15 minute read
Luke Yeaman, Deputy Secretary
Luke Yeaman, Deputy Secretary, Macroeconomic Group, Federal Treasury
Key points:
• The diverse nature of Australia’s economy, strong fiscal capacity and substantial programme of infrastructure investment places Australia in a good position to navigate its way out of the COVID-19 crisis. • For the foreseeable future, governments will seek to use infrastructure investment to help boost confidence, lift economic activity and productivity, and drive down unemployment. • The infrastructure sector will need to identify productivity-enhancing projects and support early planning and skills development to allow investment decisions to be made with speed and confidence.
I would like to give you a brief snapshot of how we in the Federal Treasury are thinking about the Australian economy, both now and over the next few years, as we hope to move into the recovery mode after this crisis. I would also like to talk about the very important role that we see infrastructure playing in this recovery, as it will be a critical part of the story.
The Federal Budget will be handed down in a few weeks’ time, and it will provide much more detail on both the outlook and the plan for recovery, but let me give you a quick highlevel view today. First, let me say a few things about the scale of this crisis. Prior to the pandemic, the Australian economy was fundamentally in good shape. Of course, there are always challenges and we had our share. Our growth was steady, unemployment was low, inflation was contained and our fiscal position was very strong by international standards. Our economy had also shown itself to be incredibly resilient over a long period of time. We were in our 28th year of consecutive economic growth, which is an outstanding record internationally,
Chart 2: Fall in real GDP, COVID-19 recession vs previous recessions
0 1 2 3 4 5 6 7 8
Per cent
COVID-19 (December 2019 to the June 2020 quarter)*
1990s recession (December 1990 to the June 1991 quarter)
Fall in Real GDP
1980s recession (September 1981 to the June 1983 quarter)
Per cent
0 1 2 3 4 5 6 7 8
Note: The COVID-19 related restrictions were only introduced towards the end of the March quarter 2020, and the March quarter also included the economic effects of the bushfires
and we had successfully weathered a number of major shocks – the global financial crisis being the most recent and significant example. But the COVID-19 pandemic is on a scale that we have not seen before – at least not in most of our lifetimes.
I want to speak in detail about the health measures and restrictions that were put in place to protect lives and take pressure off our health system. These were necessary steps and, overall, when we compare our outcomes with those of other countries around the world, I think our response has been highly effective. We have generally managed to get the balance broadly right between protecting our health outcomes and protecting our economy. It has been a very difficult balance to strike, but our cases and mortality rates have been low by international standards, and I reckon our performance also stands up very well. Nevertheless, the impact on our economy has still been very extreme. Both the speed and the scale of this downturn really are quite extraordinary.
In the June quarter alone, economic activity across the country shrank by seven per cent. Prior to this, the largest quarterly fall ever recorded was just two per cent. This crisis dwarfs the economic downturns we saw in the 1980s and the 1990s recessions (see Figure 1). In just a few months during the 1990s recession, activity fell by 1.4 per cent, peak to trough, over two quarters. In the 1980s recession, activity fell by 3.7 per cent over a period of around seven quarters. Here, we have fallen more than seven per cent in just three to four months. The effects of COVID-19 have been widespread across the economy. Household spending, business investment, construction and exports, all fell sharply in June. Government spending, including on infrastructure, was one of the few bright spots amidst the gloom.
Almost all industries have been badly affected; but, not surprisingly, our services sectors have been the hardest hit, especially those linked to tourism. In the accommodation and food services sector, activity fell by almost 40 per cent. Across sectors like the arts and recreation, transport (which means a lot to this group), administrative services and real estate services, activity fell by between 15 and 25 per cent. Now these numbers roll off the tongue, but they are incredible figures and are substantially larger falls than we have seen before, especially across such a wide range of sectors (see Figure 2). But perhaps the largest impacts of all have been
Figure 1
Chart 3: Gross value added growth, June 2020
on the jobs market. Between just March and May, 870,000 Australians lost their jobs, and total hours worked across the economy fell by more than 10 per cent.
