Unemployment could reach as high as 8% in Australia should the COVID-19 pandemic cause a recession, according to UBS, as the clampdown on travel damages Australia’s GDP.
In its Macro Keys report, the investment bank said an Australian recession caused by negative GDP in Q1 and Q2 was ‘likely’ which would end a 29-year run of no recessions.
If this was the case, it could cause unemployment to spike to 6.25%. If the recession carries on for a third quarter, described as a ‘severe pandemic scenario’ then it could reach as high as 8%.
Australian unemployment levels were currently 5.3% and had an average rate of 6.2% going back to 1978.
It said it expected further stimulus from the Government and the Reserve Bank of Australia (RBA) in the coming weeks. The Government last week announced fiscal stimulus of $21 billion which it estimated could add 1.5% to GDP in Q2 but UBS said this was ‘much smaller’ than the stimulus issued during the Global Financial Crisis. Meanwhile, the RBA cut interest rates to 0.50% and warned it may be forced to do quantitative easing by buying government bonds if the situation worsened.
“We expect an even larger fiscal stimulus ahead, perhaps as soon as Thursday. Importantly, given the Australian Government policies announced over the weekend, the risks are now skewed to our downside scenarios and potentially even worse,” UBS said.
“Specifically, Australia banned all mass gatherings over 500 people, and requires all travellers to self-isolate for 14 days. Globally, many countries also announced significant new restrictions. It seems plausible travel restrictions get extended. This is particularly negative for Australia given total tourism-related services are $69 billion or 3.5% of GDP.
“More broadly, tourism-related consumption by Australians within Australia is even larger at $113 billion or 5.8% of GDP, and with bans on public gatherings, social distancing encouraged and unwillingness to travel, this is likely to be hit as well.”