As many economists and politicians celebrated the strong-ish back-to-back quarterly increases in GDP in the second half of 2020 as the economy started its climb from the COVID-19 recession, a deeper dig into the data revealed some worrying trends that confirm grim economic times for many Australians.
Things are not back to good, even though the economy has been a little better (less worse) than feared in the middle of 2020.
Before we get to the data, it is important to determine how a strong and fair economy and economic policies lift living standards and individual well-being.
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In numerical terms, if for example, Australia’s GDP were to rise 1 per cent and that occurred with 1 per cent population growth, the average person would be no better off. All of the increase in economic output – GDP – was simply due to there being more people.
On average, no one would be better off.
Readers may recall what was dubbed the per capita GDP recession in late 2018 and early 2019 which showed that while the economy was growing, the pace of that increase was below population growth. GDP per person was falling, which was why many people were feeling a high degree of economic pain and hence, the recession in per capita GDP terms.
Fast forward to the most recent data released last week on the December quarter 2020 GDP, and that per capita GDP recession remains largely in place.
While the quarterly GDP results have been extremely volatile in the past year and population growth has slowed to just above zero, per capita GDP in real terms in the December quarter 2020 was actually BELOW the level of the September quarter 2017.
This is why so many are feeling severe economic pain over an extended time frame. This is also showing up in the facts that the unemployment is still hovering around 6.5 per cent, some 2.5 to 3 per cent above the full employment rate and annual wages growth is plumbing record lows under 1.5 per cent with few signs of picking up.
This protracted economic weakness is also a reflection of the wrong economic policies being in place.
The Reserve Bank of Australia has kept monetary policy too tight for too long, and the fiscal stimulus measures in 2020 were not large or timely enough to provide full support to the economy.
The economy has kicked off 2021 with the recovery continuing which is relatively good news.
But there are some concerns brewing over the remainder of 2021.
The government will be ending the JobKeeper wage subsidy at the end of March. In addition, JobSeeker payments will be cut by $100 a fortnight at the same time, even allowing for the $50 a fortnight increase in the pre-COVID-19 rate.
The latest budget documents from Treasurer Josh Frydenberg, revealed in the Mid-Year Economic and Fiscal Outlook in December, shows that government spending will fall a record and staggering 16.4 per cent in 2021-22 and a further 0.8 per cent in 2022-23.
This translates to a huge 6.3 per cent of GDP cut in government spending in two years which will eat away at the economy and make it difficult for per capita GDP to recover at a decent and acceptable pace.
Frydenberg will deliver the budget on 11 May and the government may choose to limit the spending cuts that are currently on the books.
The case for further fiscal policy stimulus is strong, given how structurally weak the economy still is.
Extended JobKeeper payments to sectors and regions still under severe pressure would be prudent. University education, international tourism and parts of the arts and hospitality sectors are struggling to survive and would benefit from further support.
Investment in social housing could also be considered. New publicly owned dwellings would not only boost the economy, but would help address homelessness.
Ramping up spending on affordable and accessible childcare would be a boost to employment, and in particular, female workforce participation, a vital element is boosting productivity.
There are a range of other areas where additional fiscal stimulus would help the economy through these turbulent times.
It is to be hoped – not expected – the per capita recession is addressed by the government in the May budget.
Failure to minimise the spending cuts already in the pipeline could see the economic recovery stall and with it, extend the flat-lining of per capita GDP for at least another year.