“It's actually still a pretty depressing scenario.”
These are not the words of some fringe economic blogger: they are from Reserve Bank of Australia Governor Philip Lowe as he described the economy last week to the Senate Select Committee hearing into Australia’s response to the COVID-19 pandemic.
For most sober and impartial economists, there is no surprise in this description of the Australian economy.
Dr Lowe is right: we are in a depression.
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We know already that a staggering 19.9 per cent of the workforce is either unemployed or underemployed, there were a further 4 per cent who gave up looking for work in the last two months and retail turnover, new motor sales housing sales are all in freefall.
GDP remains on track to drop by around 10 per cent in the June quarter and around 6 per cent in 2020, to record its sharpest decline since the 1930s Great Depression.
With the containment of the COVID-19 disease in Australia, many businesses and slowly but surely starting to reopen.
This is fantastic news for the economy and will spark some form of pick up in activity and some partial recovery in the labour market.
As we go to cafes, restaurants, sporting events and start to travel within Australia, many businesses will benefit from our spending. Over the second half of 2020, some of the lost GDP will be clawed back, some jobs will be regained.
The speed of the pick up will be vital to see how quickly the labour market can heal and reach full employment.
While Dr Lowe was realistically gloomy about the performance of the economy, he did note that there was tentative evidence for a marginal “upside” to the so-called RBA “base case” forecasts for the economy, but that there was unprecedented uncertainty surrounding this assessment.
When questioned, Dr Lowe noted “we call it 'upside', but, in many ways, it's a very downside, depressing scenario, with weak employment, high unemployment and low inflation”.
This was his second reference to a “depressing” economic scenario.
...Here’s the problem with that
The partial bounce-back in the economy as the lockdown rules are relaxed will run into an array of problems.
JobSeeker payments will be cut in late September, meaning the unemployed will have a reduction in purchasing power.
JobKeeper payments will also be lower or even zero meaning many businesses will not get a wage subsidy to pass on their staff, even though their businesses may still be weak.
The mortgage repayment ‘holiday’ offered by the banks is also scheduled to end. This means that for many hundreds of thousands of people who postponed their repayments in recent months, they will have to start their repayments, but with a substantial jump in the level of debt outstanding.
If many of these people are still unemployed, out of the labour market, working few hours or suffering a cut in wages, the problems in the mortgage market will be just beginning.
Such is the pain and wreckage that an economic depression unleashes through society.
With lingering unemployment, business failures and a weak global economy, the government will need to play a part in ending the depressed conditions.
There is an undeniable case that to underpin the economic fallout from the depression, and to drive a recovery, fiscal policy stimulus is essential.
With the private sector depression, the government has an ongoing obligation to get cash into the economy via the household sector and business.
The list of issues on that agenda is very long.
Money spent on skills, education, training, childcare, wages, tax breaks for business investment, increases in the level JobSeeker, building, infrastructure to name a few, are areas where the government could act to end the depression sooner rather than later.
Policy change is also urgent.
People and businesses are hurting now.
But I will leave the final words to Dr Lowe.
“Even in the upside scenario, we are going to have high unemployment for quite a few years and inflation is going to be lower than two per cent for quite a few years. We talk about it being upside, but it's actually still a pretty depressing scenario.”
He added: “It is still a pretty bad situation … I have trouble seeing inflation sustainably within two to three per cent for quite some time and I think it's going to be a long drawn-out process to get back to full employment … which will mean the estimate of full employment starts to rise, which is a terrible social loss”.