Resilient economy sails on but states risk rough waters ahead

Queensland Premier Annastacia Palaszczuk in question time on Wednesday. Picture: Dan Peled

Government-subsided airfares and online shopping have shown how effective they can be in temporarily heading off an economic downturn.

Whether the country goes into a second pandemic recession in December, however, is surely in the hands of the premiers.

That is at least the narrative that Josh Frydenberg is seeking to weave with his demands that the states open their economies back up as per the vaccination benchmarks of the national plan.

But it’s not as simple as that. The Australian economy on Wednesday showed once again its resilience, with the national accounts revealing an above-trend growth for the June quarter of 0.7 per cent. This was a surprise to just about everyone, including the Treasurer. If you’d asked him on Monday what he thought the numbers were going to be, he would have said somewhere between flat to negative.

Of the 90-odd days included in the quarter, most were spent in moderate freedom for most Australians. A total of 29 days were spent under lockdown, primarily by Victorians, and four days for those in greater western Sydney.

The results show that even with some border restrictions and lockdowns, there was some above-trend economic growth. The good news, apart from the obvious, is it sets the economy up for the rough patch ahead … the rough patch being the bad news.

No one is tipping the September quarter to be anything other than dire considering most of it will be spent in lockdown for more than half the population. A 2-3 per cent contraction is a best guess.

That leaves the December quarter as the great unknown, but we won’t know that until the new year. Considering the Morrison government will be heading towards an election then, the level of anxiety has a sharper political context. Intuitively, one would have to say it’s looking dicey.

Queensland Premier Annastacia Palaszczuk has signalled that she would like to see her state in lockdown indefinitely. Meanwhile, Western Australia Premier Mark McGowan seems determined to have his state borders closed to the rest of Australia, and the rest of the world, just as long.

Victorian Premier Daniel Andrews has at least come around to the idea of Covid-zero as a folly but has announced his state will be in virtual lockdown until he reaches the national plan targets at the end of September. Only then will restrictions be gradually lifted.

Meanwhile NSW, the engine room of the economy, remains crippled by Covid cases.

The difference between what is happening now and what happened at the start of the pandemic is that health advice and economic necessity are no longer working against each other. The health advice is now arguing in favour of opening up. The two imperatives have converged and the political debate has shifted.

While state and territory behaviour will determine the national economic conditions by the end of the year, they will say their behaviour will be determined by vaccination rates being maintained at current levels. That is the domain of the commonwealth.

While the states continue to remain blameless for anything and everything, they presumably won’t be able to dodge responsibility for a second recession should they cause one.