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.