As the world ramps up its response to the coronavirus outbreak, an investment manager has projected a GDP contraction of around 15 per cent peak-to-trough for Australia.
Insight Investment has made the call, adding fiscal and monetary policy response will be key, but business closures may limit their impact.
It has forecast an 80 per cent hit on the travel and leisure sectors, while growing restrictions will mean most sectors will face negative impact, particularly where their activity cannot be conducted remotely.
Industries such as construction and manufacturing will face both labour constraints and potential supply chain disruptions, although Insight believes the impact will be less severe declines than those for hospitality businesses.
Only two sectors in its analysis are set to have no negative impact: human health and social work activities and public administration.
Every other sector will face a downfall, with sectors such as transport to see a 30 per cent decrease, construction – 25 per cent and manufacturing – 20 per cent.
Bruce Murphy, director, Australia and New Zealand, Insight, said: “The Australian economy has large construction, restaurant and accommodation sectors which are likely to be impacted by up to 25 per cent and 80 per cent respectively.”
“To their credit these hardest hit industries are rapidly adapting with for example the expansion of services such as online exercise classes and take away food offerings. It is great to see Australian communities rallying to support these initiatives and keep the economy moving as best possible.”
Insight has added it will be watching unemployment, supply chain constraints and consumer behavioural changes for clues on the strength of the eventual rebound. The timeframe for resolution of all three factors for now remains to be seen.
But the government and central bank policies are restricted in remedying the knockbacks.
“Unlike in a typical recession, fiscal and monetary policy is limited in its ability to mitigate the economic contraction,” Insight’s analysis stated.
“Even where an element of ‘helicopter money’ is being considered (such as the US), discretionary consumption is limited by social distancing policies and business closures.
“These measures are therefore more aimed towards providing enough liquidity to businesses, individuals, and markets to ride out the downturn and facilitate a sharp rebound in activity.”
Insight has estimated the US GDP will fare better than Australia’s, with a 12.5 per cent peak-to-trough difference.
Meanwhile other markets, including the UK, EU, China and Japan have been tipped to match the 15 per cent contraction while Hong Kong is predicted to cop a 16 per cent hit.
“Monetary policy will likely be highly accommodative for over 12 months while fiscal policy will need to be loose to ensure firms and individuals have the necessary liquidity to withstand the downturn,” Mr Murphy said.
“Should authorities be able to contain the virus, this stimulus will likely set the scene for growth to run well-above trend. In most regions, we expect it will take more than 12 months to return to pre-virus levels of activity.”
Sarah Simpkins is a journalist at Momentum Media, reporting primarily on banking, financial services and wealth.
Prior to joining the team in 2018, Sarah worked in trade media and produced stories for a current affairs program on community radio.
You can contact her on [email protected].