What will happen to our economy as the pandemic sweeps through? There’s an entire industry that exists to answer that question.
This is a fecund time for models, guesses and forecasts. But like a jungle, when the growth of numbers gets too thick they can block the light, we need a machete to cut a path through.
COVID-19 has been brilliant for numeracy. Many people are getting to grips with exponential growth and logarithms for the first time. Yet even the most numerically inclined among us could be forgiven for feeling lost amid the competing claims over the future of Australia’s economy.
- We have heard about lost GDP, both on a quarterly basis ($50 billion in the three months to June, Treasury) and over the entire downturn ($406 billion, KPMG.)
- The Treasurer has telling us how much we can gain by re-opening schools ($2.2 billion) and local government, museums, and parks (a further $1.2 billion).
- Deloitte Access Economics is forecasting a structural budget deficit of $162 billion this year, and an underlying cash deficit of $143 billion.
- The RBA forecasts growth of negative 8% in the year to June, then +7% in the year to June 2021
One temptation for people like me when faced with all this data is to produce some sort of hideous dashboard, with stylised graphics representing the various projections. But there is a way to dispense with all that.
Let’s rule out several numbers you don’t need to worry about.
First, government debt. With interest rates at basically zero, that’s a sideshow. Likewise the budget deficit. Yes, the government is spending a lot and collecting less in revenue. This is suitable and appropriate. We expect to see a deficit but its exact size is wildly unimportant.
Next, economic growth. In the usual course of events, the growth number is interesting because it swings around more than other numbers, so we can use it to predict more stubborn figures like unemployment. Will growth be 2.4% or 2.8%? That subtle difference flows through to figures that matter.
This year the swings in GDP will be so outsized as to be distracting. Major gyrations make for big headlines but they obscure as much as they illuminate. Furthermore, growth is an abstraction.
Adding up all the output in the economy in one year and all the output in the next year, and measuring the size of the inflation-adjusted difference? It doesn’t say much of meaning for people. None of us can feel a 10% contraction in the economy.
Meanwhile the popular definition of a recession — two consecutive quarters of economic contraction — is arbitrary.
It is even theoretically possible Australia could pack all our economic contraction into one three-month period and avoid two consecutive quarters of shrinking output. That would not prove we didn’t have a recession though — it would just make a mockery of the definition.
So if not the budget and not GDP, what?
One number stands above the rest. It’s a glimpse through the jungle canopy to the guiding star: unemployment.
Unemployment is the one number to rule them all, for two reasons. First, it distils information from other metrics. If GDP falls, employment will fall.
Of course there is not a one-to-one relationship between the two because some industries are more labour-intensive. But if GDP falls because of declining LNG exports (not a labour-intensive source of output), guess what? That makes little difference to unemployment and little difference to your real life.
What’s more, unemployment is where the rubber hits the road. Work is where the economy intersects with people’s real lives, 40 hours a week. If you take that work away, human suffering is the result. And there is no reason to care about the economy other than human well-being.
So which forecasts of unemployment should we look at?
The RBA says unemployment will peak around 10% and hover there for at most a year. Its three scenarios for the future of the labour market are depicted in the graphic below.
The upside scenario looks awfully optimistic to me, but an outcome somewhere between the baseline and the downside seems plausible for the medium term.
That’s a lot of people looking for work. (It’s worth supplementing this main meal of unemployment data with a side of underemployment and a seasoning of the labour force participation number too. To be counted as unemployed you need to be looking for work, and some people will simply leave the labour force.)
By 2022 an unemployment rate around 7% seems likely. Beyond 2022, however, anything can happen. Forecasts should not really be a line so much as a cone of possibilities.
The recovery from the virus will not be linear. The process of defeating the virus and rebuilding what we had will be interrupted.
There will be a butterfly effect — just like 9/11 led meanderingly to the invasion of Iraq and a power vacuum that permitted Islamic State to develop, so the pandemic and its response will generate a cascade of problems.
The most likely place to find them is in the US (a probable second wave, a presidential election that will not go smoothly), and in China (antagonism with the US, trade frictions with Australia).
Both of those economies matter enormously to Australia and we are highly exposed to the fallout in both places. It will take a series of very fortunate events for us to see unemployment back under 5% at any point in the next five years.
We need massive Federal Government financial injection into jobs. Labour intensive jobs, Jobs at the local and Regional levels and jobs that will be sustained. Local Government and State Governments will need Federal money to create jobs that will serve the community where the worker lives. The jobs need to be paid at normal job rates (This is not ‘work for the dole’.
