JobKeeper will ‘mitigate’ worst case unemployment effects, says Westpac economist Bill Evans

Westpac chief economist says JobKeeper package ‘a game changer for employment and the unemployment rate’.

International student support manager Louise Myers (right) has stocked a food pantry for students such as Cherie Lai (left) who have lost their jobs due to COVID-19. Picture: Shae Beplate.

Leading economists have thrown their support behind the government’s $130bn wage subsidy package, saying it will have a “profound effect” on the trajectory for unemployment in the coming months and halve the expected peak in the jobless rate.

Under the latest government measure aimed at cushioning the blow from a forced economic hibernation, employees of businesses which have been hurt by the global coronavirus crisis will receive $1500 a fortnight, paid via the employer from May 1. Treasury estimates 6 million people will eventually receive the payment, equivalent to more than half of the private sector labour force.

As authorities shut down huge swathes of the economy to fight the spread of the virus, Westpac expects GDP to contract by 8.5 per cent in the June quarter, followed by a 0.6 per cent contraction in the September quarter, before a 5.2 per cent rebound in the final three months of the year.

That collapse in economic activity would have translated into unemployment peaking at 17 per cent in coming months had it not been for the JobKeeper package which “has been a game changer for employment and the unemployment rate,” Westpac chief economist Bill Evans said.

Mr Evans said he now expected the jobless rate to peak at 9 per cent in June, before easing to around 7 per cent by the end of 2020. The latest labour force figures put the unemployment rate at 5.1 per cent in February.

Deutsche Bank economist Phil O’Donaghoe issued an even more pessimistic forecast for a 10 per cent plunge in economic activity in the three months to June. Absent the wage subsidy program, the jobless rate would have reached as high as 15 per cent in 2020, he said.

But Mr O’Donaghoe said the latest package would result in the taxpayer paying around 30 per cent of the national wage bill and restrict the peak in unemployment to 7.5 per cent.

Concerns have been raised about the staggering cost of the combined $206bn in combined fiscal support measures announced over the past few weeks, which are equivalent to over 10 per cent of GDP.

UBS estimates that the country’s debt burden will increased by $500bn in the next financial year, taking the total to $1.5 trillion, or 80 per cent of GDP, from 50 per cent before.

But Mr Evans noted that the package, by savings jobs and softening the blow on the economy, would cut the forecast debt requirements by $60bn, making the JobKeeper program “an astute 'investment' from the perspective of the government’s finances”.

“In turn by keeping employees connected with businesses, business will be better positioned to accommodate the lift in demand which will come with the easing of restrictions,” he said.

“Coupling this finance dividend with the social benefit of containing the lift in the unemployment rate, there are certainly strong grounds for supporting the government’s bold decision to introduce the [package].”