A ‘phony’ recession still requires real reform

In the eight months between Britain’s declaration of war on Germany in September 1939 and the German invasion of France in 1940, life proceeded more or less as normal — so much so the calm became known as “the phony war”. For many Australians today, the prevailing recession might appear equally benign, even pleasant. Such is the deluge of federal government support, household income is in fact greater than it was last year and many of us are working considerably less, too. Perhaps younger Australians are salivating at the prospect of a slump in house prices.

“The increase in government benefits payments is massive and has more than offset the decrease in wages and salaries paid,” Commonwealth Bank economist Gareth Aird said on Thursday, based on an analysis of customer bank accounts. Even the increase in the unemployment rate for July turned out much better than expected on Thursday, creeping up by just 0.1 percentage points to 7.5 per cent compared with the 7.8 per cent most economists had expected. To be sure, private sector wages fell by 0.1 per cent across the June quarter — the first time that has happened since the series began. But prices fell by 1.9 per cent across the same three months, delivering a rare increase in real wages for those fortunate enough to have maintained their income.

But dark clouds are on the horizon. And as the government begins the politically painful — but economically necessary — task of dialling down its colossal economic life-support programs, the “phony recession” many Australians have observed as they enjoy working from home will become much more real.

As Adam Creighton and Richard Ferguson revealed on Monday, Australia could see as many as 640,000 jobs disappear during the next six months, on top of the 740,000 already lost up until July, according to new analysis undertaken by consulting firm McKinsey. Retail and construction could lose an eye-watering 200,000 jobs each amid “permanent structural changes” to those two critical sectors.

Dire warnings such as these will test the mettle of the Morrison government, as well as the much-vaunted “scalability” of its economic support measures. On current predictions, federal stimulus spending, including early release of superannuation, is expected to fall from its July peak of $30bn to $23bn this month, and to keep on falling to $14bn in November and $7bn in January before ceasing entirely by May next year. Absent an economic miracle, household income will shrivel accordingly, as the full cost of more than three million workers currently on JobKeeper is foisted back on businesses. As McKinsey suggests, many of those jobs will no longer be viable and the workers will become formally unemployed, bringing the official jobless rate more in line with the “real” unemployment rate, which Roy Morgan puts nearer 12 per cent. Falling house prices won’t be much help to young Australians if they don’t have a job.

Josh Frydenberg is fond of contrasting the government’s “targeted, temporary” measures with Labor’s post-GFC cash splash, which “baked in” spending. We’ll see. Already there are calls for the government to keep the door open to a more sustained and prolonged spending regimen. As Joyce Moullakis reported on Thursday, CBA chief executive Matt Comyn has called on the government to take advantage of record low borrowing costs to keep the struggling economy afloat.

The political pressure to extend extraordinary programs will be immense. Regardless, the profound uncertainty of this crisis shouldn’t detract from the government’s responsibility to respond with meaningful economic reform. It merely raises the stakes. As Australia’s “phony recession” recedes and the scale of our nation’s economic challenge is revealed in all its sobering clarity, rebuilding the economy will be government’s paramount task. Success will be measured, for example, by whether it becomes easier for businesses to hire and prosper, whether the hopelessly complex tax and welfare systems provide greater incentives to work. History and voters, ultimately, will not be kind if it shirks this duty.