The world is facing a steep downturn and long road to recovery as the coronavirus pandemic continues to create uncertainty. Global GDP is now forecast to contract by 4.9% in 2020, up from the 3% decline the International Monetary Fund (IMF) had predicted earlier. The IMF expects growth to return in 2021, but recovery will be gradual as economic activity slows due to social distancing, more businesses closing and unemployment rising.
The Australian economy is doing better than many expected and may recover faster than other countries, thanks to its virus containment and government fiscal measures. But it is in recession and a lot of uncertainty remains. The Reserve Bank of Australia (RBA) has exhausted conventional monetary policy, so economists suggest that further fiscal stimulus will be vital going forward.
Despite earlier predictions of price falls of up to 20% due to the pandemic, Australia’s housing market is holding up. Prices are now only expected to drop modestly this year, as government stimulus schemes help protect jobs and incomes. But given the unprecedented nature of the COVID-19 recession, outlook for the housing market in the next year is still very uncertain.
With the unemployment rate expected to stay above 7% until the end of 2021, interest rates are likely to remain at a record low for years. This is good news for mortgagors, businesses and would-be property buyers. The RBA’s recent measures to provide liquidity to financial markets are also keeping funding costs low, which should push lending rates further down.
Property market participants, including mortgage brokers, had taken a hit from restrictions due to COVID-19. With a recession and rising unemployment, mortgage brokers could see their businesses continue to decline for the rest of the year. A bright spot for the industry could come from first home buyers taking advantage of falling property prices and record-low interest rates.
Major banks are facing headwinds and have made substantial provisions to absorb expected losses from the economic downturn. Collectively, they set aside more than $7 billion in loan-loss provisions in recent months. Across the industry, banks recorded a 14% year-on-year fall in their combined net profit after tax at the end of March 2020. However, banks are generally well capitalised – and the big four are particularly well positioned to weather the impacts of the current crisis.
With revenues falling and spending skyrocketing, Australia’s budget deficit is expected to hit more than 7% of GDP in 2019–20 and 2020–21. Before the pandemic, the Australian Government predicted a budget surplus of 0.3% for both fiscal years. It is lifting its debt ceiling from $600 billion to $850 billion to deal with the current recession. On a more positive note, the country ran a surplus on the current account for a fourth consecutive quarter in the January–March 2020 period – the first in many decades.