Economic Outlook

The economic consequences of the COVID-19 pandemic have been swift, severe and on a scale not seen since the Great Depression. The public health crisis, and the measures implemented to slow the spread of infection, have led to sharp declines in economic activity and employment globally. Despite these measures, outbreaks have continued to occur in many countries through the second half of 2020, including in Australia.

Governments around the world have responded to the economic and social challenges created by the COVID‑19 pandemic by providing unprecedented levels of economic support to households and businesses. The fiscal and monetary policy measures implemented by the Australian and Tasmanian governments have been critical in mitigating the social and economic impact of the pandemic.

The Tasmanian Government’s Social and Economic Support packages are unrivalled in the history of the State both in terms of the level of funding and the breadth of measures. The packages are valued at over $1 billion and complement the Australian Government’s multi-billion dollar policy response. Both the Tasmanian and Australian governments have also announced increased spending on their already record infrastructure investment programs, which are expected to support jobs and stimulate economic activity.

While the majority of the containment measures have been eased in Tasmania since early June 2020, leading to an improvement in economic conditions, the COVID-19 pandemic continues to have an impact on the Tasmanian economy. Some of these impacts relate directly to the virus containment measures, but they also reflect an initial deterioration of consumer and business confidence, due to high levels of uncertainty. The Tasmanian economic recovery is expected to be gradual and uneven due to the differing degrees to which industries have been affected by the pandemic.

The COVID-19 pandemic has created challenges for economic forecasting and has led to an increase in the level of uncertainty present in the forecasts. The forecasts take into account the current border policy of the Tasmanian Government, which presumes a gradual reopening to all interstate jurisdictions including Victoria by 1 December 2020. The economic estimates and forecasts included in this chapter incorporate assumptions and judgments based on information available at the time of preparation. Due to this uncertainty, forecasts have only been prepared for 2020-21 and 2021-22.

Uncertainty regarding the evolution of the pandemic, and the associated public health response, is a key risk to the forecasts. The crisis is continuously evolving and the trajectory of the pandemic has the potential to vary markedly from that assumed in the forecasts. A number of paths to recovery are possible, with potentially quite different outcomes for households and businesses.

Global and National Economic Environment

Global economic activity contracted sharply in the first half of 2020. Global output in the June quarter 2020 was over 10 per cent below the level in the December quarter 2019 according to OECD estimates. The International Labour Organisation estimates that the total working hour losses over this period equate to around 600 million full-time jobs.

The economic impact of the pandemic has varied across economies. Generally, those that have experienced relative success in containing the virus have achieved more favourable economic outcomes, while others that continue to have limited success in slowing infection rates have experienced deeper contractions in economic activity. The economic consequences of the pandemic are expected to impact the global economy for some time and are likely to be felt unevenly across economies. In its October 2020 World Economic Outlook, the International Monetary Fund forecast global economic output to contract by 4.4 per cent in 2020, before growing 5.2 per cent in 2021.

The Australian economy contracted 7.0 per cent in the June quarter 2020 due to the impact of the COVID‑19 pandemic. This is the largest quarterly fall on record and, following a decline in the March quarter 2020 due to the impacts of extensive bushfires in certain states, has led to the first recession experienced by the Australian economy in nearly 30 years.

Fiscal and monetary support measures implemented by the Australian Government and the Reserve Bank of Australia have been instrumental in helping households and businesses to withstand some of the more severe impacts of the pandemic. The JobKeeper Payment program has assisted people to maintain relationships with employers and prevented more people from becoming classified as unemployed. This means that the effective unemployment rate has been higher than the headline unemployment rate. Combined with the JobSeeker Payment and the JobSeeker Coronavirus Supplement, this has avoided a potentially much worse deterioration in household incomes.

Accommodative monetary policy has played a critical role in sustaining the economy through the COVID‑19 pandemic and maintaining the stability of the financial system. The policy measures implemented by the RBA have kept funding and borrowing costs for banks and governments low and safeguarded the availability of credit to businesses and households.

The RBA has indicated that, due to the economic policy response and progress made on managing the public health aspects of the pandemic, a recovery is now underway in the Australian economy.

The Australian Government released its 2020‑21 Budget on 6 October 2020. The Australian Treasury expects real gross domestic product to decrease by 1½ per cent in 2020‑21, followed by growth of 4¾ per cent in 2021‑22. As containment measures continue to be eased, business and consumer confidence is expected to improve, leading to further recovery in activity.

