Miraculous or not, as will be the case in many countries, the Australian economy will take considerable time to fully recover. Each economy will face headwinds of its own, though not necessarily of its own creation. Global expectations are that uncertainty, elevated deficits and the eventual winding back of expansionary monetary policy will have an impact, long into the future.
Countries like Australia and New Zealand have essentially traded the tyranny of distance for the advantage of isolation during the pandemic and been able to control what others have let run rampant with their porous borders.
That has been fabulous and provides a firm base for recovery, and it also places the opportunity to recover strongly in a very local context, despite the global nature of our economy.
At a global level, as James Thomson wrote in the Australian Financial Review in mid-November, there is considerable uncertainty about what the future holds because no country, bank or consulting firm owns a macro-economic model that has any data on which to base predictions and forecasts. Since those models were all based on 50 years experience which has now been turned on its head by COVID 19. So, we find ourselves being grateful right now that we don’t have the data required to adequately predict the future!
In view of this uncertainty the Government is being encouraged to manage the wind back of the current stimulus measures with caution, especially the household level payments like the JobSeeker supplement (the extended unemployment benefits). As Shane Wright and David Crowe wrote in The Age in late November, the supplement that was due to end at the end of December has been reduced and pushed out until the end of March. Think of it as a kind of tapering of support for the consumption side of the economy.
To date, the Australian economy has fared very well under the combination of isolation and economic stimulus. It may not look that way in the chart below, but the June quarter slump in growth -7.0% (annualised change -6.4%) was followed by the most recent September quarter growth of +3.3% (annualised change -3.8%). Not out of the woods yet, but the prospect of a stronger than anticipated recovery remains an opportunity.
To go straight to the dashboard and take a closer look at the data, click here.
You do not need a lot of data, however, to realise that come the end of March, the ‘fiscal cliff’ could materialise in Australia. The cliff comes when household incomes in particular, are reduced, meaning expenditure will also fall.
The risk arises because the JobSeeker supplement and the JobKeeper program that have been so successful in sustaining household driven expenditure in Australia, are due to end at the same time.
If businesses are unable to retain staff at that point then potentially you could have an increase in unemployment combined with a decrease in unemployment benefits with significant consequences for household incomes.
As the chart below shows, there is nothing more significant than household consumption expenditure in moving the economic growth dial. Even our own building sector activities are caught up inside it. This annualised chart is important because it shows both the depths to which household consumption plunged in the June quarter (-7.3%) and the work that still has to be done to recover it to positive territory, despite the strength of the September quarter when it improved to -3.3%.
To go straight to the dashboard and take a closer look at the data, click here.
Little wonder there are economy wide calls for the unemployment benefit to be permanently raised to a more sustainable level, for social equity reasons, as well as to support the gradual recovery of the Australian economy.
Those with any crystal ball suggest that uncertainties will continue to be disruptive over the next year or more. The government and the RBA will need to continue to be alert to the challenges and flexible in fiscal and monetary policy responses.
