Australia’s economy was already weak – and the coronavirus pandemic sent it into recession | Australian economy

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THEobviously the number is very bad. Australia’s economy contracted 7% in the June quarter, the worst quarterly drop on record, and one million Australians are unemployed.

At the start of the pandemic, econocrats hoped it would be a V-shaped recovery. Now, no one has been talking about a V-shaped recovery for some time.

But the point is not the negative number in the Gross Domestic Product column for the June 2020 quarter, even though the number is terrible. The point is the event that the number announces.

Australia has developed for 30 years – an extraordinary race.

But now we have joined the recession club.

Recessions are injuries. They leave deep scars. Recessions shape the sensibilities of a generation.

I graduated from college during the recession of the early 90s. I got lucky and got a job, but a lot of my friends struggled. The legacy of recessions is that they teach people that their economic security is entirely situational – circumstances can change in the blink of an eye. It’s a shadow that people never get rid of entirely, get through a recession more or less unscathed, or are part of the cohort of people who lose their jobs and never work again.

Recessions also disrupt politics within nations and between nations. We saw this profound disruption after the global financial crisis, but Australia has been sheltered from the worst as we avoided the recession that hit much of the rest of the world. But we understand the fundamentals enough to know that Donald Trump went to the Oval Office to stir up discord in a torn republic, and Britain endured a prolonged political crisis over exiting the European Union, which has its roots in the economic downturn.

So these are big events. They change the course of history.

Let’s go over some facts. Australia’s economy was weak at the start of the pandemic, and the pandemic surrounded it for six years.

This contraction is incredibly strong, and Wednesday’s national accounts are a window to a country shying away from discretionary spending and savings, as if their lives depend on it. Consumers are extremely cautious and the economy will not rebound until their confidence is restored.

Scott Morrison chose to cut income support in September, which has always been a risky call given the current state of the economy.

The national accounts show the obvious: on the budgetary level, it is too early to stand on the exit ramp. What is clearly needed is a growth strategy and a sustained and likely large-scale recovery, given that Covid-19 will be a long-tail pandemic.

But the Prime Minister is under pressure from his colleagues to go back. The dominant view within government is that Canberra is funding restrictions imposed by state governments, and this must stop.

Morrison has demonstrated during the pandemic that he is prepared to do whatever it takes to avoid the worst-case scenario – he approached this very deep crisis as a problem solver, not an ideologue. He changed the identity of government in public view.

But we have now reached a point in the crisis where Morrison is grappling with several cross currents, and the issues he faces are not easy to resolve.

I said earlier that Australia needs a growth strategy and that it needs a large scale stimulus to deal with this very profound event.

On the first point, it is easy for the liberals to come up with a growth strategy in line with their vision of the world. Morrison is preparing one for the October budget: entrenching the role of fossil fuels in the economy, lowering taxes, pursuing deregulation, seeking labor market flexibility.

Party like in 1985.

But the magnitude of the economic downturn, here and around the world, suggests that more thought will be needed. The environment strongly suggests that what is needed to make a difference will be more than reverting, without thinking, to the orthodoxies that have dominated post-war economic thought.

Morrison has been able to shape the change to handle the crisis, but a big question remains whether he can be the leader Australia needs during the recovery.

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