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More jobs, surging house prices, record stock values, rising inflation and a trillion dollar debt bill. Two years since Australia officially recorded its first case of COVID-19 on January 25, the economic report card is not what most experts predicted at the time.
Paradoxically, Australia’s economy is in a stronger position than before the pandemic, at least by some key measurements.
Former Treasury economist Steven Hamilton, a visiting fellow at the Australian National University’s Tax and Transfer Policy Institute, says it’s the “silver lining” of the pandemic.
“It would have been crazy to think this two years ago, but arguably the economy looks better coming out of COVID than it did heading into COVID,” Hamilton says.
Unemployment is 4.2 per cent, versus 5.3 per cent in January 2020 – artificially aided by the international border closure to foreign labour.
House prices are about 30 per cent higher. The S&P/ASX 200 is above 7000 points.
Underlying inflation has picked up to be inside the Reserve Bank of Australia’s 2-3 per cent target band for the first time in six years.
Nevertheless, there have been enormous costs imposed on individuals and businesses.
Substantial economic activity was lost during lockdowns and the economy is smaller than it would have been had the pandemic not struck.
Future federal and state taxpayers face debts that are about $1 trillion higher due to stimulus spending and lost tax revenue.
“It’s not free,” Hamilton says. “We shouldn’t pretend the pandemic wasn’t costly.”
“But we’ve had a better economic performance than almost any other country and I give them full marks on the economic side.”
In some respects, the world was lucky that the pandemic hit when global inflation was subdued and interest rates were low.
A response funded by cheap money
The Reserve Bank of Australia slashed rates to near zero, issued cheap loans to commercial banks and bought $350 billion of government bonds to push down borrowing costs.
The ultra-low interest rates emboldened governments to unleash a tsunami of debt-fuelled stimulus to protect households and business as economic activity shutdown for months at a time in 2020 and 2021.
The Morrison government unleashed more than $300 billion of stimulus spending and tax cuts.
The $90 billion JobKeeper wage subsidy was the centrepiece – protecting jobs and businesses, while also blowing billions on businesses which ultimately didn’t need the assistance.
Former Treasury secretary Ken Henry, a key player in the Rudd government’s response to the global financial crisis, says economic crises force governments to take unprecedented fiscal interventions.
This time it was JobKeeper. Last time in 2008, it was government guarantees on banks.
“But it was different this time because interest rates were so low,” Henry says.
“Policymakers were able to get comfortable that very high levels of debt were serviceable because the debt was cheap and the monetary authorities around the world were saying interest rates were going to stay very low for a very long time.“
While he is less concerned about Australia’s more moderate government debt levels compared to foreign governments, Henry says, “some people are complacent about debt these days”.
Henry says one day the world may realise that the global debt accumulated by governments during the pandemic was less sustainable than they thought.
Big structural challenges remain
Global inflation is picking up and central banks are reversing their easy-money policies and planning interest rate rises.
Firming local inflation in the December quarter expected to be confirmed on Tuesday has money market traders and market economists tipping an interest rate rise as soon as this year, earlier than the RBA’s original 2024 forward guidance during the pandemic.
The current omicron disruption aside, the economy has been running cyclically hotter than its pre-pandemic stagnation.
But there remain big structural challenges, including to the tax system, energy markets, housing affordability and other areas.
Henry says as the immediate crisis passes, governments must have a much stronger focus on lifting productivity to improve living standards in the long term.
“Productivity has been pretty depressing for a long time, so what is the future source of productivity in this economy?” he asks.
