It’s time for those of us who predicted a long painful climb out of recession, and a lurch backwards when the JobKeeper subsidy ended, to admit we were wrong.
On Thursday, ABS data confirmed that Australia’s employment recovery is stunning and the end of JobKeeper is likely to be just a speed bump.
It could all come unstuck because of the vaccine debacle, of course, but so far so good.
Employment is now 69,000 higher than before the pandemic began; hours worked are up by 1.2 per cent; workforce participation is at a record high of 66.3 per cent; and Deloitte Access Economics says GDP returned to its pre-pandemic level sometime in February or March.
In previous columns I’ve discussed the contest between the Reserve Bank and the government – the former pessimistic, talking about interest rates having to stay near zero until 2024; the Treasurer, Josh Frydenberg, optimistic, talking up the recovery and saying that removing JobKeeper will be OK – and I concluded the RBA is probably right, since it is run by economists who generally know what they are talking about, not politicians who wouldn’t have a clue.
That looks wrong, too. In fact, there’s a good chance the RBA will have to renege on its promise to leave interest rates where they are for three more years.
So how did the RBA economists get it wrong, while Mr Frydenberg and Prime Minister Scott Morrison have been hit on the arse by a rainbow?
To put it simply, federal economic policy was positioned for living with COVID-19, which is what businesses were arguing for and the Morrison government wanted, but the states stubbornly, unanimously, went for rapid elimination instead.
So we got stimulus overkill: $300 billion, or 17 per cent of GDP, pumped into the economy by the government, resulting in public debt at a record-high $836.7 billion, as well as 0.1 per cent interest rates and $230 billion worth of new money created by the Reserve Bank, most of which hasn’t been spent yet.
It’s not a miracle, as some business leaders are saying, simply a consequence of Australia’s federal system, in which the states are responsible for health and the Commonwealth for the national economy.
The seeds of the boom
To be specific: Treasury told Mr Frydenberg in March 2020 that unemployment was heading for 15 per cent, which meant it would still be 10 per cent when the 2022 election has to be held.
Mr Morrison therefore had to choose between holding onto the creed of fiscal discipline and anti-debt, and losing the election.
He chose debt, naturally.
Meanwhile state premiers, as one, chose to protect their under-funded, inadequate hospitals from being overwhelmed and therefore having to choose who gets to go on a ventilator and who has to die.
That meant they had to lockdown and eliminate the virus – against bitter complaints from the nation’s businesses and right-wing warriors.
Fiscal overkill plus no virus equals economic boom.
Monetary policy overkill plus no virus equals housing boom.
Privatising the rollout
The federal government has been trying hard to mess things up by taking control of the vaccine rollout and then privatising it, presumably in a desperate effort to preserve some ideological dignity as it piled on government debt.
Aged-care vaccination was contracted out, vaccine delivery was given to DHL and Linfox rather than Australia Post, and actually doing the jabs was handed to the private sector – GPs.
What could possibly go wrong?
Now the states are being asked to help out and public sector vaccination hubs will be set up to get things moving.
Even so, the economy remains vulnerable to new waves of the virus if quarantine leaks before we’re fully vaccinated sometime next year.
But if quarantine holds, the Coalition has a good chance to go to the next election with unemployment at or below where it was at the last election in 2019 – 5.2 per cent, in which case Labor will be up against it.
Amazingly, unemployment is already below the 5.8 per cent it was when Tony Abbott won in 2013.
As for the Reserve Bank economists and the redness of their faces … it all depends on what happens to the NAIRU.
That stands for the “non-accelerating inflation rate of unemployment” – that is, the unemployment rate that causes inflation to accelerate.
The RBA governor, Philip Lowe, thinks it has fallen from 5.5 per cent to close to 4 per cent. That’s why he says interest rates won’t have to increase until 2024, which is how long he thinks it will take to get unemployment to 4 per cent – and he’s probably right about that.
But there’s a good argument the NAIRU may have gone up, not down, because the bargaining power of workers has been improved by the lack of migration, temporary and permanent.
We won’t know that for a while. The last time Australia had negative net overseas migration as we do now – that is, more people leaving than arriving – was World War I, when the Diggers left to fight, so there is no precedent whatsoever for what’s happening now.
The RBA should perhaps have been a bit more cautious about interest rates, and not slapped a use-by date of 2024 on the packet of low rates.
Alan Kohler writes for The New Daily twice a week. He is editor in chief of Eureka Report and finance presenter on ABC News