Reading between the lines, RBA is looking for more government spending

The speed with which Australia's economy returns to normal will depend on the government's spending plans.

The speed with which Australia's economy returns to normal will depend on the government's spending plans. Photo: The New Daily

According to Reserve Bank figures on Friday, it will be years before Australians can rebuild what the coronavirus has destroyed – unless there is more and smarter federal government spending in the months ahead.

Under present government policies, the RBA believes our unemployment rate will be about 50 per cent higher in a year’s time than before COVID-19 hit and will still be painfully high in two years’ time. 

What’s more, the expected unemployment rates of 9 per cent in December, 7.5 per cent in June next year and 6.5 per cent in June 2022 are worse than they look as those numbers hide the many discouraged job seekers who will drop out of the workforce. 

High unemployment for years means falling living standards for most as it translates into little or no increase in wages. 

That in turn comes after many households will have had their savings exhausted by the COVID recession. 

The inevitable consumer wariness after a recession and the drive to rebuild savings further constrains demand. 

And the RBA’s quarterly statement on monetary policy (SoMP) makes plain what the government does not: non-mining business investment won’t come back until consumer demand does – it’s not about tax rates and red tape and industrial relations reform. 

The sombre RBA outlook contrasted with the Prime Minister’s media conference on Friday afternoon as he released a three-stage plan to lift restrictions, “a plan that according to treasury can see some 850,000 jobs restored in the months ahead.”

Treasury and the RBA sup from the same forecasting bowl. Given the RBA’s expectation of 9 per cent unemployment at Christmas, nearly all the 850,000 “restored” jobs come under the JobKeeper category. 

The unemployment needle will have been barely nudged from the current 10 per cent or so. 

Mr Morrison dodged a question about how many people would not have their jobs restored and subsequently again retreated into the government’s familiar refrain of longer-term policy changes:

“I want to see everyone get back to work,” he said.

“That’s the plan I set out, not just in relation to the opening of our economy, and the reset we need on the policy level, that is what is going to drive the jobs and make is sustainable in the future, the essentials on hospital funding and disability funding and aged care, that all requires a strong economy. 

The PM is trying to put a brave face on the dire economic conditions ahead. Photo: AAP

“That’s why those subsequent policy measures, building on the reforms we put into place, before we came into the COVID crisis, that is what is going to drive the jobs growth into the future.”

But it threatens to leave hundreds of thousands of people behind and millions diminished. 

According to the RBA, Mr Morrison’s announced policy measures won’t have everyone back to work by the next election and median Australians’ living standards are likely to be below what they were in 2013. 

The RBA never says it, but between the lines is what’s missing from government policy: a plan to create employment as the JobKeeper and JobSeeker initiatives end.

The SoMP economic outlook summary notes the immediate impact on jobs of social distancing and health issues, but adds:

“Other factors that will be important are the responses of households and businesses to changes in the economic environment, and the effectiveness of policy support. 

“It is quite plausible that the current economic disruption will have some long-lasting effects, not only because it will take some time to restore workforces and re-establish businesses but also because it could also affect mindsets and the behaviours of consumers and businesses. This could result in structural change in the economy. 

“Changes in the financial position of households and businesses could also have long-lasting effects.”

It is not just the unemployment rate that is jumping and we stay high. The RBA expects our troublesome underutilisation rate will also sharply increase and “is likely to take a few years to unwind”.

“This is because businesses are likely to delay rehiring workers until the uncertainty around the outlook has subsided. 

“Any post-outbreak reconfiguration of the industrial composition of the economy will take time due to the transition and possible retraining of workers. 

“It will also take time for businesses to find suitable workers from the pool of unemployed, and for workers who had previously withdrawn from the labour force to return.”

COVID-19 filled Centrelink offices with the suddenly jobless. Photo: TND

The central bank warned that a slower-than-expected decline in the unemployment rate “could create an adverse feedback loop whereby a slower pick-up in private demand could cause further knock-on effects to the labour market”.