Australian labour market outcomes are forecast to improve from the end of 2020. Employment is forecast to grow by 2¾ per cent in 2020-21 and the unemployment rate is expected to peak at eight per cent in the December quarter 2020, before falling to 7¼ per cent by the June quarter 2021 and to 6½ per cent by the June quarter 2022. The Australian Treasury expects the effective unemployment rate to converge toward the headline unemployment rate as labour market conditions improve.

Population growth is expected to slow from 1.2 per cent in 2019‑20 to 0.2 per cent in 2020-21 and 0.4 per cent in 2021‑22, according to the Australian Treasury. This is the lowest rate of growth in over one hundred years, with the expected first occurrence of negative net migration since 1946.

Recent Performance, Estimates and Forecasts of the Tasmanian Economy

The Tasmanian economy performed strongly in 2018-19 growing by 3.6 per cent, the strongest result since 2003-04. This performance was supported by above trend growth in household consumption and dwelling investment, as well as robust business investment driven by strong growth in tourism over recent years. These factors continued to provide benefits to the Tasmanian economy through the first half of 2019-20.

The COVID-19 pandemic has had a profound impact on the Tasmanian economy. Like many other economies, Tasmania has experienced record falls in most key economic indicators. The initial onset of the pandemic in the March quarter 2020, and its continuing impact through the June quarter, are estimated to have offset earlier gains in the first two quarters of the year, resulting in a contraction in the Tasmanian economy of ½ per cent in 2019-20. This would be the first decline in Tasmanian gross state product since 2012-13 and the largest decline in almost 20 years.

Table 2.1 shows Treasury’s estimates for key Tasmanian economic indicators for the 2019‑20 financial year, and forecasts for 2020‑21 and 2021‑22.

Table 2.1:         Estimates and Forecasts

			Budget 2020-21
	2018-19		2019-20	2020-21	2021-22
	Actual		Estimate	Forecasts
Gross State Product (real, % change)	3.6		-½	-1½	3¾
State Final Demand (real, % change)1,2	4.0		-0.1	-¼	3½
Employment (year-average, % change)2,3,4	0.2		1.3	-1¾	-1
Labour Force Participation Rate (year-average, %)2,3	60.6		60.4	60½	59½
Unemployment Rate (year-average, %)2,3	6.3		5.9	8½	8¼
Consumer Price Index (year-average, % change)2	2.5		2.4	1.7	1.2
Population (year-average, % change)	1.2		1.0	0.5	0.6

Source: Actual - Australia Bureau of Statistics; Estimates and forecasts - Treasury

Notes:

1.    State Final Demand actuals have been calculated using the June quarter 2020 National Accounts data.

2.    Actual for 2019-20, not estimate.

3.    Labour Force actuals are based on September 2020 data.

4.    If the economy starts to recover sooner, employment is expected to decline by only ¼ per cent in 2020-21, followed by growth of ¾ per cent in 2021-22.

 

Tasmanian economic estimates and forecasts rely heavily on official data produced by the Australian Bureau of Statistics. As a small jurisdiction, some of the key data for Tasmania are more volatile and less reliable than for the larger states, including data relating to the labour force and gross state product and its components, including interstate and international trade. Data are also subject to revision. These revisions can have a greater impact for smaller jurisdictions.

These existing challenges have been made more complex due to the COVID-19 pandemic. The estimates and forecasts included in this chapter have relied to a greater extent on more timely economic indicators and preliminary data, which have the potential to exhibit greater volatility.

The economic estimates and forecasts incorporate assumptions and judgments based on information available at the time of preparation. They assume that Tasmania continues to experience favourable outcomes in relation to virus containment, with interstate travel having commenced from Western Australia, South Australia, the Northern Territory, the Australian Capital Territory, Queensland and New South Wales. Travel between Tasmania and Victoria is expected to commence towards the end of 2020. However, international travel and migration is assumed to remain low over the forecast period. Australian Government fiscal measures are assumed to end in line with their current timetables. This will see the JobKeeper Payment program tapering through the December quarter 2020 and concluding at the end of the March quarter 2021.

