Waking up to a different world

The Australian federal government has delivered another massive fiscal package in the form of the JobKeeper wage subsidy to help prop up the economy as COVID-19 sweeps across the nation.

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The package is estimated to cost $A130 billion over six months on the basis it will be used to subsidise the wages of six million workers. That this equates to almost half the work-force demonstrates the enormous scale of the package and the challenge facing the economy.

"If the shutdown is deeper or longer than currently assumed then the government payments will limit the downside.”

The Government’s wage subsidy package is a much bigger fiscal intervention than ANZ Research had factored into previous analysis. Accepting the Treasury’s estimate that six million workers will receive it, the amount of subsidy that could be paid in the June quarter alone equates to more than 10 per cent of GDP for that quarter - if it is all delivered.

ANZ Research thinks the stimulus will help to cushion the blow but is unlikely to prevent a sharp drop in GDP given the fall in activity caused by COVID-19. Indeed, the massive payout expected by the Treasury will only happen if large parts of the economy are actually shutdown for an extended period. In ANZ Research’s view, it will act more as a safety net for GDP – if the shutdown is deeper or longer than currently assumed then the government payments will limit the downside.

Some of the wage subsidy will be saved by workers who are unable to spend it on anything other than essentials such as food, rent and utilities as non-essential businesses remain closed. Hours worked will also be down sharply, which will impact incomes for many of those people who are normally paid more than the JobKeeper amount. And ANZ Research doubts the subsidy will motivate businesses to invest.

Flattening the economic curve

ANZ Research is working through the implications of the subsidy for GDP, with initial thoughts being that a very sharp drop in GDP in Q2 is still likely.

Prior to the release of this policy, ANZ Research had expected the unemployment rate would surge to 13 per cent in Q2 before dropping back to around 8 per cent by Q4. ANZ Research thinks the size and reach of the JobKeeper payments should reduce the peak in unemployment – the economic version of “flattening the curve”.

Just how much lower is a question ANZ Research is still considering. The drop in output in Q2 is still likely to be considerable, with consequent implications for hours worked. But the JobKeeper payment means there will now be many businesses that will keep on staff they would otherwise have let go - even if those staff still work close to zero hours. In effect, the JobKeeker payment is a ‘safety-net’ option for many businesses.

But there will be lots of workers that aren’t eligible for the payment. And there will be many businesses that decide to reduce their workforce even with the payment. It seems inevitable there will still be sizeable job losses.

But a reduction in the peak of unemployment will still be an important outcome of the wage subsidy policy. However, ANZ Research thinks it will still leave a long tail. Not least because the economy that emerges from ‘hibernation’ will likely be very different from the one that entered it.

Awake, Rip Van Winkle

The federal government’s policy has been described by some as an attempt to put parts of the economy into ‘hibernation’. The idea being this will reduce the prospect of lasting damage and allow the economy to recover faster when the pandemic passes.

If only it was this simple.

ANZ Research thinks the post-pandemic world will look very different. Most obviously there will be a lot more government debt. Commonwealth debt issuance is set to surge over the next couple of years. The net increase in Australian Commonwealth Government Bond (ACGB) supply over the coming 15 months will be well north of $A200 billion. And given the amount of time it usually takes to improve the fiscal position, net debt will continue to rise from there.

This will likely constrain the activities of the Government in many ways, even with the Reserve Bank of Australia (RBA) taking up a lot of this debt and the cost of debt servicing at record lows. The state governments will also face fiscal challenges.

ANZ Research thinks there will be world-wide shifts in areas of policy, such as protection of strategic industries. The production of medical safety equipment and pharmaceuticals is an obvious example. These sorts of policy shifts will create winners and losers.

As will a reconsideration of global supply chains. However, ANZ Research doesn’t think supply chains will be brought back onshore. The cost of doing so is too challenging and probably not sustainable over time. But firms may seek to diversify their supply chains more broadly which will come at some cost.

ANZ Research also thinks consumer attitudes toward risk will change. Given the amount of debt Australian households have, we could see quite a change in consumer behaviour, at least for a number of years.

In ANZ Research’s view, this adds up to a world where trend growth is lower. ANZ Research has already expressed the view that trend growth for Australia in the coming decade is likely to be less that it was for the decade just past.

The long-term implications flowing from the shock of the pandemic are such that there is some risk ANZ Research hasn’t lowered expectations enough.

David Plank is Head of Australian Economics at ANZ Research

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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