Question

Read the following excerpts taken from the Governor of the Reserve Bank of Australia's

speech on 21 April 2020.

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:

• the immediate outlook for the economy

• 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:

• 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.

• Total hours worked in Australia are likely to decline by around 20 per cent over the

first half of this year.

• 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.

Please keep this criteria answering the question:

Evidence is shown of a deep understanding of GDP and related concepts

This criterion is linked to a learning outcome Evidence is shown of a deep understanding of unemployment and related concepts

This criterion is linked to a learning outcome Economic concepts have been applied well to the real world context

This criterion is linked to a learning outcome Explanation is clearly related back to the article content

This criterion is linked to a learning outcome Appropriate economic terminology used without error

This criterion is linked to a learning outcome Appropriate writing style and tone

Answer 1

The GDP will experience contraction in the current period by 10%, meaning in 2019 the nominal GDP growth rate of Australia was 4.5% according to IMF, this means that there is going to be severe contraction in the nominal GDP of Australia. Thus Australia's GDP might be -6%. Nominal GDP essentially considers the inflation rate in the system, while real GDP is lower because it doesn't factor in the inflation rate. Unemployment figure might be higher at 10%. With the economy undergoing a drastic change, there might be a mix of structural and cyclical unemployment with several industries undergoing transition, whereas several industries completely shutting off permanently.

Thus the output might still improve in the rest of 2020, depending on when lockdown restrictions are eased, but the output will definitely contract and the unemployment rate might decline to less than 10%. But the overall macroeconomic condition is expected to be severe and strenous to revive growth as there will be limited wage growth, plus the inflation might be low, which means the nominal output will also be low coupled with lower output already of several firms in the industry. The personal consumption level will be low as people don't know when their next paycheck is going to come from, even though government expenditure will drive up growth, it all depends on whether market forces will bolster employment and GDP over the long run.