Treasury believes the jobless rate will start to “gradually” fall from early 2021 and still be around 8.75 per cent by the middle of next year. It notes that unemployment took seven years after the last recession to fall by more than 4 percentage points.
“There may be longer-term impacts on the labour market if some workers who have been dislocated, especially those in more vulnerable cohorts, lose skills or need to re-skill to enter employment in a different occupation or industry,” it noted.
The high unemployment rate will weigh on wages growth for those with a job.
Treasury is forecasting record low wages growth at 1.25 per cent this year. With inflation also expected to be 1.25 per cent, that would in effect mean zero wages growth.
Ahead of the pandemic, the Reserve Bank had been hoping to see wages growth above 3 per cent to help turbocharge the economy.
The update confirms the coronavirus pandemic has driven Australia into its first recession since 1990-91. GDP is thought to have contracted by 0.25 per cent in 2019-20 with growth of minus 2.5 per cent this year.
Year-on-year, the economy is tipped to shrink by 3.75 per cent in 2020 and then expand by 2.5 per cent in 2021. That would leave the economy smaller than it was in 2019.
If that occurs, it would be the first consecutive years of negative growth since the Great Depression of the 1930s.
Growth will be held back by falling household consumption while business investment is tipped to fall off a cliff this year, dropping by 19.5 per cent.
Any growth will be driven by government, with public final demand tipped to expand by 4.5 per cent while private demand is forecast to fall by 4 per cent.
Population growth is assumed to fall to its lowest level since the middle of World War I, dropping from 1.2 per cent last financial year to just 0.6 per cent.
Treasury says this is largely because of falls in net overseas migration but it is also expecting fewer babies to be born “due to the weaker economic conditions and outlook”.
All of the forecasts are predicated on a return of international travel from January and the coronavirus lockdowns across Victoria finishing within six weeks.
There is also doubt over household consumption, with retail trade figures suggesting people have used the government’s coronavirus supplement and JobKeeper to lift their spending.
NAB chief economist Alan Oster said the key risks to the forecasts remained the pandemic itself as well as the hit to the labour market and consumer confidence.
“Overall, these forecasts appear pessimistic and suggest the government is starting from a conservative position on the pace of recovery,” he said. “However, there is exceptionally high uncertainty around all forecasts at this point and our own forecasts embody a relatively optimistic recovery in consumption despite ongoing labour market fallout.”
Shane is a senior economics correspondent for The Age and The Sydney Morning Herald.