Resilient economy must build on a strong position

Driven by the “enormous economic cost of lockdowns”, as Josh Frydenberg said on Wednesday, Australia’s 1.9 per cent economic contraction in the September quarter was the third-largest fall on record, following the severe 6.8 per cent tumble in the June quarter last year and a 2 per cent fall in the June quarter in 1974. Accommodation and food services was the sector hardest hit from June to September, contracting 26.4 per cent – a direct effect of lockdowns and closed borders. Retail trade fell by 3.4 per cent. Mining and agricultural production increased. As KPMG chief economist Brendan Rynne said, “we have not completely dodged a bullet but we have avoided a rout”, which was testament to good handling of the Covid crisis. Growth across the past year was 3.9 per cent, bolstered by a 36.5 per cent boom in agricultural production and a 5.9 per cent lift in construction. Looking ahead, Australia’s Covid vaccination coverage, which is among the highest in the world, should stand the nation in good stead. As the Treasurer said, Omicron is unlikely to be the last variant of the virus we face. “We must hold our nerve and cool heads must prevail,” he said.

The national accounts figures coincided with release of the OECD’s latest economic outlook, which upgraded Australia’s projected growth for next year to 4.1 per cent. The OECD also highlighted the importance of the nation’s vaccine coverage and, in line with the Morrison government’s reopening blueprint, emphasised the importance of the full reopening of international borders and the return of international students, tourists and skilled workers to alleviate labour shortages.

The report confirms Australia has managed the economic effects of the pandemic better than most of the world. In a table of 17 advanced nations, only Australia and Denmark recorded higher GDP, hours worked and employment from late 2019 to June. Falls in these measures in almost every other nation were eye-watering.

Soaring property values of more than 20 per cent have been a cornerstone of Australia’s recovery. But new real estate data suggests the boom has run its course in Sydney and Melbourne, although it continues in Brisbane and Adelaide for now. Investors need to factor in a rise in interest rates in 2024, according to the Reserve Bank, although the OECD report warned that an earlier increase to contain inflationary pressures may be necessary. When it comes, a rise is likely to cool the market further. As Australia heads towards next year’s March 29 budget and a likely May election, the major parties, in preparing their election promises, should heed the OECD’s general warning on fiscal policy. The coming campaign is not the time for populist sweeteners but to look to budget repair. The mid-year economic and fiscal outlook update on December 16 will clarify the budget position. The OECD notes that after implementing unprecedented and necessary measures during the Covid crisis, policymakers around the world face a tough balancing act to revamp public finances. Failing to do so would be a mistake, with adverse consequences.

Fiscal support, it advises, should be refocused on productive investment, including in infrastructure, to boost growth. Australia sensibly has invested in infrastructure throughout the pandemic. As reported on Thursday, expenditure is set to peak in the second half of 2024, according to Infrastructure Partnerships Australia, when public and private expenditure will reach almost $20bn in the third quarter. Major road, rail and energy projects, vital for growth, are set to dominate outlays. But labour shortages are looming as an impediment to delivering projects. Skilled migration, possibly including a special stream of workers to deliver infrastructure development, will be needed if the nation is to capitalise on economic opportunities during post-pandemic recovery.

Freeing up supply chains is also vital, which is why Scott Morrison is right to put the maritime union on notice that the commonwealth will ­intervene to stop new strikes ­before Christmas. Slow, inefficient ports are a drag on the economy, which is why a new Productivity Commission inquiry into the efficiency of the maritime logistics system, to report by the middle of next year, needs to spur action, regardless of the election outcome. Lifting waterfront productivity, a feat last achieved by the Howard government, is vital to growth. A recent Australian Competition & Consumer Commission report warns that Australia risks ­becoming a less-attractive destination for shipping unless productivity, workplace relations and supply chain inefficiencies are tackled. The report found existing enterprise agreements constrained workplace performance and reduced incentives to improve productivity and increased labour costs. A recent study by the World Bank and IHS Markit ranked Australia’s largest container ports, Melbourne and Sydney, in the bottom 15 per cent and 10 per cent, respectively, of 351 global ports studied. ACCC data shows the length of time a ship spends in berth at Port Botany, for example, increased from 11.9 hours pre-pandemic to 21.2 hours in 2020-21. It is a sector ripe for reform, with potential to boost growth, investment and jobs. Studied collectively, the latest economy data shows the path towards budget repair will be challenging. Australia, however, is starting from a position of relative strength.