Why JobSeeker and JobKeeper changes will test Australian economy

It might feel like life is back to relative normality but there’s still one huge hurdle that will test if Australia will survive the pandemic and recession.

Is the Aussie economy back? Is it time to celebrate? Cut loose? Buy a couple of Mercedes for the kids and put a big new renovation on your house?

If you look at the unemployment data that came out this week you might be tempted to conclude yes. I admit, the numbers are good. Very bloody good as I’m about to show you. But don’t call up the bank for a million dollar loan just yet.

The economy has one more massive hurdle to get over. As we will see in the Olympics later this year (if they actually happen!), it only takes one hurdle to make you fall flat on your face.

First let’s look at the good stuff. Australians are streaming back into work at a rapid rate and the unemployment situation is better than we dreamed it could be. This next chart shows our current employment situation on top of the forecast scenarios released by the RBA in May.

The RBA had a “baseline” scenario, a “downside” scenario with very high unemployment and an “upside” scenario with lower unemployment. Seven months later, reality turned out even better than the upside scenario. That’s a triumph.

RELATED: Bold US move that will impact all Aussies

The reality of the unemployment rate has turned out much better than predicted. Data: ABS, RBA.

Another sign of how well things are going is the number of people in the labour force right now. Usually recessions result in less people looking for work because jobs aren’t out there and they get discouraged. But right now more people are working or looking for work than ever before.

This is called the labour force participation rate and it hit a record in December 2020. You would usually expect to see record labour force participation in the good times, not in the aftermath of a recession. This just goes to show how strong the economic recovery is looking right now.

THE BIG HURDLE

Soon the economy will have to work without its safety net. And that safety net is massive.

Just look at this chart from Commonwealth Bank showing how much of the extra money landing in people’s bank accounts is from wages versus government payments. The black line shows how much higher income is now compared to last year – about 10 per cent higher.

The yellow and green bars show where that lift in income is coming from. The yellow bars are government benefits and they account for much more of the rise in incomes than the green bars, representing wages and salaries paid.

RELATED: One place house prices will get smashed

Government benefits are the reason why unemployment is so low.

So when JobSeeker and the JobKeeper supplement are finally turned off at the end of March, the black line is going to fall a lot. Much less money from government payments will be flowing in and incomes will tumble. The question is what happens then.

Most households have saved up a lot of money over the pandemic. The government hopes people will dip into those new savings to keep spending even when incomes fall. But what if that doesn’t happen? What if we decide to hoard our money and protect our bank balances as the economy falls apart around us?

This is the paradox of thrift – one person being cautious with their money is a good idea. But if we are all cautious with our money at the same time, that accelerates an economic downturn. After all, one person’s spending is another person’s income.

THE POWER OF GOVERNMENT MIGHT BE SHOWN TWICE

The two parts of this story are linked by one common thread: Government spending. An enormous tsunami of government spending has soaked the Australian economy in the last 12 months, inundating almost every corner of Australia and turning bad times to good for many businesses and households.

That’s why the unemployment situation is so much better than we thought. The government spending worked even better than expected to make the economy healthy.

We got an upside surprise when the spending started. Are we going to be surprised again with a downside when the spending stops at the end of March? If you’re planning a splurge, it might be worth keeping an eye on what happens in April.

Jason Murphy is an economist | @jasemurphy. He is the author of the book Incentivology.

Originally published as Why JobSeeker and JobKeeper changes will test Australian economy