The COVID-19 pandemic is primarily a health crisis but its impact on the Australian and global economy has been significant.
In the early days of the COVID-19 outbreak, there was much talk of what shape the economic contraction and subsequent recovery would look like - V, U, L and even W.
With the latest lockdown measures in Victoria and a resurgence of the virus in various parts of the world, it would be reasonable to assume that economic pain is likely to be prolonged and the recovery gradual.
As with all things COVID-19, the economic landscape is also fast changing and extremely uncertain. Initially, back in April 2020, the IMF forecast a 2020 reduction of 6.7% in Australian real GDP. In June, as restrictions were lifted and the impact wasn’t as bad as initially feared, the forecast was revised to -4.5%. The Federal government, in its own July economic forecast suggested a reduction of 3.75%. That was however before the latest Victorian lockdown and GDP reductions of 4% to 5% or more now seem likely again.
Unemployment estimates have been a major talking point over the last few months with the official unemployment rate of 7.4% (June 2020) at its highest level in over two decades. Notwithstanding this elevated level, the official rate is very likely not a true reflection of the jobs market both due to the offsetting impact of the JobKeeper wage subsidies and the extent of underemployment.
Consensus seems to be emerging that unemployment will peak around 9-10% in late 2020/early 2021 with a slow recovery thereafter.
From an inflation perspective, the Consumer Price Index (CPI) saw a record fall of 1.9% in the June quarter, driven by free childcare and lower fuel prices. In terms of the outlook over the next couple of years, inflation is likely to remain subdued in the 1-2% range. The lower economic inflation, combined with a weak employment market is also having an adverse impact on wage growth. Wage growth was negligible in the June 2020 quarter and expectations for 2020/21 remain very low relative to historic levels (at around 1 – 1.5%).
The broader economic impacts, and consequential impacts on the insurance sector are likely to vary by industry and state. The charts below show the the exposure of total market premiums to industries grouped according to the relative size of COVID-19 wage impacts using the ABS’ latest industry level Payroll data.
The most heavily impacted industries to date (hospitality and arts/recreation) form a relatively modest component of insurance premium income. By comparison, the larger insurance sectors of Construction and Retail have seen ‘average’ jobs impacts to date, but both sectors will be more materially impacted by the current Stage 4 Victorian business restrictions.
While insurance industry GWP held up relatively well in the June quarter, the support provided to businesses by Government and insurers will have impacted this result and we expect to see a greater number of businesses forced to wind-up as restrictions continue and support packages reduce.
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 : APRA NCPD, Insurance Statistics Australia, ABS