Wake up, Australia, there will be no easy snapback

Every ray of sunshine is welcome in the bleak midwinter of the coronavirus recession. The International Monetary Fund is forecasting Australia, alone among rich nations, will suffer a milder-than-anticipated drop in gross domestic product of 4.5 per cent this year, down from an April prediction of a 6.7 per cent contraction. That’s in line with the view of our top advisers. Treasury had initially expected a 20 per cent slump in GDP this quarter, and a similar fall in the number of hours worked. As well, Moody’s reconfirmed Australia’s AAA sovereign credit rating, putting us in an elite club of 10 countries rated AAA by all three global ratings agencies.

But cold reality bites back. In its latest world outlook, the IMF revealed the pandemic will lead to a 4.9 per cent plunge in global economic activity this year, compared with a 3 per cent fall it had forecast in April. We are an open, trading economy, so that will keep a lid on recovery and getting people back to work. COVID-19 is unleashing cyclical and structural change across industries and in the labour market. On Thursday, Qantas said it was sacking 6000 people. “These are hard days, Australia,” Scott Morrison said, presaging more difficult moments ahead. Commonwealth Bank economists predict the number of unemployed will surge past one million in September, ahead of the withdrawal of emergency fiscal support at the end of that month. No one in government is now talking about “snapback”, a term deployed three months ago to signal a return to normal settings in welfare and a halt to Keynesian “whatever it takes”.

Certainly there is intense lobbying from business and community groups to avoid a “fiscal cliff” when JobKeeper ends and the dole returns to normal. As well, there will be pressure on state and territory leaders to reopen borders and ease restrictions. The Prime Minister again stated medical advice has never been to close borders. Outbreaks will occur, but we have tools and processes to deal with them as long as we operate in a COVID-safe way, in business and in social life. The last thing we want is a “go, stop, go, stop” rhythm. But even assuming a smooth transition out of shutdown, and success in fighting the virus, post-pandemic Australia will be a jobless devastation zone. This will likely be the worst economic calamity in 90 years, nothing like the drop in GDP in the early 1980s or the “recession we had to have” at the start of the 90s.

All organisations are adjusting how they work, searching for cost savings as operating budgets are slashed for the coming financial year. It should put into perspective the shameful carry-on of NSW public servants over a wage freeze and other proposed mild administrative reforms in other sectors. The slack in the labour market, with a record under-utilisation rate of more than 20 per cent and hundreds of thousands exiting the job search, is here to stay. As Mark Wooden noted in his dissenting view in the annual wage review by the Fair Work Commission, a return to pre-recession employment levels can take a long time: in the 80s it took six years for the unemployment rate to recover and more than 10 years in the 90s. Professor Wooden said there was a distinct possibility that many who lose their job or are entering the workforce this year “will be consigned to a future of long-term unemployment and/or permanently reduced career earnings”.

This should be a wake-up call for the political class in Canberra and beyond to focus on the main game of growth, jobs, productivity and living standards. A month ago, Mr Morrison declared we had to reset and go for growth of 3.5 per cent each year — one percentage point above our long-run average — for five years to claw back the lost ground from this disaster. He got a tick for ambition but economists were sceptical about the chances of meeting that target. Why? Because of two decades of complacency on supply-side reform. Those lost years were hurting us pre-crisis — anaemic growth in GDP and incomes, falling productivity and new start-ups, and capital shallowing — and they’ll hold us back in recovery. We need reforms for a more dynamic economy otherwise, as serial optimist Reserve Bank governor Philip Lowe warned, Australia “will meander along with mediocre growth”. Meandering along is not an option for us. Comfortable and relaxed is history.

Right now, approvals processes kill projects. Our industrial system delivers the world’s highest minimum wage but not the flexibility or simplicity for job creation in new areas. The tax system should try to promote expansion and innovation. State taxes hold back the movement of capital and labour. Yet, apart from the notable exception of NSW leaders, like Narcissus premiers are falling in love with their reflections rather than getting busy on retooling their states. The Morrison government is doing running repairs on workplace laws, skills and red tape, while building a debt mountain. Josh Frydenberg’s economic statement next month and October budget will reveal how much political will, energy and imagination the government has for reform or if policy incrementalism is its comfort zone. But the Coalition is unlikely to get any help for business-friendly policies from Anthony Albanese, despite an apparent Road to Eden-Monaro conversion on climate and energy policy. Labor is simply striking a pose.