Envisaging Australia’s recovery plan 

Summary

• Post flattening the coronavirus curve, Australia has moved towards the direction of re-opening of the economy with U shaped recovery plan.
• Australia’s Treasury Secretary in his address urged the government to utilise fiscal measures to life up the employments. Nearly 2.7 million people lost their employment or got number of hours decrease in around last 2 months period. It will be a huge task for the government to respond on it.
• As global coronavirus cases continue to rise, with social distancing still in place, the international export market has been heavily impacted. All these elements are currently keeping the economy from speedy recovery.

There has been considerable positive sentiment on recovering from coronavirus much early than the expectations but the Australian economy is not expected to get back to normal in the near-term, stated Treasury Secretary.

On 21 May, Steven Kennedy, Treasury secretary, Australia addressed Covid-19 Senate committee urging that the government must use fiscal policy measures to lift up the jobs in the economy instead of cutting fiscal policies to enhance its budget position.

While addressing to the question of weak labour force data as per ABS which reflected that about 6,00,000 people lost jobs and April recorded an unemployment rate of 6.2%, Kennedy replied that the numbers matched Treasury’s forecast of 10% unemployment rate. With the total number of people who stopped looking for jobs in April, had the government not implemented JobKeeper subsidy, the unemployment rate would have been at 15%.

He noted that about 489,000 left the labour force amid coronavirus. If they were counted to the increase in the number of people unemployed, the actual unemployment rate would have reached 9.6%.

He also noted that the number of hours worked has fallen significantly. ABS figures stated that the underemployment rate stood at 19.9% while the participation rate declined to 63.5%. The Treasury secretary added that the fall in the participation rate was much larger than expected but confirmed fall in participation rates in other countries, also due to isolation measures.

Dr Kennedy asserted that the jobless rate would be on similar levels in the next month because of the nature of the shutdowns and the labour force withdrawal. Still, it will rise reaching a peak in May or June as those people who could not look for work amongst the labour force then reengage and meet the ABS criteria of being unemployed.

Australia to follow U shaped recovery

The idea of V-shaped recovery seems to be dwindling as coronavirus induced contraction within the economy has affected few areas much massively than what was forecasted. The Treasury Secretary told the Senate that he is not anticipating a V-shaped recovery but also not an L shaped recovery. This suggested anticipation of U-shaped recovery.

When asked by the senator about how long the base of U would be when recovery happens to which he replied that things opened much earlier than anticipated and there is also significant fiscal support. However, things are not so well globally, and the nature of the response to the shock remains uncertain, which will determine the pace of economic recovery.

4 things are keeping the economy from recovering-

1. The problem for businesses to open due to social distancing
2. As schools are closed, people have increased childcare responsibilities, and their work has been suffering
3. Global export markets have been disrupted
4. Demand confidence effect, i.e. behavioural changes before regulation changes

The things mentioned above are the major factors in determining an L, V or a U-shaped recovery as per the Treasury Secretary.

Role of fiscal policy

About 2.7 million people lost jobs or had their hours reduced in the last 8 weeks. The major deal would be to get back people to work for which firm fiscal policy is needed with JobKeeper payment playing a very crucial part. During the global financial crisis, interest rates were cut by 4.5 percentage points.

Dr Kennedy emphasised on the importance of fiscal policy in the coming months and years given that monetary policy remains accommodative and not able to provide the usual impact that it would. As the Australian economy shifts from the supply shock as industry reopens and economy adopts practices to keep COVID-19 away, managing demand and confidence becomes much more critical. This implies that fiscal policy’s contribution to the growth and how the composition of those policies help in lifting growth and re-employment will be the primary focal point.

During the recovery phase, businesses try to increase the number of hours of the employee before they hire new employees, so key thing the Treasury will be thinking about is whether there are measures that focus on getting more people back or just general stimulus for demand.

RBA lessons from coronavirus

Robert Lowe, Governor of RBA while speaking via webinar on 21 May stated that though the country’s financial system is strong and resilient, banks must keep the credit flowing in the economy by lending and draw on their capital buffers. He added that as the country is going through its worst economic slump and as restrictions have been relaxed, banks must not be afraid to lend and use their buffers built for such a period of financial uncertainty.

ALSO READ: RBA uncertain on economic recovery while PMI for May disappoints

He also asserted on the importance of the development of a vaccine for coronavirus, citing the uncertainty of economic recovery and slow growth if that does not happen. He added that confidence is very weak amongst people to spend and in businesses to invest. There is an increasing need for contingency planning and fiscal support to help the economy in rebounding.

Fiscal support and demand confidence

During the interview, Senator Keneally stated that JobKeeper and the coronavirus supplement would support the Australian economy in the order of some AU$60 billion in the September quarter which is about 10% of Australia’s quarterly GDP. He asked Dr Kennedy on the impact of such huge economic support on the December quarter.

The Treasury Secretary replied to it stating all the money will not be spent in the December quarter, and a lot of money will go into business and individual balance sheets.

In the June quarter, the household savings rate will rise as spending has been reduced due to the shutdown of businesses and cautious spending behaviour, as per Dr Kennedy. He stated fiscal policy builds over time, over 4-6 quarters just like monetary policy and comes with a lag.

However, if people who have money but are not confident about their jobs, and people have no confidence in spending money given to them by the government due to bleak future will dramatically reduce stimulus.

Dr Kennedy although expects consumption to come back but highlighted that he would keep an eye on recovery in housing and business investment as that would reflect the confidence that people have in future.