Glynn’s Take: Australia’s Economy Breaks Shackles of Pandemic
By James Glynn
SYDNEY–Perhaps it is the misery brought on by the ongoing global pandemic and war in Ukraine that has dulled the awareness of Australians to the economic miracle appearing before them.
Two years ago, when the economy was deliberately put into hibernation to save lives after the coronavirus entered the country through air and sea ports, economists were full of dire warnings about coming double-digit unemployment, a house-price collapse, and the deepest recession in a century.
The pandemic snapped nearly 30 years of sustained economic growth and put before policy makers a threat to the prosperity of the country that easily dwarfed that of the Global Financial Crisis in 2008.
As international and state borders slammed shut in 2020, Australians hunkered down in their homes and braced for the worst.
It is through this prism that the economic forecasts contained in the federal government’s budget for 2022-2023 released on Tuesday need to be viewed.
Instead of a job market horribly scarred by years of recession, the country is now on the cusp of full employment. In simple terms that means anybody seeking a job can get one.
Nearly every forecast for unemployment since the start of the pandemic has had to be jettisoned quickly as the economy consistently outperformed.
The jobless rate is now forecast to fall to 3.75% by mid-2022 from 4% currently. That’s a number no economic policy maker or politician in the country will have seen in their working lives.
Even Reserve Bank Governor Philip Lowe, who joined the central bank out of school in the late 1970s, can’t claim he has witnessed such a low number.
It’s a staggering forecast that, if anything, looks conservative given current trends in hiring and record numbers of job vacancies. It’s highly possible the unemployment rate will fall even further than that in the next year.
The employment situation is underpinning a forecast for the economy to grow by 3.5% over the next year.
Some economists will argue that with closed borders and a federal government fiscal stimulus of more than 300 billion Australian dollars to battle the pandemic, the country should indeed be approaching full employment.
They’ll be right. But the success also reflects the design of the government spending which had at its core a wage subsidy known as “job keeper” that kept companies afloat so that when the lockdowns ended, the engines of growth reengaged at speed. Prior recessions, like the one in the early 1990s, have been marked by years of sustained high unemployment, with older and low-skilled workers typically remaining unemployed the longest.
The budget also includes a forecast that wages will grow by 3.25% in the next year, reversing the moribund trend of the last decade.
Those looking for a dark lining in the Australian economic story will point to rising inflation, but the budget forecasts consumer prices will rise by just 3.0% in 2022-23 and by just 2.75% in 2023-24.
Viewed against a backdrop of inflation running hot in major economies, stoked by interrupted supply chains and soaring energy costs, these low numbers look ambitious. But Australia has been an inflation outlier for some time. Its proximity to Asia, where inflation is more benign, and a sluggish wage-setting system, have helped to keep wage-growth tame.
If the budget’s economic forecasts are too optimistic, it would be a big challenge for policy makers to rein it back in.
Getting this wrong could undo the good work that is now visible in the economy, bringing with it rapid rises in interest rates.
On the other hand, there is a strong argument to suggest that current price pressures in the economy will eventually fade. To have a true inflation breakout, we would need to see wages jump. While they are drifting higher, there is no surge yet that would signal the genie is out of the bottle.
In the last year, house prices have jumped by more than 20%, a double-edged statistic given that the rise has frozen many out of home ownership. Nevertheless, it represents a big boost to household wealth.
After two years of pandemic, Australia has been left with government debt that could leave the country more vulnerable in the event of another shock, it can be argued. Still, Australia’s debt burden is much lower than that of many of the major economies, and the strong job market means accelerating GDP growth could tamp it down.
By late 2022, full employment is likely to have been achieved, and on current indications, interest rates will still be low.
It isn’t what anyone could have anticipated two years ago, but the miracle is looking more and more like reality.
Write to James Glynn at james.glynn@wsj.com
