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.