Australia’s worst economic crisis in 90 years is frightening consumers into dramatically cutting back on their spending – and causing prices to fall.
Treasury is expecting gross domestic product to plunge by a record seven per cent in the June quarter alone, wiping out more than three years’ worth of wealth gains.
By Christmas, the department charged with preparing budgets is expecting the jobless rate to hit 9.25 per cent, a level unseen since 1994, with a record one million Australians already officially without work.
Westpac is also forecasting a fall in prices, otherwise known as deflation, for the first time in 60 years as landlords slash rents and transport costs fall as Australians stay home.
Financial comparison group Canstar estimated 6.5million Australians had already cut back on their spending with bank repayment holidays coming to an end in September just as JobKeeper wage subsidies are wound back.
Canstar group executive Steve Mickenbecker said younger adults were even more likely to slash their spending, with more of them losing their jobs because of the COVID-19 shutdowns.
‘Young people working in the hospitality and tourism industry have been some of the hardest hit during the coronavirus pandemic with no choice but to cut spending,’ he said.
‘Regardless of your age or occupation the same rules apply to all; if you’ve taken a financial hit in recent months then now’s the time to take action and be frugal with your money.’
The Canstar survey of 1,024 people this month found 33 per cent of respondents overall had cut their spending but this rose to 45 per cent for Millennials.
A cut in personal spending is also likely to cause deflation for the first time since the early 1960s with Westpac predicting a 2.4 per cent plunge in consumer prices in the June quarter.
Put another way, price falls in three months will be greater than price rises during the entire year to the end of March.
On an annual basis, Westpac is forecasting that prices during the last financial year would have declined by 0.9 per cent.
Westpac senior economist Justin Smirk said cheaper rent was a major source of this deflation.
‘Rising vacancy rates, rent deferrals, rent holidays and even rent reductions have been widely reported,’ he said.
A fall in petrol prices, to levels below $1 a litre in April, and a surge in professionals working from home have both reduced transport costs.
Treasurer Josh Frydenberg revealed on Thursday Australia would have a budget deficit of $184.5billion for this financial year.
This would constitute 9.7 per cent of gross domestic product – the highest proportion of the economy since World War II.
Gross government debt was expected to reached $852billion by the end of 2020-21 as taxpayers funded JobKeeper wage subsidies and boosts to the dole, known as JobSeeker.
Economists fear it would take three decades to pay this off and return to a budget surplus for the first time since 2007, despite Australia having lower levels of government debt compared with other rich nations.
Mr Frydenberg described it as the worst crisis in almost 90 years.
‘Australia and the world are now experiencing the most severe economic crisis since the Great Depression,’ he said.
Despite the bad news, $1,500 a fortnight JobKeeper wage subsidies are being reduced to $1,200 from the end of September and to $1,000 next year, as part of a two-tiered system based on the number of hours worked.