5.12pm – Mar 9, 2020

Robert Guy

Westpac chief economist Bill Evans now expects the Australian economy to slide into recession in the first two quarters as coronavirus impacts supply chains and hit sectors spanning tourism to mining.

The forecasts, based on a "no fiscal stimulus basis", point to a contraction of 0.3 per cent in both the first and second quarters before growth accelerates to 2.2 per cent in the second half.

His forecasts may be revised after the government unveils its package.

"That growth profile constitutes a technical recession but given the expected recovery in the second half of the year it is much more realistic to characterise the situation as a “major disruption” to growth rather than the style of recession that Australia has experienced in the past," Mr Evans says.

Westpac chief economist Bill Evans sees a recession in the first half. James Brickwood

He said in Australia’s last two recessions the unemployment rate lifted from 6 per cent to around 11 per cent.

However, Westpac expects the unemployment rate to hold under 6 per cent.

The contraction in the first quarter is expected to be driven by a 10 per cent decline in services exports - namely education, tourism and transport - and a 3.5 per cent contraction in goods exports.

In the June quarter, Westpac is forecasting a 1.2 per cent decline in consumer spending.

It also expects a 0.5 per cent decline in new business investment.

After a tough two quarters, growth is expected to rebound by 1.4 per cent in the September quarter and rise 0.8 per cent in the December quarter.

Mr Evans' forecasts are not based on the expected impact of a stimulus package.

He says the government's package should aim to support jobs rather than avoid a recession.

"Policies to lift business investment through temporary subsidies are unlikely to have any short term impact as businesses will be concerned about the state of demand limiting their appetite for investment," Mr Evans says.

He says payments to those groups such as pensioners and the unemployed who have a high propensity to consume can lift demand in the short term.

Lower tax rates should also be considered by the government.

"Westpac believes that now that the Government’s focus on achieving a fiscal surplus has passed the structural need to lower personal taxes should be addressed. As noted, the economy is entering this crisis with little momentum.

"That is largely due to the cautious consumer. Weak consumer spending is attributable to slow after tax income growth."

"The Government has already legislated personal tax cuts to begin in 2022. Bringing forward those tax cuts in the May Budget would greatly assist households to boost demand at a time when the economy will be emerging from a very difficult time."