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Australia is in a recession: How long will it last?

Is Australia in a recession? According to Federal Treasurer Josh Frydenberg, we are.

Strictly speaking, a recession is defined as two consecutive quarters of gross domestic product (GDP) contraction. This is something Australia has miraculously avoided for 29 years.

But with the Australian Bureau of Statistics reporting a 0.3% contraction in first quarter GDP on Wednesday morning, Mr Frydenberg recognises that a recession is now inevitable.

When quizzed at a press conference about whether the country was now in a recession, Mr Frydenberg said: “Yes, that is on the basis of the advice I have from the Treasury Department about where the June quarter is expected to be.”

Why is GDP certain to contract in the second quarter?

Although there is almost a month before the end of the second quarter, the pandemic-related shutdowns that occurred in March and April are understood to have materially impacted GDP during the quarter.

While the reopening of Australia sooner than many expected will be a boost, it certainly won’t be enough to offset the economy grinding to a halt at the height of the pandemic.

One positive is that Sarah Hunter from BIS Oxford Economics believes the country will escape a Great Depression-like scenario.

In a note, courtesy of the ABC, she said: “With the health outcomes tracking better than expected [which has allowed an earlier-than-anticipated end to lockdown conditions] and the government packages providing a significant support to household income, the decline in GDP in the first half of 2020 will be relatively small when compared to other economies.”

But how small is “small”? Hunter and her team are expecting “the peak-to-trough fall in GDP to be significantly less than 10 per cent.”

When will Australia’s recession end?

The economics team at National Australia Bank Ltd. (ASX: NAB) believe that Australian second quarter GDP will be down 8%. After which, it is expecting a recovery to start from the third quarter, ultimately leading to a 4.3% decline in GDP for the year.

A return to growth is then forecast for 2021, with a full recovery achieved by 2022.

The bank explained: “Looking forward, we expect a much larger fall of around 8% in Q2 where strict containment measures were in place in the first half of the quarter. Beyond that we expect a small rise in GDP in Q3 before a more substantial pickup in growth in Q4. That sees a year average fall in GDP of 4.3% this year, followed by growth of around 4.0% in 2021.”

“Despite the rebound in growth, we do not see the level of GDP fully recovering to its pre-virus levels until mid-2022. Therefore, while we see unemployment improving over 2021 from its peak in coming months, it should remain elevated for some time,” it added.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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