State final demand is expected to decline by ¼ per cent in 2020‑21, driven by low levels of consumption and private investment, partly offset by continued strong public expenditure (Chart 2.1). Quarterly growth in household consumption is expected to be positive over the period and this is underpinned by an assumed continuation of the successful containment of the virus, which has allowed most of the Tasmanian economy to open since June 2020. Recent indicators suggest renewed growth in consumption in the September quarter 2020, following a large decline in the June quarter 2020.

 Chart 2.1:        Tasmanian State Final Demand (seasonally adjusted, quarterly)

Source: Australian National Accounts: State Accounts, ABS Cat No 5220.0; Treasury forecasts.

 

The Australian Government’s fiscal policy responses have boosted household incomes and business cash flows which, combined with lower overall levels of consumption, have led to large increases in household savings in the June quarter 2020, which are expected to support consumption once these measures are phased out.

Private investment is expected to decline in the September quarter 2020, largely driven by declines in business investment. Improvements in business investment are expected to lag the recovery in consumption. Dwelling investment is expected to be higher in 2020-21 than in 2019-20, reflecting the impact of targeted government policies such as the Australian and Tasmanian HomeBuilder Grants, and the extension of the First Home Owner Grant at $20 000 to 30 June 2022.

Government expenditure will remain elevated in 2020-21, reflecting the ongoing cost of managing the public health aspects of the pandemic, economic support and the higher costs of delivering essential services in the current environment.

International exports are forecast to detract from gross state product in 2020-21, largely due to sharp falls in service exports. International service exports (which are mostly international education and tourism) fell by 15 per cent in the June quarter 2020 and are expected to also fall in the September quarter 2020. Looking ahead, merchandise exports are anticipated to improve as international demand continues to strengthen. Services exports are expected to remain weak, with low levels of international travel assumed over the forecast period affecting international education and tourism exports.

Overall, the Tasmanian economy is forecast to contract by 1½ per cent in 2020‑21 and then grow by 3¾ per cent in 2021-22.

 

The COVID-19 pandemic has had a severe impact on the labour force in Tasmania. Prior to the pandemic, Tasmanian employment had been at a series high and unemployment was at very low levels, supported by high levels of tourism to the State and population growth that was over double the long‑term average rate. The ABS estimates that employment decreased by 19 100 persons between March and May 2020, and then grew by 12 400 persons between May and September 2020, to be 0.4 per cent above the level one year earlier. Around 55 per cent of this recent increase in employment was in female employment. The unemployment rate was 7.6 per cent in September 2020, up from 4.9 per cent in March 2020. The COVID‑19 pandemic has affected some industries more than others, especially the hospitality industry, which has a higher proportional representation of women and young people.

The increase in the unemployment rate as a result of the COVID-19 pandemic would have been much greater were it not for the Australian Government’s JobKeeper Payment program preserving the relationships between employees and employers over this period, and the temporary removal of mutual obligations for JobSeeker recipients that resulted in some recipients not actively looking for work and therefore being classified as not in the labour force.

The Tasmanian Government has also taken significant steps to support ongoing employment across both the public and private sectors. The decision to maintain the public sector at current employment levels, with no changes to existing wage agreements, along with initiatives such as the Construction Blitz, will assist to support spending across the economy.

The announced $3.1 billion Construction Blitz, which supports both public and private investment across a range of residential, commercial and civil works construction projects, will support growth in aggregate demand across the economy.

However, employment is expected to decline by 1¾ per cent in 2020‑21 in year‑average terms, reflecting the effect of the tapering of the JobKeeper Payment program, partly offset by a recovery in economic conditions that will provide some support to employment. Employment growth is expected to strengthen through 2021-22, to approach early 2019‑20 levels by June 2022, with growth of just under 4 500 persons between June 2021 and June 2022. The Budget contains significant fiscal stimulus and if the economy starts to recover sooner, employment is expected to decline by only ¼ per cent in 2020-21, followed by growth of ¾ per cent in 2021-22. Under these circumstances, between June 2020 and June 2021 employment would increase by 4 000 persons, with a further increase of over 6 000 persons between June 2021 and June 2022.

Chart 2.2:         Tasmanian Employment (seasonally adjusted)

Source: Labour Force, ABS Cat No 6202.0.

 

The participation rate is forecast to remain subdued through 2020‑21 and 2021‑22, as the labour market adjusts to the changed economic landscape. In the first half of 2021, it is expected that more people will return to the labour force as JobSeeker mutual obligation requirements are fully restored. However, this impact is likely to be offset by the end of the JobKeeper Payment program, which may see newly retrenched employees becoming discouraged from seeking new employment and leaving the labour force. Overall, this is expected to result in lower labour force participation.

