In the last year, the Australian economy outperformed all expectations as it negotiated the COVID-19 pandemic with cuts in interest rates, easy credit and a substantial fiscal policy stimulus all doing their part in helping this relatively good news.
Mention must also be made to the fabulous Chinese economy, which is getting back to full strength and in the process is buying lots of Australian commodities and paying a very high price for those goods. The impact of the influence of Chinese economic activity on Australia should not be underestimated.
The big question now is ‘will this good news continue?’
While a double dip recession remains a low probability – it is very unlikely – there are a few warning signs on the momentum for the Australian economy particularly as economic policy is tightened and population growth via immigration remains at its weakest point in over 100 years.
Retail sales have slumped 4.0 per cent in the last three months which bodes poorly for household consumption growth early in 2021. The Westpac ‘card tracker’ fell sharply in early April to a point where card usage is below the level prevailing before the COVID-19 pandemic hit in early 2020.
The Federal budget, which will be handed down by Treasurer Josh Frydenberg on 11 May, will show a massive and record 16 per cent cut in real government spending in 2021-22.
In dollar terms, this is a cut of $104 billion in the amount of government spending in just a 12 month period. This is an extraordinary cut especially in the context of unemployment still being around 6 per cent, with record low wages growth and still sluggish business investment.
The fiscal austerity from Frydenberg in the budget is very risky if the private sector does not pick up the slack that will be left by the scaling back of government demand.
The latest RBA forecasts are for GDP growth of 3.5 per cent in the year to the June quarter 2022 and a further 3 per cent by the June quarter 2023. These are plausible but will require many things to ‘go right’.
It will require consumer spending to pick up from the early 2021 slump, the housing market will need to keep growing, business investment will need to strengthen further and the global economy – and China in particular – to deliver strong growth.
Such a positive growth outlook is also predicated on a further recovery in the labour market and higher household income growth. The current wages data and outlook casts doubt on this leg of the strong recovery story.
One of the lessons from earlier recessions and especially the 1930s great depression was that economic policy was often tightened too early, just after there had been a few snippets of good news. This meant unemployment stayed higher for longer and in hindsight, policy errors were made.
The government will need to be agile if its budget in May turns out to be too austere, too early in the economic recovery. A rethink of government spending, a new version of JobKeeper and other stimulus measures may yet be needed later in 2021 and in 2022.
It is also important to note that extra monetary policy stimulus is unlikely. The RBA has signalled that it is reluctant to implement negative interest rates with the only additional monetary easing possible in the form of additional bond buyer and an extension of the loan facility.
Not out of the woods
In Australia, the labour market is still weak and there are significant segments of the economy under severe pressure. It is still a long way from getting back to full health.
The latest downside threat to the economy is the debacle in the vaccination roll out. The failure to rapidly roll out vaccinations in Australia will delay any opening of international borders, which will continue to weigh international tourism and the university sector.
It also risks lockdowns whenever there is a hot spot break out of COVID-19, moves which hurt businesses and jobs.
While the economy looks to be in a reasonable position, it wont take much to go wrong, including in the budget, for this good news to turn sour.