Have we survived and thrived?

While Australia is firing on all cylinders, the speed of our economic recovery won’t be even. In fact, economists are tipping many individuals and businesses are likely to be unfortunate casualties as the country moves to rebuild post the COVID pandemic.

While not all are thriving, Australians as a whole are benefiting from swift government action. We’re seeing the economy, which was essentially put on ice for several months, come roaring back as consumers emerge from lockdown and resume this ‘new normal’.

In fact, the International Monetary Fund (IMF) has upgraded its outlook, noting that the “Australian economy continues to show a strong recovery momentum” and that a “favourable labour market recovery continues to support a strong rebound in private consumption, added by wealth effects from rising house prices”.

However, defrosting an economy comes at a large cost, forcing the government to raise funds at a rate not seen in a peace-time environment. This, in turn, is having a large impact on individuals and businesses. So, what did we get for record spending? And have we simply survived or have we thrived in the emerging post-pandemic world?

Wartime spending

Australia is currently winning the battle against COVID-19, saving lives, protecting the economy, and supporting jobs in the process. Consumer confidence is skyrocketing as Australians see the light at the end of the tunnel. However, like any war, victory does not come cheap.

To get us through the health and economic impact of the pandemic, the Australian government joined international counterparts in raising funds at levels not seen since World War II. Australia added $211 billion to its national debt in 2020, equivalent to the entire national debt of Hong Kong, pushing its total debt to a record high of $1,021 billion.

As a nation, Janus Henderson found we now owe $40,068 per person, although that is roughly half of what US citizens owe and a third of the debt inherited by our British peers. Since 1995, national debt has risen 420 per cent, which has seen Australia jump two notches in the world’s public debt rankings to 13th position.

Head of Australia at Janus Henderson Matt Gaden says, “The issuance of debt can sometimes be accompanied by negative connotations, but this view misunderstands the importance of government borrowing to support the economy in bad times like 2020.

“Things would have been far worse had governments not acted to protect millions of livelihoods. While debts are at record levels, lower interest rates have helped cushion the impact of that higher debt.”

Go hard, go early

Despite fears of burdening our young with this momentous debt, the country has learnt its lessons from previous downturns. The nature of the COVID-19 downturn has meant businesses have had to close up shop, pushing the economy down by rates not seen since the Great Depression.

However, unlike the Great Depression, where countries lowered expenditure, world leaders instead stepped in to cushion the economy.

“I think they learnt from past recessions in that if you don’t spend early, you’re going to have a protracted recovery because it’s harder to get things going again,” the general manager of technical policy at the Institute of Public Accountants, Tony Greco, says. “So, the motto is ‘go hard, go early’ and I think the government lived up to that expectation.

“The proof is that we are recovering much faster than if the marketplace did not have that income support.”

But what did Australia get in return for its record spend?

Labour market’s ‘miraculous’ recovery

First and foremost, Australia’s economic recovery from the COVID-19 pandemic will be propped up by better-than expected labour conditions. These conditions, the government believes, are a direct result of its spending. Figures released by the Australian Bureau of Statistics (ABS) in April showed that Australia’s unemployment rate has fallen to 5.6 per cent from 5.8 in March.

Seasonally adjusted employment increased by 71,000 people between February and March 2021.

“Of those new jobs, around 80 per cent went to women and around half went to young people,” Treasurer Josh Frydenberg told reporters at the time.

“Australia’s jobs market, Australia’s labour market, is recovering 4.5 times faster than the experience of the labour market during the 1990s recession.”

The ABS, however, staved off assumptions that improved employment figures reflect a full economic recovery by highlighting that the data was only collected from the first half of March, before JobKeeper’s expiry.

“The April Labour Force release, along with weekly payroll jobs data, will show the state of the labour market after the end of JobKeeper,” says Bjorn Jarvis, ABS head of labour statistics.

Mr Frydenberg, however, said early figures make a case for optimism, even if they don’t fully capture the state of employment following the withdrawal of the government’s biggest and arguably most important stimulus package, which the Treasury forecast would subject up to 150,000 people to unemployment.

“Now, we will see the full impact of the end of JobKeeper over the course of the coming months,” he said. “But in some of the early data that we are seeing, we are not experiencing a massive increase in people turning up to Centrelink.”

Commonwealth Bank CEO Matt Comyn says CBA’s economics team is expecting unemployment to fall to 5 per cent by the end of this calendar year, and to 4.7 per cent by the end of 2022. So, is there significant cause for optimism? “The recovery in the labour market is, in one word, miraculous,” Mr Comyn says.

Businesses improve but recovery tipped to be two-paced

A recent NAB study has revealed business conditions and confidence are running well above their long-run averages with profitability, trading and employment all well into expansionary territory. However, improvements for businesses as a whole will be of little comfort to many, with COVID-19 still impacting how many operate. The emergence of the new digital world will see some businesses thrive while others struggle to survive.

“How much of business returns to pre-COVID conditions remains to be seen,” Mr Greco says.

“Employees have requested more flexibility around working conditions. The worst-case scenario for business is employers provide this and employees come into the office only a couple of days a week.” Consumers are also looking for new ways to spend money which will significantly impact how business is done.

“People are more comfortable with buying online. How many will return to CBDs? I think the trends that were there have accelerated under COVID, with the question remaining: Is it temporary or is it long-term?” he says. 

“I think there’s going to be a lengthy adjustment for many businesses.”

Getting the budget back in balance

A near record-high rebound in employment, business profits recovering and asset price booms are predicted to see Australia’s budget rebound by $200 billion even with an increase in government spending. UBS economist George Tharenou predicts a more rapid than expected decline in JobSeeker recipients, led by a rise in employment and strong commodity prices, which are leading to a faster than expected recovery.

“If the momentum continues for the rest of 2020-21, the deficit will be up to $50 billion smaller than expected. However, we allow for a conservative forecast and new policies, so we forecast the budget will present a $35 billion improvement,” Mr Tharenou says.

He points to the strong employment-to-population ratio, which is nearing record highs, as well as a boom in business profits and asset prices, which Mr Tharenou opines has limited the long-term impact of the economic downturn. “Hence, it’s plausible the budget will project a return to balance in ’24-25, with a cumulative improvement of $200 billion across the profile,” he says.

Through necessity as much as anything the Australian economy has managed to survive a once-in-ageneration downturn.

“This was born out of a crisis. The economy was basically in intensive care. What the government was seeing is people were laying people off and lines were forming outside of centrelink,” Mr Greco says. “It was a clear signal that the economy was in crisis, so I don’t think there was a choice.”

However, whether we simply survived or thrived post downturn remains to be seen.