the restrictions are lifted but also on the resolution of the uncertainty that people feel about the future.

It is harder to make forecasts about the unemployment rate given the uncertainty about how many employees will remain attached to their firm and whether people who are stood down will be looking for employment and thus be counted as unemployed. But it is likely that the unemployment rate will remain above 6 per cent over the next couple of years. With many firms delaying or cancelling wage increases, year-ended wage growth is expected to decline to below 2 per cent, before gradually picking up again. In underlying terms, inflation is expected to remain below 2 per cent over the next couple of years.

Of course, there are other scenarios as well. On the optimistic side, the restrictions could be lifted more quickly, with the virus being contained. In that case, a stronger recovery could be expected, particularly in light of the very large monetary and fiscal support that is in place. On the other hand, if the restrictions stay in place longer, or they have to be reimposed, the recovery will be delayed and interrupted. In that case, the loss of incomes and jobs would be even more pronounced.

Your Task:

With reference to the speech excerpts above, discuss what the GDP and unemployment figures for the current period are expected to be, and how they might change throughout the remainder of 2020.

Within your answer, make sure to focus on showing your understanding of what the GDP and unemployment figures mean, and that you reference key concepts and use the key terminology that we have studied in this topic.

Solutions

Expert Solution

As indicated by the discourse expressed above, GDP (Gross household item) has been alluded to as national yield. Pay earned through employments and speculations by families are tow terms that are identified with GDP for our situation national yield.

Because of the infection, the present evaluations express that the first 50% of 2020 will encounter the greatest fall or logical inconsistency that the Australian economy has encountered in quite a while. Allegorically, the economy will encounter a decay by 10% in the national yield with a dominant part of the drop in the June quarter. Since a greater part of the organizations are under limitations which is required to proceed in any event, during the year, normal working hours are relied upon to go down to 20 hours and the joblessness rate is required to be 10% in the first 50% of 2020. The greatest addition in joblessness is additionally expected in June. This reality expresses that there a nearby immediate connection among yield and joblessness. Where since there is no creation and organizations are closed, there is no work and thus no yield.

The improvement of GDP and decrease in joblessness rely upon the circumstance of the limitation around. On the off chance that the lockdown is lifted in stages over the second 50% of the year with complete lifting of the limitations before the year's over, the bob back procedure, i.e organizations fully operational once more, at that point this year will at present have a plunge/withdrawal in the GDP. In any case, the development expected in the following year will be at the pace of 6%-7% following a 6% fall this year.

Joblessness gauges are troublesome since alongside limitations the dread and vulnerability among individuals will likewise assume a job in evaluating the joblessness rate. People that desire to work and can't look for some kind of employment will fall in the class of jobless. Individuals who don't wish to work are not included in the figure. From the present circumstance, the joblessness rate is required to improve from the current 10% however will stay above 6% for the following barely any years. The year end wage rate is relied upon to be 2% which is a marker that the expansion rate will be kept up under 2% since year end wage rate is wage balanced for swelling. The entirety of the above forecasts rely upon to what extent it takes for the infection to be contained and how rapidly the limitations are lifted.


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