Out of recession, but not out of the woods

In more ordinary times, Australia’s speedy bounce back from recession as confirmed in Wednesday’s national accounts would be cause for unbridled celebration. Given the circumstances that forced the managed suppression of economic activity to combat the COVID-19 pandemic, however, and the high level of government support still being used to bring the economy out of coma, some caution is warranted. This is not to downplay the welcome economic news contained in the national accounts, nor positive comments from government, the Reserve Bank and international authorities such as the OECD. But as economics editor Adam Creighton has written, another two quarters of data are needed for the clarity required to set policy in future.

Nonetheless, the latest quarterly figures confirming Australia’s strong performance relative to other developed nations gives cause for optimism. In headline terms, Australia’s economy is bouncing back strongly from recession, posting the fastest growth since the late 1970s on the back of a surge in consumer spending as coronavirus restrictions unwind. The economy grew 3.3 per cent across the three months to the end of September, better than the 2.5 per cent most economists had expected. The rise partly reverses the 7 per cent drop in the second quarter when business restrictions and lockdowns were at their peak.

Household spending, which plunged almost 13 per cent in the second quarter, rose almost 8 per cent in the latest period, driven by spending on hotels, restaurants and cafes, which began to resume more normal trading. Victoria was the only state to record a fall in household spending, of 1.2 per cent, as a result of a second lockdown that began in July. Gross domestic product rose 3.3 per cent in the quarter as COVID-19 restrictions eased across most states and territories. One reality check is that household spending in the September quarter was still 6.8 per cent lower than in the December quarter last year, immediately before the pandemic.

Josh Frydenberg was upbeat about the latest figures, saying the creation of 178,000 new jobs last month signalled an improving employment outlook for the nation. The Treasurer’s optimism was shared by Reserve Bank of Australia governor Philip Lowe, who told a parliamentary committee he expected GDP growth to be “solidly positive” in the September and December quarters. The RBA’s central scenario is now for the economy to grow by 5 per cent next year and a further 4 per cent in 2022. The Commonwealth Bank says it wants to see more data but remains largely positive about the outlook for early next year.

Scott Morrison says the easing of hard borders, restoration of lost jobs and hours, and the graduation of more than two million Australians from JobKeeper payments in October demonstrates “the comeback is on”. But Anthony Albanese used question time on Wednesday to warn the government not to claim a premature economic victory. The Opposition Leader is rightly focused on the fact unemployment remains high and underemployment is an ongoing concern.

In an appearance before parliament on Wednesday, the RBA governor gave an indication of the long road ahead. Dr Lowe’s key message is that the economy has turned the corner and recovery is under way. He says the RBA expects unemployment to peak between 7 per cent and 8 per cent, rather than close to 10 per cent as earlier forecast. The RBA target is to get unemployment back below 5 per cent, something that is expected to take several years to achieve. Dr Lowe says this points to an extended period of record low interest rates, which have already buoyed the housing market.

The immediate outlook for employment is clouded by the impact of the federal government’s JobKeeper scheme, which subsidises employers to keep workers on their books. While the trend is positive in terms of a reduced demand for JobKeeper payments last month, well below government expectations, a true picture on jobs and economic health will not emerge fully until the subsidy measures are removed early next year. There is a suspicion that some businesses and individuals are hanging on until the end of this year in the hope that next year will unfold as if nothing has happened. The wish is that the pandemic is over and we can all move on.

This clearly is not the case. There are still restrictions on travel and the capacity at which some companies can operate, particularly in the hospitality sector. Many small businesses that have been hit by lockdowns and border closures have been able to survive only because of intervention by government and special measures such as eased insolvency trading rules and loan repayment deferrals from banks. It is only when these measures are unwound and stock is taken of the higher levels of debt assumed during the crisis that a full picture of the health of the economy will emerge.