The economy was doing well before the Delta strain. Really well. The employment–population ratio was the highest ever recorded for people aged fifteen to sixty-four. The number of job ads on SEEK was the highest in its twenty-three-year history. Quarterly GDP growth leapt a whopping 10.6 percentage points from the negative June quarter to the September quarter.
Delta slammed on the brakes. Although another economic bounce-back is on its way, it will be smaller and more temporary than it was after the lockdowns in 2020. Worse still, these post-lockdown bounce-backs and unprecedented government and central bank supports have a nasty habit of acting as an anaesthetic: giving the impression of a healthy economy despite underlying conditions suggesting a difficult period once the sugar hits fade.
Increased productivity is the answer, and that won’t happen without changes in government policy. Even though it will be smaller than the last bounce-back, the post-Delta boom might well be the government’s last chance to bite the bullet during good times. Making necessary changes during hard times is much more difficult.
There are several reasons why the economic bounce-back after the 2021 lockdowns won’t be as big as what we saw after the 2020 lockdowns. For one thing, Australians haven’t cut their spending as much. People no longer fear economic collapse and have kept up their purchases accordingly. Spending fell by nearly 15 per cent across Sydney and Melbourne during the 2020 lockdowns but is down only 5 per cent in the current lockdown. This means less pent-up consumer spending will be unleashed on the economy once lockdowns are eased.
The end of 2021 lockdowns will also be a lot less dramatic than in 2020, when we thought Covid was beaten. “Living with Covid” doesn’t mean a return to normality. Many restrictions will persist. Limits on social gatherings, and mandatory isolation periods after visiting exposure sites will be a handbrake on economic activity. Freedoms will return in a trickle, not a flood.
Consumer confidence will be lower as well. Those who were eager to get out in the “Covid zero” world might be less enthusiastic about the “Covid greater than zero” world, particularly older Australians, those with compromised immune systems and those worried about the impact of Covid on unvaccinated children.
Government income support was also lower in 2021 than it was last year. The federal government has been less generous with its payments to struggling businesses and workers. The Reserve Bank is already dialling back its stimulus.
With a smaller economic rebound on the cards, the real question is what happens after that. The economic boom after the 2020 lockdowns was very welcome. But it distracted us from an unpleasant reality: an unhealthy economy being propped up by a one-off burst in economic activity, and unsustainable fiscal and monetary policies.
If the long-run driver of economic growth is productivity (which it is), Australia is in trouble. Every man, woman and child is $11,500 worse off thanks to the worst decade of productivity growth in more than half a century. Multifactor productivity fell for the first time in almost a decade last financial year, and we’re doing terribly on many of the things that boost productivity and support growth in the medium term.
Investment boosts productivity by fuelling research and development, and by giving workers more and better tools to work with. Unfortunately, investment growth is three-quarters below its long-run average. The pre-Covid economy was plagued by anaemic investment and it’s unlikely that the uncertainty generated by a global pandemic will do much to lift it.
Trade boosts productivity by directing our scarce labour and capital to the things we are good at making (which we then export) and away from the things we are bad at making (which we then import) — in other words, by allowing us to make more money with less. But a worsening relationship with our biggest trading partner, a gummed-up trading system struggling to cope with high demand and weakened supply, and growing calls to reduce our reliance on overseas suppliers make for a tough road ahead.
Education is another critical way to boost productivity in the long run. Again, Covid has wreaked havoc. Students in Victoria have missed more than 120 days of face-to-face learning since March last year. The effects will be felt for years to come. Universities have seen their budgets devastated by the closing of international borders and limited support from government, with an obvious impact on both research and student outcomes.
Productivity has been dragged down by inequality, and Covid has made that worse, too. A rise in the share of national income going to the rich means an increase in savings, which pushes down interest rates. This fuels more borrowing by the poor — whose share of national income has been slipping — creating a self-perpetuating cycle of rising inequality, weak demand, low growth and low investment.
Almost every facet of inequality has been made worse by Covid. Not only has it pushed interest rates down further, but it has also driven up the value of rich people’s assets. The poor, meanwhile, have borne the brunt of lockdowns, unemployment and uncertainty. Women have been disproportionately affected by school closures and increased domestic violence. Young people have lost life-changing employment, education and recreation opportunities in order to protect the elderly.
The biggest problem is that none of these challenges is new. The pre-Covid economy was no golden age. It was characterised by low wage growth, low productivity, low investment, below-average GDP growth and high inequality. Covid has made all these things worse. The post-Delta sugar hit should not distract us from these long-run challenges that are hurting our long-run economic trajectory.
Luckily, the post-lockdown sugar hit is also an opportunity. Tackling the myriad challenges outlined above will require reform, and reform is always easier during good times than bad times. The government has wasted many opportunities to undertake reform during good times: the boost from its tax cuts, the boost from its historically large supports during Covid, the boom after lockdowns were eased in 2020. The sugar hit from the post-Delta boom might be its last chance to fix the roof while the sun is shining. The government best start laying the groundwork now. •