When the economy of the "lucky country" collapses
The Australian economy’s 30-year expansion, one of the longest of any country in the history of capitalism, came to a screeching halt in the last quarter. Figures for the three months to June show a contraction of 7 percent, the largest fall since records began in 1959. While economists expect a rebound in the next set of quarterly figures, the real pain for many working-class households is only just beginning.
Hospitality, recreation and transport have been the worst-affected industries. Construction and manufacturing are also struggling because investment started to dry up in the middle of the year.
An Australian Bureau of Statistics business survey, released in August, revealed that almost a quarter of companies had reduced or cancelled investment plans in the previous three months, and that a third of businesses were expecting difficulties meeting their financial commitments over the next three months. Uncertainty about the future was affecting the investment decisions of 50 percent of businesses.
Employment has taken a beating. Nearly 900,000 jobs were lost in April and May, and despite some employment growth in recent months, there are now 800,000 more people on the dole than in March. Casualised young workers were hit the hardest, but older people have also been forced out of work, many of whom will find it difficult to get another job. A surprise increase of 110,000 jobs in August was almost entirely composed of precarious positions in ride-share and delivery services; total hours worked increased by just 0.1 percent.
Hopes in June that the relative control Australia had gained over the virus would lead to a rapid economic recovery in the second half of the year have been dashed by the second wave in Victoria. The state accounts for a quarter of Australia’s economic output and was the fastest growing state before the pandemic.
The latest payroll job numbers (which give a more accurate picture of working-class employment) show a slow decline in employment since the brief recovery of May and June. And it’s not falling only in Victoria; payroll jobs declined in seven states and territories in the last week of August, followed by five in the first week of September.
The official unemployment rate, which is the highest it’s been since 1998, conceals a much higher number of people who are out of work but not currently looking for a job, receiving JobKeeper but working no hours, or underemployed, meaning they are working fewer hours than they would like.
Workers’ share of national income is at a 61-year low, falling below 50 percent for the first time since records began. Meanwhile, company profits are up 15 percent, largely due to government stimulus spending, and at least 25 companies in the ASX 300 receiving JobKeeper have paid executive bonuses worth $24 million, and millions more in dividends to shareholders.
While this is the most rapid downturn on record, there are mitigating factors. First, the creation of JobKeeper and the increase in JobSeeker payments maintained or increased cash flows to millions of households. These payments, coupled with the reduction in consumer spending, have stimulated the highest level of household savings since the 1970s.
Second, the government passed legislation to allow companies to continue trading while insolvent (unable to repay debts). The intention is to give firms that have become unprofitable a chance to restart once the pandemic is under control. Had these measures not been implemented, many thousands of small and medium businesses would have declared bankruptcy by now.
Third, a six-month mortgage and loan holiday began in March, allowing borrowers who are in financial stress to delay repayments. More than 900,000 loan repayments have been deferred since the beginning of the pandemic; 262,000 of these are home loans, and 105,000 loans to small and medium businesses. This has helped to stabilise the property market.
These measures, however, are only temporary. Their removal will likely have devastating, though not entirely predictable, consequences for the economy and unemployment rate. JobSeeker payments will be tapered back to their original below-poverty rate by 2021, and JobKeeper, while extended beyond the original end of September deadline, is also being slowly wound back and will disappear in March.
Deloitte Access Economics estimates that the reduction and withdrawal of the $550 per week coronavirus supplement will cost the economy $31 billion and cut 145,000 full-time equivalent jobs over the next two years. Those who have lost their jobs during the pandemic will be hurled into poverty, and longer-term welfare recipients who have for the first time in years been able to buy fresh food, catch up on bills and cover medical expenses will once again no longer be able to do so.
Researchers at Morgan Stanley, an investment bank, estimated in July that more than 50 percent of house owners with mortgages have accessed some form of government payment, or withdrawn from their superannuation accounts, in the last six months. Twenty-two percent are receiving JobKeeper and 15 percent are on the dole. From the start of 2021, the JobSeeker rate will be back to $282.85 a week, or $40.41 a day, and the mortgage repayment amnesty is also scheduled to end in January. How anyone living on JobSeeker will be capable of paying off a mortgage is anyone’s guess.
So while most people have not yet been catastrophically impacted by the recession, if the federal government refuses to raise the rate of JobSeeker permanently and extend JobKeeper beyond March, hundreds of thousands will experience serious poverty for the first time.
The changes to insolvency and bankruptcy legislation will also expire at the end of the year. Treasurer Josh Frydenberg has announced permanent changes to bankruptcy laws, which aim to give ailing companies another chance to hold on, but this is no substitute for a healthy income and will not protect many thousands of unprofitable businesses. Heading into the crisis, one in seven Australian firms were classed as “zombie companies”, making just enough revenue to service their debts. Companies in retail, food and accommodation, agriculture and the construction industry are the most vulnerable.
When the federal stimulus measures were slated to end in September, economists warned of the “fiscal cliff” the economy was about to fall off. Now that they are being tapered, AMP chief economist Shane Oliver has shifted the analogy to that of a “fiscal slope”. Not quite as sudden and dramatic, but still a steep and rocky descent.
