Melbourne’s Covid transmission outbreak has been widely publicised by the media. Melbourne’s daily positive test rate is relatively benign by world standards (i.e. 0.5-0.6% versus 7.5% in the USA). However, the reinstated 6-week lockdown of Melbourne is likely to have a negative impact on Australia’s economy. Melbourne is responsible for producing over 19% of Australia’s GDP.
Spending has bounced back strongly with Victoria lagging
Firstly, let’s start with the good news. The good news is that according to ANZ Economics, spending has bounced back relatively strongly (see charts below - click to enlarge).
Spending overall is up 5.5% year-on-year to 3 July 2020. Households are spending more on goods and groceries but substantially less on travel and entertainment.
Spending in Victoria is lagging compared to other States, due to the stricter lockdown rules.
Victoria’s lockdowns will give rise to higher unemployment and a prolonged recession
Up until a few weeks ago, I was firmly in the V-shape camp. That is, I expected the Australian economy would recover sharply after lockdown restrictions were lifted. I based this view on the assumption that there would be more targeted government stimulus post September. To date, economic data (similar to the spending data above) has been supportive of this view.
However, given Melbourne accounts for over 19% of Australia’s total GDP, Melbourne’s reinstated lockdown is likely to weigh heavily on the nation’s economic recovery.
It is my view that a second lockdown will substantially harm consumer and business confidence. A few weeks ago, restaurants and entertainment venues were contemplating reopening. Now they won’t be able to do that for at least another 6 weeks. There are not many (otherwise) viable businesses that could survive a 5-month closure. As a result, I fear that more businesses will not survive this period and as such, unemployment will rise and take much longer to recover.
Based on data from March & April, the following categories of expenditure will likely suffer the most: dining and takeaway, accommodation, entertainment and travel.
Impact of immigration, education and population growth
Border closures will have a negative impact on population growth due to reduced levels of overseas and interstate migration. And population growth drives economic activity and property values.
As discussed in my recent
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