The unemployment rate is forecast to increase over the forecast period, to be 8½ per cent in 2020‑21 in year‑average terms. Unemployment is forecast to remain elevated in mid‑2021, before improving through 2021-22 to be 7¾ per cent by June 2022. In year‑average terms, the unemployment rate is forecast to be 8¼ per cent in 2021-22, largely reflecting higher rates of unemployment through the first half of the financial year. Headline unemployment is expected to converge with effective unemployment over 2020-21, as some employed individuals working zero hours will become unemployed, more accurately reflecting their true labour market status (Chart 2.3). The response of businesses to the removal of policy supports will determine the path of Tasmania’s labour market outcomes over the forecast period and remains a key area of uncertainty.

Chart 2.3:         Effective Unemployment Rate (seasonally adjusted)1

Source: Labour Force, ABS Cat No 6202.0; Treasury calculations.

Note:

1.    The effective unemployment rate counts the changes in unemployed persons, employed persons working zero hours, and changes in the size of the labour force relative to its size prior to the beginning of the COVID-19 pandemic.

 

The ABS estimates that Hobart’s Consumer Price Index declined by 1.4 per cent in the June quarter 2020, the largest fall in 65 years. This was largely driven by reductions in the retail price of automotive fuel, free childcare and the refund of some education levies. Most of the fall was regained in the September quarter as fees for childcare and preschool were reintroduced. Inflation is expected to remain weak during the forecast period, in response to expected demand and labour market conditions placing downward pressure on wages and prices.

In recent years, Tasmania’s population had been increasing at a rate around double the long-term average. This growth had been driven by positive net migration, with around 65 per cent of the annual growth to the March quarter 2020 attributed to positive net overseas migration and just under 20 per cent from positive net interstate migration.

The COVID-19 pandemic and related movement restrictions mean that overseas migration has largely ceased in the short‑term and the volume of interstate migration movements may also decline, leading to low population growth in the short to medium‑term. Tasmania’s population is expected to grow by 0.5 per cent in 2020-21 in year-average terms, slightly below the long-term trend of 0.6 per cent.

Medium-term Outlook for the Tasmanian Economy

The uncertainty created by the current situation has presented a major challenge to the forecasting of economic variables. As a result, the estimates and forecasts included in this chapter reflect a departure from Treasury’s usual approach to developing and presenting economic data for the Budget. In past years, the State Budget presented a forecast for the Budget year, followed by ‘projections’ in the following three years based on the long-term averages. In the current environment, the medium-term outlook is more uncertain and projections based on long term trends may not be as meaningful. It is due to this uncertainty that forecasts have only been prepared for 2020‑21 and 2021‑22 for this Budget.

The recovery path of the Tasmanian economy is expected to be gradual, due to the severity and nature of the impact of COVID‑19. The impact on the economy resulting from the current crisis is far greater than that which resulted from the Global Financial Crisis. Global economic output is estimated to have fallen by just 0.1 per cent in 2009 after the GFC. This compares with a contraction in the global economy of 4.4 per cent in 2020, as forecast by the IMF in October 2020. The magnitude of this decrease would make the current economic downturn the worst since the Great Depression.

The return of interstate and international tourism to Tasmania will be a key factor in the speed of Tasmania’s economic recovery. Even with the expected lifting of interstate travel restrictions, interstate tourism may not return to pre‑COVID-19 levels for some time as individuals are deterred from travel due to uncertainty around the virus and higher income insecurity, which will lead to declines in the proportion of household consumption used for discretionary purposes such as holidays. On the same basis, it is expected that international tourism will also be adversely affected in the short to medium‑term.

Looking ahead, the Tasmanian economy is forecast to continue to follow a gradual recovery path from the end of 2021‑22. The assumed continuation of positive outcomes in relation to the control of virus infection rates, both in Tasmania and on mainland Australia, will support the continued strengthening of consumer and business confidence, leading to gradually improving levels of economic activity. However, unless Tasmania’s economy grows at significantly above its long-term trend rates of growth throughout 2022‑23 and 2023‑24, it is unlikely to recover to the previously projected levels of activity and employment before the end of this period.