In other words, weak employment results in weak demand which means further weak employment – a vicious cycle. 

“The fall in non-mining machinery & equipment investment is expected to be particularly sharp, as firms seek to preserve cash flow in response to the actual and expected falls in private demand.”

The bank expects consumption – already weak before the ‘Rona Recession – will remain weaker again “over coming years”.

“After falling sharply in the June quarter, business investment is expected to remain subdued over the remainder of 2020, as many businesses cut back on discretionary capital expenditure in response to a sharp fall in private demand. 

“Taken together with the sluggish growth prior to the outbreak of COVID-19, non-mining business investment is not expected to recover to its pre-outbreak levels by the end of the forecast period.”

The forecast period is two years – as far as the central bank dares to guess. 

To be clear then, the independent central bank is saying wages growth, consumption and business investment are going nowhere are far as their eye can see, at least two years.

“It is likely that non-mining business investment will lag the recovery in other components of private demand. 

“This reflects the assumption that firms will first use up spare capacity as demand picks up, as well as the typical lags in the approval and planning of construction projects. In the near term, the fall in non-mining investment is expected to be led by machinery & equipment investment, consistent with information from liaison that firms intend to defer or cancel planned discretionary investment to preserve cash in response to weaker demand and heightened uncertainty.

There are plenty of pitfalls on the way to a construction industry revival. Photo: TND

 “Non-residential building and infrastructure activity is expected to hold up in the next couple of quarters, reflecting the substantial pipeline of work yet to be done and relatively limited evidence to date of disruptions to the supply of labour and materials in the construction industry. 

“However, construction activity is expected to fall later in the year, consistent with liaison information that indicates that many projects that have not yet commenced have been put on hold or cancelled.”

The Australian economy’s biggest domestic challenge before the pandemic was a lack of poor wages growth. Now it will be worse:

“As has been the case during other downturns, it is likely that businesses will make most of the adjustment to their labour costs through reducing both hours worked and the number of employees.

“However, it is also expected that many businesses and employees will agree to wage freezes and, to a lesser extent, to some cuts to hourly wages. Bonuses are also likely to be reduced.”

I suspect with more hope than conviction, the SoMP predicts wages growth will gradually pick up over 2021 – but the RBA has been hopelessly optimistic about wages growth for a decade and it carefully qualifies that hope. 

“The degree of spare capacity is a key area of uncertainty and it will depend on a range of factors, including the extent of underemployment and the number of discouraged people that have left the labour market. 

“If those available workers are not able to be matched to jobs during the recovery phase, there may also be an increase in the number of long-term unemployed or structural unemployment in the economy.”

Good, bad, worse

And this has all been according to the RBA’s most-likely central case. It also offered better and worse scenarios. 

The better depended on a quicker lifting of restrictions and no relapses.

“An important precondition right for this scenario is that households and businesses expect a sustained economic recovery to build over coming months, underpinned by a high degree of confidence in the ongoing management of health outcomes.”

It is not explained how households and businesses could have much confidence with an employment policy vacuum. 

On the other hand, if household and business confidence remains low:

“A slower economic recovery would have ongoing adverse consequences for the labour market. 

“The longer the economy remains weak, the more employment relationships are severed and the more households and firms will suffer severe financial stress. 

“This would slow the recovery further and increase the chance that workers need to take jobs that are poor matches for their skills. Slow recovery and poor skill-matching are particularly likely if the economy’s industrial structure changes significantly to adapt to the post-outbreak realities. T

“The longer someone is unemployed, the more difficult it is for them to find employment because of a loss (or a perceived loss) in skills or because they become discouraged and exit the labour force.

“Past experience also suggests that workers who first enter the labour market during a downturn are especially affected and can suffer long-term income and employment consequences. 

“And with lower investment as well as poor skill-matching, the economy’s productive potential could also be damaged over a longer period.”

There is one certainty: we don’t want to go there. 

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