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Monday, December 05, 2022

Glynn’s Tasks: Australia’s Economy Breaks Pandemic

By James Glynn

SYDNEY – Perhaps it is the misery caused by the ongoing global pandemic and war in Ukraine that has blunted the awareness of Australians for the economic miracle that appears before them.

Two years ago, when the economy was deliberately put to hibernation to save lives after the coronavirus entered the country through air and sea ports, economists were full of serious warnings about impending double-digit unemployment, a house price collapse and the deepest recession in a century.

The pandemic broke nearly 30 years of sustained economic growth and posed a threat to policymakers for the prosperity of the country that easily dwarfed that of the 2008 Global Financial Crisis.

While international and state borders were closed in 2020, Australians languished in their homes, preparing for the worst.

It is through this prism that the economic forecasts contained in the federal government’s budget for 2022-2023 released on Tuesday should be viewed.

Instead of a labor market hit hard by years of recession, the country is now on the brink of full employment. In simple terms, this means that anyone looking for work can get one.

Almost every unemployment forecast since the start of the pandemic had to be thrown away quickly as the economy consistently performed better.

It is now predicted that the unemployment rate will drop to 3.75% by mid-2022 from 4% at present. This is a number that no economic policy maker or politician in the country would have seen in their working lives.

Even Philip Lowe, governor of the Reserve Bank, who joined the central bank outside school in the late 1970s, cannot claim to have seen such a low number.

This is a staggering forecast that, if anything, looks conservative given current trends in appointment and record number of vacancies. It is highly possible that the unemployment rate will fall even further than that in the next year.

The employment situation supports a forecast that the economy will grow by 3.5% over the next year.

Some economists would argue that with closed borders and a federal government fiscal stimulus of more than 300 billion Australian dollars to fight the pandemic, the country should indeed approach full employment.

They will be right. But the success also reflects the design of government spending that had a wage subsidy at its core, known as the “job keeper” that kept companies going so that when the restrictions ended, the growth engines quickly got back on track. . Previous recessions, such as the one in the early 1990s, were marked by years of sustained high unemployment, with older and low-skilled workers typically remaining the longest unemployed.

The budget also includes a forecast that wages will grow by 3.25% in the next year, reversing the mortal trend of the past decade.

Those looking for a dark line in the Australian economic story will point to rising inflation, but the budget predicts that consumer prices will rise by just 3.0% in 2022-’23 and by just 2.75% in 2023-’24 will rise.

Seen against a backdrop of inflation warming in large economies, fueled by disrupted supply chains and rising energy costs, these low numbers seem ambitious. But Australia has been an inflation outlier for some time. Its proximity to Asia, where inflation is more favorable, and a sluggish wage-fixing system have helped keep wage growth tame.

If the budget’s economic forecasts are too optimistic, it will be a major challenge for policymakers to keep them in check again.

Doing it wrong can undo the good work now visible in the economy, leading to rapid rises in interest rates.

On the other hand, there is a strong argument that current price pressures in the economy will eventually disappear. To have a real inflation outbreak, we will have to see wages jump. As they float higher, there is still no surge that will indicate that the genius is out of the bottle.

In recent years, house prices have risen by more than 20%, a two-pronged statistic given that the rise has frozen many from home ownership. Nevertheless, it represents a major boost to household wealth.

After two years of pandemic, Australia has been left with government debt that could leave the country more vulnerable in the event of another shock, it could be argued. Yet Australia’s debt burden is much lower than that of many of the major economies, and the strong labor market means accelerated GDP growth could slow it down.

By late 2022, full employment is likely to be reached, and at current indications, interest rates will remain low.

This is not what anyone could have expected two years ago, but the miracle looks more and more like reality.

Write to James Glynn at [email protected]

(END) Dow Jones Newswires

03-29-22 0540ET

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