After an extended period of optimism about an imminent recovery from pandemic lockdown, sharemarkets in the United States and Australia finally succumbed last week to the realisation that any recovery will be slow and grinding.
In the US, community cases of COVID-19 are trending upwards again, especially across southern states, in what could be the beginning of a second wave engendered by the overly rapid reopening of a number of states. If that happens while the Chinese regime struggles with a new cluster in Beijing (guess that victory lap by a maskless Xi Jinping was a tad premature?), the outlook for global growth for the rest of the year is bleak.
Markets in Asia (including Australia with a 2%-plus slide) continued to be sold off on Monday and were heading lower on Wall Street overnight until the US Federal Reserve revealed the details of its corporate bond buying policy, first announced more than a month ago.
The central bank had been having problems making it work but finally clarified its structure and will start indirectly purchasing corporate bonds, including bonds classified as junk, as long as they were previously investment-grade.
That boosted Wall Street, with many confusing the Fed’s announcement for new buying (don’t laugh — it will drag the ASX, and your super investments, up today) but illustrating how, without the astonishing (in kind and quantity) levels of support from the Fed, markets would be a lot lower and struggling.
At least investors here can reflect on how Australia has managed to almost completely shut down infection. Accordingly there’s much talk about the economic impact being significantly less than feared earlier, especially around unemployment, which with the help of JobKeeper might not even reach 9%.
An unemployment rate peaking around 8% would be a considerable achievement and a testament to governments’ handling of the crisis — especially the Morrison government — and the advice they received from their health and economic departments.
What will drive the economy?
The problem will remain, however: what will drive the recovery? How will we get unemployment down to 7%, then 6%, and then to its pre-COVID-19 level, let alone the Reserve Bank’s 2019 fantasy of getting unemployment down low enough to lift interest rates?
The issue we need to keep coming back to — especially because of the media’s reluctance to acknowledge it — is how weak the economy was before the pandemic when it was characterised by low GDP growth, low wages growth, low investment, low jobs growth and falling productivity.
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Scott Morrison, with a straight face, said yesterday: “We need to lift our economic growth rate by more than 1 percentage point above trend to beat the expected pre-COVID-19 GDP by 2025.” Is that now the government’s economic target, the benchmark it should be judged by? If so, good luck. That means ~3.75% a year, every year, for five years beyond this one.
With any luck 2021 will see some quarters of strong growth as the economy returns to something like normal. But what about after that, after we’re back at “normal”, when the borders are reopened and immigrants, students and visitors begin coming again?
In calendar 2019, the economy grew at 2.2%, despite those magical tax cuts the press gallery thought were going to turbocharge the economy. It grew at 2.2% in 2018 as well. In 2017, under Malcolm Turnbull, it managed 2.5%. In 2016, 2.7%; 2015, 2.6%; 2014, 2.1%.
Australia hasn’t cracked 3% growth in a calendar year since Wayne Swan was treasurer in 2011 and we managed 3.4%, including a negative quarter from Cyclone Yasi.
We know there’s a lobby group in business and The Australian Financial Review who think we just need some hardline neoliberalism to pep things up: wage cuts, deregulation, lower company tax. Except this would simply entrench low growth and low productivity.
Wage stagnation has been the key curb on Australian growth in recent years via its effect on household spending. A return to a WorkChoices industrial relations system will have the same negative productivity impact that the Howard-era version did.
The government has had an awful lot to say about the need for economic reform but so far has done little beyond set up some talk shops on industrial relations, an area for which — despite incessant commentary from business and commentators — there’s little evidence of major productivity potential.
And it is signalling it is committed to pulling JobKeeper and JobSeeker as quickly as it can in September, likely leaving hundreds of thousands of unemployed people, and thousands of businesses, in deep trouble.
It will still run a stimulatory fiscal policy — large deficits this year, next and, courtesy of much lower company tax revenue, deficits for some years beyond that. But additional fiscal stimulus — not even stimulus designed to put a rocket under the economy, just enough to keep growth going — seems unlikely.
Eventually investors will work that out. Australia won’t suffer as deep a contraction as feared but it will return to the stagnation that marked this country before the crisis.