Unlike past recessions, the predominant effect of those job losses has been felt in our casual workforce, particularly amongst younger workers and women. In the Federal Treasury, we have estimated that the effective unemployment rate – which includes those people who have lost their jobs, but also those who have dropped out of the job market altogether or are still employed, but are working zero hours – peaked at almost 15 per cent in April. In February, before the crisis hit, the unemployment rate was just 5.2 per cent. That is a 10 percentage-point increase in unemployment in just three months. Hopefully that gives you a sense of the scale of the crisis we are dealing with. This is not business as usual. Having said that, it could have been much worse. As I said earlier, when you compare Australia’s economic performance with that of other countries around the world, we have done well to limit the damage. When you look at the combined fall in GDP over the March and June quarters, very few advanced economies have performed as well as Australia.
In countries like the United Kingdom, France, Italy, Spain and India, activity fell by closer to 20 per cent in the first half of this year, not seven per cent. Almost three times more than we have seen here. I would argue that this relative success is the result of two key things. Firstly, our strong up-front health response, which included closing the international borders on 1 February, only one week after our first confirmed case of COVID-19. I agree with David Speers’s comments that there are always things we could have done better and faster, but overall, I think our health response has been very strong, and very effective in the main. The second factor that has made a difference for our international performance has been the unprecedented amount of fiscal support that has been provided by the Government and injected directly into the economy.
To date, the Government has announced over $300 billion of direct and indirect economic support. That amounts to around 15 per cent of GDP flowing into the economy, mostly in the next six to 12 months. As you all know, the JobKeeper programme has been the centrepiece of this support. More than $50 billion has already been provided through that programme to support more than 3.6 million people and more than one million
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Figure 2
Chart 5: Forecast GDP levels, July Economic and Fiscal Update
Australian businesses. It really has been an incredibly successful programme and it has been effective, according to our analysis, in keeping people connected with their jobs, keeping businesses open during the worst of this crisis and putting a floor under business and consumer confidence. You can see it in the data; when that programme was announced, there was a noticeable stabilisation and improvement in confidence across the economy. That programme has been backed up by a range of other measures, including boosting and expanding eligibility for income support payments, including JobSeeker; a cashflow boost for eligible businesses and not-for-profit organisations of up to $100,000; allowing early access to superannuation; bank loan deferrals for household mortgages and small businesses; and a range of other measures. The Government has also provided direct support to badly impacted sectors like aviation, the creative arts sector, and construction through the HomeBuilder programme. Now, these policies have come at a significant cost to the budget. There is no doubt about that, and we will see the full impact in a few weeks’ time. But I do want to make the point that our debt levels remain very sustainable and low by international standards. There is not an immediate
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Figure 3
need to pull back on spending, and there is enough ammunition in the locker.
There is also no doubt that policy support has had a major positive impact on our economy and put a floor under activity and confidence. Without that support, we would have seen a much deeper recession of the kind we are seeing elsewhere in the world. We would have had a much larger mountain to climb on our way out of this crisis. What can we expect from here? That is the million-dollar question. As I said upfront, this is not a normal recession, if there is such a thing. How the economy recovers over the next few years depends almost entirely on how the virus and its treatment evolves, here and around the world. Of course, we all live in hope that the vaccine will be developed as soon as possible to allow us to resume normal business. But in the meantime, our success will depend on our ability to contain any further outbreaks, without having to return to widespread restrictions.
On the positive front, prior to the second wave outbreak in Victoria, we had seen in the data that we monitor a very substantial and fairly rapid bounce back across a range of economic indicators as restrictions had started to be eased
across the country. By July, we had recovered around 340,000 jobs, or around 40 per cent of those that we lost between March and May. Business confidence and conditions have shown strong improvements after falling to record lows in March and April respectively. They are not back to the pre-crisis levels, but they had started to really bounce back close to those levels. Measures of consumer confidence and sentiment had also recovered much of their earlier falls, and retail spending had also rebounded significantly in the months following its record fall in April. We are seeing that recovery continue, albeit at a much more gradual pace, in those states that are still relatively free of the virus. This shows that if we can successfully limit transmission of the virus and reopen our borders, there is a pathway to recovery.
On the other hand, we have seen in Victoria the damaging effects that the second-wave outbreak and further restrictions can have on our economy. And it is having a very significant effect. David talked about a two-speed economy, and that is very much the case. In those states that are relatively COVIDfree, we are continuing to see an upward trend in many of those economic indicators, but Victoria is definitely having a severe effect on the national economy and dragging down confidence around the rest of the country, as well. Internationally, we are also seeing case numbers either continue to rise or rise again in a number of countries around the world, including France, Spain and India. And there is increasing thought being given to further restrictions being applied in some of those countries. In the absence of a vaccine, this risk of further outbreaks, both here and internationally, and the return to restrictions, will continue to drag on household and business confidence.
