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