Government stimulus package announced this week could help stave off a severe economic downturn as a result of the pandemic currently sweeping the globe say experts. 

Australian GDP would be at least 0.9 percent lower in 2020 because of the COVID-19 pandemic, estimates KPMG modelling in a report published this week.

However, the fiscal stimulus package announced on 12 March will soften the blow and help underpin business and consumer confidence. This is important because a lack of confidence and increased uncertainty have the potential to turn this temporary health crisis into a full-blown economic crisis where panic set in to financial and other markets and credit dries up.

The report estimates that 36 million workdays could be lost, with an estimated 1.5 percent hit to productivity in Australia. This is through workers withdrawing from the labour force through illness and having to care for others.

DIt is important to recognise that our modelling is not a forecast but an analysis of what would happen to the economy due to several ‘shocks’ caused by COVID-19, all other factors being equal. Some of the loss of economic activity in the near term due to the pandemic will be temporary as business and consumers delay investment and spending decisions.

KPMG believes that the government stimulus package was comprehensive, well-targeted and represented a circuit-breaker to ensure that Australia does not descend into a more acute and protracted economic downturn due to businesses and households losing confidence. The firm estimates that, assuming it is implemented in an optimal and efficient manner, it could add slightly over $20bn to GDP in the next two years.

But the report adds that there are two caveats to this – first, in order for the Delivering support for business investment components of the stimulus package to be implemented and successful, small-to-medium businesses will need to invest slightly more than $30bn in the Australian economy over the next 2 years. This is a significant ask; especially in an uncertain domestic and global business environment.

Second, the impacts of the COVID-19 pandemic are unfolding in real time. If the pandemic turns out to be more acute and last longer than is currently anticipated then the economic impacts may be significantly greater.

We the aim of the stimulus package is to bring forward spending from the future. This will mean that from around late 2021, early 2022, the government will have to address the deficit by increasing taxes or reducing other expenditures and that businesses that have brought forward investments may not be able to do as much later on.

History shows us that influenza pandemics have a material effect on the functioning of the global economy, as individuals change their normal pattern of behaviour. Sickness and temporary or permanent withdrawal from the workforce, added to measures from the authorities like work and school closures, limitations on movement of travel by the public and quarantine procedures will all reduce labour productivity. Some of this lost output will be temporary in nature as workers catch-up and over-produce once the pandemic is over, but ultimately it is inevitable that some production will be permanently lost.

The analysis applies a series of ‘shocks’ to the world economy, and a set of Australian-specific shocks, where exports, including tourism, higher education and commodities are either temporarily or permanently delayed:

  1. Productivity loss associated with workers temporarily withdrawing from the labour market because they have contracted COVID-19 and are too sick to work.
  2. Productivity loss associated with workers temporarily withdrawing from the labour market because they need to care for sick children and older family members who have contracted COVID-19.
  3. A temporary increase in the user cost of capital reflecting investors demand for a higher risk premium during this period of uncertainty.
  4. Demand shocks causing a variation in capacity utilisation.
  5. Reduced anticipated consumption expenditure.
  6. Revenue associated with higher education fees and other education-related tourism expenditure by Chinese students will decline during calendar year 2020.

In modeling these shocks we have made conservative assumptions in terms of consumer behaviour and on the basis that there is not a wholesale closing of schools, universities and aged care centres. If these assumptions turn out to be false then the economic impacts of COVID-19 can be expected to be both larger and more prolonged than the scenario we have modelled. We recognise there are downside risks that may play out in terms of both the duration and reach of the pandemic and the potential for panic to spread to financial markets and result in an over-reaction that then feeds back into the real economy.

Despite evidence of households engaging in stockpiling behaviour that appears irrational and the recent heavy falls in financial markets, we believe the probability of the pandemic resulting in a full-blown panic scenario remains low. We anticipate governments have an opportunity to implement a range of policies that can assist with reducing uncertainty and minimise the chances of such a scenario materialising, as the Australian, US and UK governments did last week.

For more information, get in touch with the author of this report, Dr Brendan Rynne, partner and chief economist, KPMG