The recovery in the Tasmanian labour market is also expected to be gradual. The specific nature of the economic downturn caused by the COVID-19 pandemic is different to past downturns in that service sectors have borne the worst of the economic impact. Past downturns have seen these impacts spread more evenly across industries or concentrated within the manufacturing sector. In Tasmania, the level of employment fell by more in just April and May 2020 than the total decline in employment in the 1990s recession. Following the 1990s recession, it took around a decade in annual terms for the unemployment rate to recover. It is not anticipated that it will take the same period to recover from the current position. For instance, as at September 2020, around two thirds of the recent decrease in employment had been recovered. However, it is likely that employment will continue to be adversely impacted by the pandemic and associated public health measures for some time, as businesses adjust to changes in the level of fiscal policy support and restructure in response to ongoing challenges in the economic environment.

The point at which the Australian and Tasmanian economies recover to pre-COVID-19 levels of activity and employment will be determined by the ongoing evolution of the pandemic. Whilst there is a range of potential economic outcomes that may eventuate depending on how the pandemic develops, it is expected that demand in the economy will remain weak for some time and the recovery will be prolonged.

Risks to the Outlook

The current environment is characterised by heightened levels of uncertainty and a number of risks to the outlook are present.

The evolution of the COVID‑19 pandemic, the public health responses, and the social and economic impacts are key risks to the forecasts. The trajectory of the pandemic has the potential to vary markedly from that assumed in the forecasts, with potentially quite different outcomes for households and businesses.

In the event that Australia achieves success in containing the virus, global outcomes in relation to the management of infection rates will still play a large role in determining the course of the economic recovery. These outcomes are unpredictable and are likely to be characterised by extreme variations across regions and countries. Recently, there has been a resurgence of infections in some countries and regions that had previously reduced transmission rates, leading to the reinstatement of restrictions on movement and activity. These setbacks have jeopardised earlier gains in both economic and public health outcomes.

The outlook for Tasmania’s labour market is especially uncertain. The nature and speed of the recovery in Tasmania’s labour market indicators will be dependent on how businesses and consumers respond to, and are affected by, the removal of policy supports in the short‑term, and the protracted uncertainty in the medium to long‑term.

In the event that large, broad-based resurgences in infection rates occur, which require the imposition of restrictions of a similar scale to those imposed in response to the initial outbreak of the pandemic, Tasmania’s economy would be expected to experience a further shock. This could potentially cause the Tasmanian economy to contract by approximately 4½ per cent in 2020‑21, around three times the magnitude of the forecast decline in that year and result in a delay to Tasmania’s economic recovery. This disruption to economic activity would also flow through to Tasmania’s labour market, potentially causing employment to decline in the order of 4¼ per cent in year‑average terms.

Alternatively, a stronger economic recovery could be possible through the timely achievement of better outcomes in relation to COVID-19 containment and treatment. Under these improved circumstances, interstate travel would be expected to resume at higher levels, and strengthened consumer and business confidence would lead to higher levels of demand in the economy. Under these circumstances, there is potential for Tasmania’s economy to contract by approximately ¾ per cent in 2020-21, around half the magnitude of the Budget forecast. Under this scenario, employment levels would also be expected to be more resilient, declining by around ¼ per cent in year-average terms in 2020-21, which compares to the Budget forecast of -1¾ per cent.

Based on the assessment of risks to the forecasts, it is noted that the balance of risks related to the COVID‑19 pandemic are not symmetrical. The downside risks to the economic forecasts associated with more negative developments in the containment of the pandemic are of a greater magnitude than the upside potential associated with the achievement of more positive outcomes.

In addition to the risks embodied in the uncertain status of the COVID-19 pandemic, there are other risk factors that have implications for both the international and domestic outlook.

Geopolitical tensions have recently eased as the global nature of the pandemic has necessitated greater global cooperation. The ability for countries to cooperate on multilateral initiatives, such as vaccine development, is of critical importance in the current environment. However, if the pandemic continues on a global scale, there may be increasing tensions that may weaken multilateral cooperation and result in a further downside risk to global trade and economic recovery.

Targeted monetary policy enacted by governments worldwide has thus far insulated global and domestic financial systems from potentially more severe impacts arising from the pandemic. Notwithstanding the current high level of support, financial conditions could deteriorate, causing lending to tighten, and the supply of credit to household and businesses to decline. This would not only slow the immediate economic recovery, but potentially cause deeper economic scarring with implications for the longer-term outlook.