It is not clear how much trouble the economy is in.
The rolling lockdowns throughout much of Australia have seen businesses close, workers stood down and a general fear in the community which is bordering on pessimism.
Australia, which did enjoy one the best economic recoveries in the world from the 2020 episode of the COVID-19 pandemic, is now at great risk of recording a double dip recession just as many countries with high vaccination rates are registering a strong economic pick-up.
Recall that just prior to the current round of lockdowns, GDP was poised for 9 per cent annual growth, the unemployment rate was below 5 per cent for the first time in a decade and business and consumer sentiment were remarkably buoyant.
For now, GDP growth will fall by around 1.5 per cent and the unemployment and underemployment rates will each rise by 1 percentage point. And it is possible if not likely that things will be worse than this.
Many of the best economists are scrambling to adjust their forecasts for GDP and unemployment, using the experience of the 2020 recession as a guide to what is unfolding now.
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If GDP falls by 1.75 per cent in the September quarter, it would be the second largest fall in GDP since 1974, and behind only the 7.0 per cent fall in GDP in the June quarter 2020.
Indeed, it would be the third largest quarterly fall since the 1950s.
This clearly is not good news.
The pain can be contained
Economic policy needs to change to address these problems and minimise the pain being felt throughout much of the community. Recent economic history during the COVID-19 pandemic and even the global financial crisis a little over a decade ago shows that aggressive, pro-active economic policy can support growth and jobs.
With the current lockdowns, the Morrison government has committed $250 million a week in the form of special payments to workers experiencing a loss in hours worked.
This sounds like a lot of money, but it is just 0.7 per cent of GDP which is inadequate when overall GDP is at risk of falling 1 per cent or more.
The Reserve Bank is likely to maintain a stimulatory monetary setting ensuring the banking sector has access to plentiful capital, which is critical for the smooth functions of the business sector.
That said, more urgent and substantial fiscal policy measures are needed.
As 2020 showed, JobKeeper is relatively simple and effective in supporting workers in businesses where turnover slumps as the lockdowns crunch their operations.
A JobKeeper 2.0 could be implemented to iron out the wrinkles in the original JobKeeper scheme. In particular getting the money into effected workers pockets and also having a provision where firms who do not in fact experience a fall in revenue have to pay it back.
It appears the Morrison government is being slow in implementing such a scheme. The economy is already in trouble and there is no hint of a renewed JobKeeper scheme.
This tardiness will make the current down turn deeper, with higher unemployment than need be.
When will the downturn end?
All economic booms and busts come to an end.
The current economic slump will one day turn into a recovery.
When vaccination rates finally get to a decent level and lockdown rules are relaxed and come to an end, people will go about their business and spending, investment and hiring will pick up.
What is likely to make the recovery from the current slump more problematic are issues that will be unfolding when the lockdowns end.
In particular, the closed international border will mean Australia’s population growth is hovering near zero. By itself, this is trimming around 0.3 percentage points from the quarterly GDP growth rate when compared with population growth prior to COVID-19.
A turn lower for housing and exports are also likely to dampen the recovery when the lockdowns end.
The change in the economic mood in the last month has been extraordinary. It just goes to show that policy makers also been to be quick to move when unexpected circumstances come along and change the momentum of the economy.