4 minute read 25 May 2020
Woman hanging an open sign

How does Australia emerge from “The Great Lockdown”

By Jo Masters

EY Oceania Chief Economist

Economist. Pundit. Keen tennis player. Referee to teenage girls. Paddle board lover.

4 minute read 25 May 2020

The impact of COVID-19 on the economy has been abrupt and widespread. But with restrictions easing and business starting to re-open, can we help Australia's economy recover faster?

Despite large, co-ordinated policy action across geographies and agencies, the world is grappling with concurrent hits to supply, demand and liquidity.

In Australia, fiscal stimulus of 16.5per cent of GDP- one of the largest direct responses among advanced economies – has been designed to ensure there is enough economic fabric to support recovery for individuals and businesses, once the health crisis stabilises. And the RBA has done its bit as well, by driving interest rates down across the yield curve and supporting the flow of credit.

Of the travel restrictions, social distancing and deliberate closure of parts of our economy, EY research shows it is social distancing that has been most damaging to economic activity – accounting for over half of the impact - followed by domestic travel restrictions and then the closed international borders.

In the face of restrictions, Australians have rapidly shifted how and where we work, entertain, exercise, shop and eat.

Where does this leave economic growth?

Australia will record the biggest contraction since the 1930s – with an expected 8-10 per cent loss of activity over the first half of 2020 (with the vast bulk of the impact in the June quarter).

That contraction, and the peak in the unemployment rate, would have been larger except that policymakers pulled every lever as hard as possible and in a co-ordinated manner.

Over the year, the economy is expected to contract by around 4 to 6 per cent but it won’t contract forever. Indeed, the consensus is for growth of 4 to 6 per cent next year. This sounds like a so-called “V” but really, it’s a wide U.

On those forecasts, the economy will still be smaller at the end of 2021 than at the end of 2019. 

Economic recovery could take even longer if there is another outbreak which requires a reversal of some restrictions or, perhaps more worryingly, the hit to the labour market and incomes when the government stimulus measures end and the loan repayment holiday ends in September. This could well make the “U” shaped recovery look more like a saw tooth, with a bumpy round before a more sustained recovery takes hold.  

In the face of a near doubling of government debt, we need to think beyond the now, to how we can drive toward a more robust, efficient economy, that can elevate growth to assist in repaying that debt.

With population growth set to slow and participation having fallen, productivity growth will be critical.

And so the conversation about productivity enhancing reform has taken on a more urgent tone, after a decade of so with little progress.

Everything should be on the table: the burden of red tape and regulation; the complexity of our industrial relations system; the efficiency of our tax system; the way we think about infrastructure; the emerging skills gap; how we inspire innovation.

Crisis can be a catalyst for change, and while current conditions are challenging, we need to take this opportunity to make our economy as strong, resilient and efficient, to generate as much growth as possible to repay debt and leave young Australians with economic opportunity.

What are the challenges?

The gradual easing of restrictions will mean our recovery will be slow and varied across states – and the initial wave of easing may not help activity much. If we consider sport it looks like games will be played to empty stadiums meaning people watching at home won’t spend money on tickets, food and drink that they would normally at the game.

EY’s Future Consumer Index, a national survey conducted end April/early May, also shows a level of cautiousness about being out and about. The Index shows that nearly two thirds of those surveyed expect another Covid-19 outbreak within the next six months. Indeed, at least seven in ten Australians surveyed expect it will be at least months or even years before they are comfortable going to bars and pubs, the movie theatre, a fitness club or outdoor sporting event, or concert.

This cautiousness together with households’ likely tightening of the purse strings – as they look to boost precautionary savings or pay down debt – in the face of elevated job insecurity, weak wage growth, high debt and falling house prices means getting back to pre-Covid economic activity levels will take time.

What makes this crisis unlike any other is that every sector of the economy has been impacted, with three quarters of businesses suffering a hit to cash flow and two in five businesses having registered for JobKeeper.

Not surprisingly given the social distancing impact, accommodation and food services has been hardest hit, with around one in three jobs lost from the payroll since mid March. While arts and recreation, professional, scientific and technical services and rental, hiring and real estate services have seen more than 10 per cent fewer jobs on the payroll.

The least impacted, with minimal job losses have been, financial and insurance services, healthcare and social assistance, education and training, public administration and safety and utilities. Even so, the breadth and extent of the shock to the labour market has rattled households. This is troubling if we’re thinking about the recovery given households really are the engine room of growth, accounting for around 60 per cent of economic activity. 

Source: EY analysis of ABS data
Australian jobs a COVID casualty

In April nearly 600,000 Australians became unemployed, the largest shift on record.  If we consider, however, that anyone currently receiving JobKeeper is not considered unemployed, even though three quarters of a million of those are working no hours, and a further million are working fewer hours than typical, the real unemployment number is arguably much higher.

Meanwhile, the under-employment rate – those that have a job but would like to work more hours – surged to 13.7 per cent, the highest level since records began nearly fifty years ago.

The data also shows us that half a million people left the workforce – that is they classify themselves as no longer available, or not looking for work. For some, it may be the case that there is no point looking for a work in an industry that has been closed, but many may simply be discouraged. Participation in the labour force fell to the lowest level since 2004, and females were hit harder than males.

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The unemployment rate – typically one of the best indicators of conditions in the labour market – bucked the trend, rising from 5.2 per cent to 6.2 per cent, much lower than the expected 8.3 per cent level. However, this reflects that smaller workforce, so is not good news.

Given the complexities around how we count who is unemployed in a Covid world, the more important indicator is actually hours worked, which fell by a record 9 per cent in April. From an economic perspective, working no hours means there is no lift in production of goods and services.

Moreover, the large number of people that left the workforce is a significant challenge as they will first need to be enticed back into the workforce, and then find a job.

History tells us that the unemployment rate goes up quickly but takes a long time to fall again – in the early 90s recession, it took seven years for the unemployment rate to fall back to pre-recession levels. We continue to expect the unemployment rate to rise in coming months, and then decline only very slowly. Indeed, the Reserve Bank of Australia expects the unemployment rate to moderate to only 7.5 per cent by the end of 2021. 

Summary

With COVID restrictions easing EY's Chief economist Jo Masters shares how Australia's economy begins to recover.

About this article

By Jo Masters

EY Oceania Chief Economist

Economist. Pundit. Keen tennis player. Referee to teenage girls. Paddle board lover.