Australia’s first recession in three decades is set to spark a house price plunge even as interest rates stay at record-low levels for at least three years.
Official national accounts data released on Wednesday showed a record seven per cent economic contraction in the June quarter alone.
For the first time since mid-1991, Australia has suffered a technical recession – defined as two consecutive quarters of gross domestic product going backwards.
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Australia’s first recession in three decades is set to spark a house price plunge even as interest rates stay at record-low levels for at least three years. Pictured is a closing down sale in Melbourne
Even before the Australian Bureau of Statistics national accounts figures were released, the Reserve Bank indicated record-low interest rates of 0.25 per cent were here to stay.
Governor Philip Lowe told a parliamentary hearing in August: ‘I think the cash rate is going to be at its current level for three years.’
In his scripted remarks, Dr Lowe said interest rates would not increase until ‘progress is being made towards full employment’.
Economists regard full employment as a situation where inflation rises if the jobless level falls below five per cent.
‘Given the outlook I discussed earlier, these conditions are not likely to be met for at least three years,’ Dr Lowe said.
Before the coronavirus pandemic, Australia’s unemployment level in February stood at 5.1 per cent but in July rose to a 22-year high of 7.5 per cent.
The Reserve Bank is expecting the jobless rate to hit ten per cent by the end of 2020 – a level unseen in Australia since April 1994.
Australian house prices are also in for a beating with the Reserve Bank predicting a 40 per cent plunge. Pictured are houses in the Sydney suburb of Mascot
Official national accounts data released on Wednesday showed a record seven per cent economic contraction in the June quarter alone. Coronavirus social distancing measures and lockdowns have caused a quarterly economic downturn that is even worse than the 1930s Great Depression. Pictured is a deserted Gold Coast airport on Wednesday morning
Economist Saul Eslake, the principal of Corinna Economic Advisory, expected Australia’s unemployment rate to peak in 2021 as more people competed for jobs.
The 2020 recession
Gross domestic product plunged by a record seven per cent in the June quarter
First technical recession since mid-1991 – following 0.3 per cent downturn in the March quarter
Worst quarterly downturn in records going back to 1959
Slump more severe than early stages of 1930s Great Depression
Household consumption dived by a record 12.1 per cent
Australia’s world-record, 29-year run of uninterrupted growth now over
‘I suspect we’ll see unemployment continuing to rise until some time in the first half of next year,’ he told Daily Mail Australia.
‘It will happen because people who are currently unemployed but not looking for work and hence not counted as unemployed will actually start looking for work again.’
He also expected the economy to shrink again in the September quarter before returning to growth in the December quarter – unless there were new third waves of COVID-19 in Australia, China, the US and Europe.
This would still mark the longest recession since 1983 – which followed a devastating drought and the Ash Wednesday bushfires in Victoria and South Australia.
‘We’re not past the worst point yet,’ Dr Eslake said.
‘In terms of the rate at which things are deteriorating, we will not get another quarter as bad as the one we’ve just had unless there’s a nationwide third wave.’
Australian house prices are also in for a beating with the RBA predicting a 40 per cent plunge – with the banks set to end their extended mortgage repayment holidays in March next year.
‘We believe this is an extreme but plausible scenario, which is broadly in line with the shock experienced by some countries during the Global Financial Crisis,’ a Reserve Bank paper published last month said.
Treasurer Josh Frydenberg pointed out Australia’s record seven per cent GDP contraction in the June quarter was much less severe than an equivalent 20.4 per cent contraction in the UK, a 13.8 per cent drop in France, an 11.5 per cent shrinkage in Canada and an expected 20 per cent plummet in New Zealand where lockdowns have been stricter
The seven per cent plunge in Australia’s gross domestic product during the June quarter of 2020 was even more dramatic than the early stages of the 1930s Great Depression
Should such a scenario occur, Sydney’s median house price would plunge from $985,723 to just $591,434, going by CoreLogic data.
Melbourne’s equivalent house prices would dive from $781,888 to $469,133 – with Stage Four lockdowns causing values to fall in August for the fifth straight month.
How COVID-19 is hurting house prices
MELBOURNE: Down 1.4 per cent to $781,888
SYDNEY: Down 0.5 per cent to $985,723
BRISBANE: Flat at $557,969
ADELAIDE: Flat at $480,972
PERTH: Flat at $461,891
HOBART: Up 0.3 per cent to $517,877
DARWIN: Up 1.1 per cent to $476,143
CANBERRA: Up 0.5 per cent to $716,400
Source: CoreLogic Home Value Index of median house prices for August 2020
The national plunge in real estate values, predicted by the Reserve Bank, would be ‘more extreme’ than the 20 per cent drop that occurred during the aftermath of the 1991 recession that saw the jobless rate peak at a six-decade high of 11.2 per cent – as unemployment stayed in the double digits for three years.
Nonetheless, the RBA said a 40 per cent drop in Australian house prices would be comparable with the GFC a decade ago, which saw property values fall by 32 per cent in the United States, 37 per cent in Spain and 55 per cent in Ireland.
Dr Eslake said a ten to 15 per cent plunge in house prices was more likely than the Reserve Bank’s prediction of a 40 per cent plummet.
During the last recession in 1991, more young people went to university – sparking a surge in higher education enrollments.
Unlike three decades ago, deferred university fees are much higher and Dr Eslake wasn’t expecting the same phenomenon to happen in 2020 and 2021.
‘I’m less inclined to think so because it’s a lot more expensive now than it was then,’ he said.
On an annual basis, the economy shrunk by 6.3 per cent – a level unseen since the aftermath of World War II in 1945 when the troops returned home.
The national accounts data confirmed a technical recession for the first time since mid-1991, with the seven per cent plunge in the three months to June following a 0.3 per cent GDP decline in the March quarter.
Quarterly economic data going back to 1959 had never shown a plunge of that magnitude.
On an annual basis, the economy shrunk by 6.3 per cent – a level unseen since the aftermath of World War II in 1945 when the troops returned home. Pictured are police in Melbourne during the Stage 4 lockdown and the 8pm to 5am curfew
Until this morning, Australia officially held a 29-year world record for avoiding a recession but COVID-19 social distancing policies and border closures have ended that very dramatically.
Nonetheless, Treasurer Josh Frydenberg pointed out Australia’s record seven per cent GDP contraction in the June quarter was much less severe than an equivalent 20.4 per cent plunge in the UK, a 13.8 per cent drop in France, an 11.5 per cent shrinkage in Canada and an expected 20 per cent plummet in New Zealand where lockdowns have been stricter.
‘We have performed better in these difficult circumstances than all these other developed nations,’ he said.
‘The road ahead will be long, the road ahead will be hard.’
Recessions in Australia
Up until the 1991 recession, Australia had suffered an economic contraction several times a decade, on average.
A prolonged recession that began in September 1982 lasted a year, during a period of prolonged drought and the devastating Ash Wednesday bushfires in Victoria and South Australia. That followed another recession in 1981.
Another recession also occurred in 1977, during an era of widespread strikes.
The economy also took a beating in the final two quarters of 1975, when Governor-General Sir John Kerr dismissed Gough Whitlam as Labor Prime Minister.
A recession also occurred in late 1971 and early 1972, several months before Billy McMahon lost the election, ending 23 years of Coalition rule.
A credit squeeze also sparked another recession during the June and September quarters of 1961, ending only two months before then Prime Minister Robert Menzies held on to power by one seat.
Source: Australian Bureau of Statistics national accounts GDP data