The federal budget holds an economic miracle

It’s through the prism of an ongoing global pandemic and recent forecasts of double-digit unemployment that the federal budget must be viewed.

Perhaps it is the misery brought on by the ongoing global pandemic and war in Ukraine that has dulled the awareness of Australians to the economic miracle forming before them.

Two years ago when the economy was deliberately put into hibernation in order to save lives after the Covid-19 virus entered the country through air and sea ports, economists were full of dire warnings about coming double-digit unemployment, a house price collapse, and the deepest recession in a century.

The pandemic came to snap nearly 30 years of sustained economic growth, and put before policy makers a threat to the prosperity of the country that easily dwarfed that of the Global Financial Crisis in 2008.

As international and state borders slammed shut in 2020, Australians hunkered down in their homes and braced for the worst, with a generation of them unaware of what a recession meant.

It is through this bleak prism that the economic forecasts contained in the federal government’s budget for 2023 released on Tuesday need to be viewed.

Instead of a job market horribly scarred by years of recession, the country is now on the cusp of full employment. In simple terms that mean that anybody seeking a job can get one, or already has one.

Nearly every forecast for unemployment since the outbreak of the pandemic has had to be binned quickly as the economy consistently outperformed.

The jobless rate is now forecast to fall to 3.75 per cent by mid-2022 from 4 per cent currently. That’s a number no economic policy maker or politician in the country will have seen in their working lives.

Even Reserve Bank governor Philip Lowe, who joined the central bank out if school in the late 1970s, can’t claim he has been witnessed to such a low number.

It’s a staggering forecast that, if anything, looks conservative given current trends in hiring and record numbers of job vacancies. It’s highly possible the unemployment rate will fall even further than that in the next year.

So instead of long lines of long-term unemployed, Australia is engaging its labour force, which is underpinning a forecast for the economy to grow by 3.5 per cent over the next year.

Some economists will argue that with closed borders and a federal government fiscal stimulus of more than $300bn to battle the pandemic, the country should indeed be approaching full employment.

They’d be right too. But the success also reflects the design of the government spending which had at its core a wage subsidy known as job keeper that kept firms afloat, but more importantly, kept employers paid and linked to a firm.

So when the lockdowns ended, the engines of growth re-engaged at speed. Prior recessions, like the one in the early 1990s, have been marked by years of sustained high unemployment. It’s usual that older and low skilled workers remain on the trash heap for some time.

The budget also includes a forecast that wages will grow by 3.25 per cent in the next year, reversing the trend of the moribund trend of the last decade.

Those looking for a dark lining in the Australian economic story will point to rising inflation. This is where it gets interesting. The budget forecasts consumer prices will rise by just 3.0 per cent in 2022-24 and by just 2.75 per cent in 2023-24.

Viewed against a back drop of inflation running hot in major economies, stoked by interrupted supply chains and soaring energy costs, these low numbers look ambitious. But Australia has been an inflation outlier for some time. Its proximity to Asia, where inflation is more benign, and a sluggish wage setting system, have helped to keep wage growth down.

Still, if the budget’s economic forecasts are too optimistic, it is here as inflation could still easily break out of its cage in the next year, setting up the next great challenge for policy makers to rein it back in.

Getting this wrong could undo the good work that is now visible strength in the economy, bringing with it rapid rises in interest rates.

Still, there is a strong argument to suggest that much of what consists of current price pressures in the economy will eventually fade. To have a true inflation break out, you need wages to jump. While they are drifting up, there’s no surge yet that would signal the genie is out of the bottle.

To round the story of the economy, the last batch of GDP growth data showed the economy steaming ahead at its fastest pace since March 1976, unemployment is currently at a 14-year low, and consumers have saved a large portion of the pandemic stimulus. It sit in bank accounts waiting to be spent.

In the last year, house prices have jumped by more than 20 per cent. While that’s a vexed statistic given the rise has frozen many out of home ownership, it still represents a big lift in household wealth.

After two years of pandemic, Australia has been left with a bulging government mountain that some economists will argue leaves the country more vulnerable in the event of another shock.

All that is true, but still, Australia’s debt burden is much lower than that of many of the major economies and the strong job market means the debt mountain can be eaten into by driving GDP growth faster.

By late 2022 (if not earlier), full employment is likely to have been achieved, and on current indications, interest rates will still be low.

It wasn’t meant to be like this.

Dow Jones