Even before extreme dislocation of the economy in Melbourne, parts of Victoria and pockets of New South Wales, the Australian economy was floundering with the deepest economic downturn since the 1930s Great Depression.
Even with that bleak and stark outlook, Treasury and the Reserve Bank were looking at the economy through rose coloured glasses, with a moderate rebound forecast over the second half of 2020 and a further pick up through 2021 and into 2022.
This view was in large part based on the broad containment of COVID-19 with many businesses slowly but surely reopening, interstate border restrictions relaxed and even, possibly, international borders reopening for tourism and foreign students in the not too distant future.
This outlook saw economic policy cast for the recovery.
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The RBA has ruled out any more monetary policy stimulus and Treasurer Josh Frydenberg announced a winding back of JobKeeper and JobSeeker payments, such was his optimism about the outlook.
This was always an optimistic take on the outlook. With the housing slump, chronic labour force weakness, falling wages growth and a free-fall in private sector business investment, any recovery was likely to be muted and riddled with risks.
It meant that economic policy was wrongly cast to protect jobs and economic growth.
If Treasury and the RBA were both more realistic about just how severe the COVID Depression is, they would be advocating more policy stimulus to at least partially offset the depths of economic despair that is percolating through the Australian economy.
Quite frighteningly, the opposite was true – policy was being tightened!
A little over a week ago, Treasurer Josh Frydenberg announced that JobKeeper and JobSeeker would be progressively scaled back from the end of September and this follows the ending of free childcare in the middle of July.
The RBA, which has signalled it can do no more with monetary policy, it now looking at the Australian dollar surging through 70 US cents as demand for the Australian dollar rises with our relatively high interest rates and strong sovereign credit rating.
While the trade sector appears to be booming, after all the monthly trade surpluses are running at record highs around $5 billion to $10 billion, all of this good news can be pinned on iron ore, gas and coal exports.
A rising Australian dollar is an explicit tightening in monetary conditions which risks crimping export volumes and revenue.
Victoria locks in the bad news
The essential lockdowns in Victoria are so large that the odds are building that September quarter GDP will be negative, even with some recovery in other States and Territories.
While forecasting economic outcomes in the current climate is more hazardous than usual, GDP could fall 0.5 per cent in the September quarter which will follow falls around 7 per cent in the June quarter and 0.3 per cent in the March quarter.
The outlook for the labour market has, clearly, deteriorated from a gloomy starting point.
Labour underutilisation, which is the sum of unemployment, underemployment and the fall in the participation rate, is set to rise to 25 per cent.
These horrendous figures will spill over the other vital parts of the economy.
Rent and mortgages will be difficult to pay. Prepare to see the ugly and disturbing scenes of people being evicted from their houses, defaulting on their mortgages and bankrupting their small businesses.
Policy action is needed – now
For months, it has been clear the government’s policy support and stimulus measures have been stingy and tied up in complex red tape. They have also been too narrow.
The lockdowns in Victoria make that all the more obvious which means the Morrison government must urgently implement more stimulus … and lots of it.
It needs to be targeted at sectors in pain – tourism, education, the arts and related businesses. It needs to be directed at geographical areas where labour underutilisation is set to exceed 25 per cent.
If this call for action sounds like a broken record, it is because economic records are being broken.
A record fall in quarterly GDP.
A record high in labour underutilisation.
Record low inflation.
Record low wages growth.
Record low interest rates.
Policy action to inject money into the economy can be delivered. It just takes policy vision to do.
The federal budget in October is a long way away for policy stimulus to be implemented. Action is needed now. If stimulus is delayed, the decline in GDP and rise in labour underutilisation has further to run.
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