Jobs and Conundrum on Continued Stimulus: Government and RBA opine it differently 

Summary

• The government of Australia and central bank have both joined hands to spend $250 billion to avert a long-term economic contraction triggered by COVID-19 outbreak.
• RBA Governor stated that if the economy does not recover by September, the JobKeeper scheme must be extended or modified in some way.
• Interest rates unlikely to increase for a few years, and the labour market appeared to be in a severe state of instability, as stated by the RBA Governor.

There is considerable uncertainty about how the economy will move ahead when several medium and small-sized business will not have access to the stimulus measures after September.

The Federal government and the central bank have had pledged to spend $250 billion to prevent a prolonged economic contraction due to coronavirus. The relief packages had been designed to sustain small businesses through coronavirus pandemic and help employees to keep in their jobs.

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The government announced JobKeeper Payment, along with mandatory code for commercial tenancies, moratorium on evictions, early access to superannuation and additional payments for employers to retain their employees.

Apart from this, government gave greater leniency for insolvency and bankruptcy, wage subsidy for apprentices and trainees, accelerated depreciation for investments and other tax relief measures.

With the recent news of reporting an error in JobKeeper, the package is now to cost lesser by $60 billion, and the government has got another chance to rethink its approach.

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Josh Frydenberg (treasurer) has assured a revised economic and fiscal outlook in June. Still, it remains unclear if it will be a brief of the financial position of the country or about the strategy to follow after September. There are wide expectations from the government to extend its policy support beyond September to vulnerable sections.

Greg Smith, a former deputy secretary of Treasury, requested the federal government to deliver an economic statement providing a plausible structure for coronavirus expenditure and economic recovery. In a conversation on economic recovery after coronavirus, Smith stated that there are 3 big things Australia needs a formal view on. First is the basic profile of the crisis since it is much different than the global financial crisis. Second, would be the mismatch in the timing, i.e. budget being shifted to October while the policy support ends in September. The third is the looming uncertainty on coronavirus.

While Prime Minister, Scott Morrison has stated that some additional support might be needed after the stimulus expires in September.

RBA states JobKeeper may need to be stretched to avoid recession

Philip Lowe, RBA Governor, has suggested on extending the JobKeeper program to avoid a prolonged recession. He cautioned that ending $1500 JobKeeper wage subsidy too early would be a mistake, and it may have to be extended beyond September. However, the extension of the scheme depends on the recovery of economy by the month of September.

JobKeeper subsidy has been crucial in preserving a connection between workers and employers, and if that association is lost, recovery would be even more difficult. He added that he expects more job losses ahead, but they will not be as awful as in April when about 600,000 workers became jobless. There is also an added risk of industries that held on their employees at the beginning of the COVID-19 would start battling as their pipeline of work dries out. The economic recovery of the country would be mostly dependent on the duration by which Australians gain confidence in health and finances.

ALSO READ: Australia's April Employment Report Card – Fair Versus Reasonable

Dr Lowe, while answering Senate on COVID-19, stated that the world is very uncertain, and it is too early to say what it is going to be and how the economy will look in 4 months. But if Australia doesn’t come out of the current trough in economic activity by September, it would be looking at the extension or modification of the JobKeeper scheme in some way as a part of the review. He was particularly glad that a 3-month review was built in JobKeeper which is a 6-month program

As per the RBA Governor, the economy may be in a much better condition than initially anticipated, and RBA had revised its working hours lost from 20% to 15% in May. He added that as the economy slowly reopens, some jobs in retail and hospitality were coming back while jobs in construction and professional services are beginning to drop.

Interest rates not expected to increase for some years

Dr Lowe emphasised that RBA’s support had been working well for the financial system and interest rates are likely to remain at 0.25% for some years until unemployment falls back to full-employment rate level to about 4.5% and inflation is in between the set target of 2-3%.

He stated that the labour market is in severe instability and the unemployment rate does not represent its condition at best as thousands of people are working 0 hours but are still taken as employed. Hence a better indicator is the number of hours worked by the labour force. He warned that it is essential for Australia to get a decent recovery without which the risk of permanent damage to the labour market will rise. The level of full employment could creep back to 5% if such a scenario comes up.

Shadow Treasurer, Jim Chalmers stated that RBA Governor’s comments reflect the dangers of government’s snapback approach and rapid abandonment of fiscal assistance. A quick abandonment of support for the economy in September will hurt many.

He also added that a lack of future planning by Morrison Government would mean a deeper downturn, longer unemployment queues and a painful recovery.

New figures have shown that about 72% of businesses have witnessed a fall in revenue and accessed support measures due to COVID-19. ABS data has reflected that private investment has stayed mostly flat in the first 3 months of 2020, while the firm’s expectations of future capital expenditure point to a massive fall in investment over the coming months.

Dr Lowe stated that the worst of the phase was from mid to late April and it seems to be stabilising now. There has been some recovery in certain parts of the economy. RBA has forecasted a 10% decline in the Australian economy during the first half of 2020, which will undoubtedly produce the first recession after a gap of three decades.

(All currency reported in AUD unless otherwise stated)