Those not able to work or find work will need to be paid at the current Job Seeker rate, at least.
The resultant Consumer Spending (and paying down private debt) will boost the economy with Small to Medium (at least) Businesses able to survive, pay more staff, earn a living.
Our Economy does not depend on Mining and big multinationals and our employment does not depend on them.
We need a worker/consumer based recovery. There will be people who will see business opportunities but we all know, and have for some time, that without well paid workers we do not have a consumer base for a healthy Economy.
Your mentioning work for the sole reminds me that we have had a “massive Federal Government financial injection into jobs”. Unfortunately, it has not gone to the un- and under-employed (or changed their fortunes much at all), but to the grifters who run JobActive agencies (or whatever they’re called this week).
Debt levels, Deficits, GDP figures, Exports/Imports, the Stock Market levels, Multinationals and Mining Company profits do not measure the health of, nor drive, our Economy.
These do not make any difference to the quality of the life Citizens of Australia experience.
It is unemployment and wage levels that make a difference; it is management of personal debt; it is managing the environment we depend on. If these are made right the Economy, including businesses, will do well.
There will still be innovators and entrepreneurs. They are only really successful if the rest of the population is doing well.
(When the rest of the population is not doing well many of the innovators and entrepreneurs have to resort to graft, patronage, skewed ‘playing fields’, and distorted/unequal economic and political arrangements, to succeed. Surely that cannot be very satisfying for them, knowing they only succeeded because of ‘cheating’ in some way and only getting ahead at the expense of others. Of course the Ann Rand types think this is only their right.)
Poor Alice Rosenbaum; she had a rotten time and it scarred her, so she scarred masses of minds with her mindless outbursts, forgetting love, humanity, society, decency, success.
Spot on but, a little arcane for the kiddies here?
At first glance, the graph allows the reader to see unemployment rate jumping up fourfold, which would be a significant and disastrous development. It takes a little scepticism to check and see that the information has been distorted by moving the zero line upwards. Any journalist is professionally bound to remove distortions of truth before they reach the trusting reader. Crikey must have access to software like Illustrator that made the graph or allows the graph to be edited. The bottom line of the graph should appear at the function’s value of zero. Only then would the trusting reader see at a glance that unemployment will double. This doubling is serious and valuable information that we should be able to see at a glance on a graph that starts at zero.
Not sure what you are seeing in the only graph in the article.
I have seen this one elsewhere . The y axis is well marked.
The graph is from the Australian Bureau of Statistics (with information from the Reserve Bank of Australia.)
The unemployment level over the last few years does not start from 0%, if only it ever did.
Fact: All honest prediction is unreliable, at best 50/50. Economic ‘prediction’ is mere hope and historically much more often way wring than ever even about right. These are statistical facts based on history.
The solution? Listen to Nassim Nickolas Taleb: Forget making policy on the basis of prediction and forecasts. Base all decision-making and policy on what we know now from the evidence we have now. Sure, create a forecast for the effects of the decision or policy as a way to test over time the perspicacity of the decision or policy.
But making decisions or policy on the basis of forecasts is vacuous idiocy, although that is how most organisation work.
10+
From now on, for the foreseeable future, there will be growing and chronic unemployment, more unsafe, poorly managed, paid, supervised gig and casual work, rotten lives with fringe areas growing as problems in drugs, violence, mental and personality declines, theft. Australia, the unfair go land, Advance Australia where? More and more, the high management executive types are pumping up the personality penis to become nobles, living parasites, with reward settings high and performance often sub par. Wealth for worms, returns for rejects, riches for rubbish. Work itself is about to change in fundamentals, sharply, nastily.
Rather cynical but, alas, 110% correct.
Depressingly – you are spot on Paradise. But wasn’t all that always obvious to those who decided they the only way to fight the virus was to lock us all up, feed us jingoistic BS about being “all in this together”, shut down our economies and put them on life support? For how long? Incredibly, we are only now starting to hear from WHO and all the other smartest people in the room that we may never have a vaccine, that in fact we may be living with Covid forever. Now we have to work out some way with dealing with it that doesn’t result on us all going back to subsistence farming and being banded together into little warring fiefdoms fighting each other with crossbows and rock-throwing catapults over access to natural resources like coal?
No one even suspected that beforehand?