I want to make the point that even if we can contain further outbreaks, past shocks and recessions have shown us that it still takes time to fully unwind the effects of an economic shock of this size and get back to pre-recession levels of activity. The jargon in the economic field is ‘economic scarring’, but it does take time for confidence to return into the economy, for the income effects to flow through the economy, for businesses to get back and invest, and for those people who have lost their jobs to retrain, adjust
and find new roles. There is a mountain that we still need to climb. In the July economic and fiscal update, Treasury forecast the economy to gradually improve throughout 2021 as restrictions ease, and employment and incomes recover. The Federal Budget will provide an updated and longer-term forecast, but it is no secret that there are still some hard yards ahead of us.
For the foreseeable future, governments will be focused on boosting confidence, lifting growth and productivity, and driving down the unemployment rate as fast as possible. I think the unemployment rate will be the key indicator of success over the next few years, and trying to drive that down quickly will be the key priority for all governments. I think Australia is very well-placed – as well-placed as any country around the world – to grow strongly out of this crisis, but it will require a concerted policy focus. I will finish by turning to infrastructure; I think this sector does have a critical role to play in supporting the economic recovery. It is no surprise to me that the Federal Government has prioritised infrastructure as one of the key planks in its JobMaker plan, alongside skills and training, deregulation, industrial relations, tax reform, and energy.
Infrastructure serves a dual purpose in times like this. Firstly, as a stimulus, it can provide an immediate boost to growth and jobs, especially through the traditional suite of shovel-ready projects, like maintenance, road safety and other small-scale local projects. The fact that spending on government services and infrastructure flows directly through activity on the ground is a big advantage, especially where there is so much uncertainty and a lack of confidence. That is why the Federal Government has already announced an additional $3.8 billion, for land transport infrastructure projects in response to COVID-19, including $1 billion for priority shovel-ready projects. And I know that states are also looking at opportunities to accelerate and increase their infrastructure programmes.
Indeed, the Reserve Bank Governor has recently called on the states to spend an extra $40 billion on top of their existing plans over the next two years. Secondly, and importantly, as well as providing a short-term stimulus, as you all know well in this group, infrastructure can have a major long-term benefit for the productivity and competitiveness of our economy, provided it is high quality. And that’s what we will need in order to emerge strongly out of this crisis. We need measures that can create jobs in the short-term and growth, but we also need measures that boost the supply side potential of our economy, making it run better and faster over the longer term. Infrastructure, if done well, can address both of these needs. I know that right now, there is a lot of discussion out there about the longerterm impacts of COVID-19 on trade, on travel, and on the way people work and move around our cities.
This year, we will also see a dramatic fall in the level of overseas migration into Australia, and population growth, which has been a key driver of infrastructure demand. But I cannot see any scenario in which good, high quality, productivityenhancing infrastructure will not play a critical role in the economic recovery. I agree that both sides of politics have prioritised this over time and I think will continue to do so. I want to be clear that this is across the full suite, including transport infrastructure, energy, communications, water and other social infrastructure, as well. To conclude, infrastructure clearly has a vital role to play in Australia’s recovery from COVID-19. And I think there will be a strong appetite from all governments – federal, state and local – to continue investing more over time.
The main challenge I see for the sector is to be able to respond quickly to the constraints that we know exist in this sector to make sure that infrastructure can play a worthwhile and important role. That includes identifying high-quality projects and having the early planning in place to allow investment decisions to be made with confidence. And it also means continuing to ramp up the delivery capacity across the sector, including through skills development across the private sector and state agencies, so that we can get more spending out the door each year.
Even prior to the outbreak of COVID-19, governments across the country had significantly ramped up their spending on infrastructure, and we were seeing those constraints start to play out in the sector with delays to some projects. As economic policymakers, Federal Treasury looks very favourably on infrastructure investments for the reasons I mentioned earlier, but we need to be confident in times like this that there are good, high-quality projects that can be delivered quickly to help the economy when it needs it most. I know from my past experience that Infrastructure Partnerships Australia and the sector as a whole is acutely aware of these challenges, and that you are all working hard to address them.
