The Australian economy smashed expectations on Wednesday, expanding 3.1 per cent over the December quarter to cap off the fastest six months of growth on record.
But Australians will struggle to find enough jobs and wages growth will be weak for quite some time as economists warn of a uniquely bumpy pandemic recovery.
That’s because the historic rebound from the pandemic-induced crash last year is starting to slow. And unlike with past recessions, ongoing restrictions on certain sectors are limiting the capacity of some segments of the economy to return to normal.
Activity in sectors such as transport, accommodation and food services declined more than 10 per cent in 2020, while the crucial mining sector fell 3.6 per cent.
Elsewhere, industries like agriculture (up 20 per cent) and retail (up 6.3 per cent) soared — carrying weaker parts of the economy over the line and then some.
It’s the type of patchy recovery that Angela Jackson, lead economist at Equity Economics, warns will be a regular feature of 2021, despite an otherwise “impressive” national bounce back over the last three months of 2020.
In other words, with an economy that’s still 1.1 per cent smaller than this time last year, we’re still not out of the woods.
“We’re still well below capacity,” Ms Jackson told The New Daily.
“Even though we’re only 1 per cent below where we were, where we should have been is another 2.5 per cent above that at least.
“We will need to make that up for unemployment to come down.”
Treasurer Josh Frydenberg is confident we’ll get there soon, though, telling reporters on Wednesday that Australia was lifting itself out of the “economic abyss”.
“The job is not done. There are challenges ahead. But you wouldn’t want to be in any other country but Australia as we begin 2021,” he said.
But economists such as Callam Pickering, APAC economist at jobs site Indeed, are unsure how quickly we will get back to pre-pandemic levels.
Will it occur in the March quarter? And what will happen when JobKeeper ends?
“The recovery is progressing faster than anticipated, which is a positive for households and businesses, but it also indicates the economy has a long way to go,” Mr Pickering told The New Daily.
The gains from here on out are going to be a little more difficult.’’
Because sectors like tourism and hospitality will be subject to restrictions for the foreseeable future, the trajectory of Australia’s path back from the pandemic recession is shaping up differently to previous economic recoveries.
What will determine Australia’s ability to drive growth above and beyond pre-pandemic levels will be how successfully activity moves from depressed segments of the economy to more productive areas, Mr Pickering said.
And the level of government support for displaced workers will also be crucial.
“Certain regions and industries will continue to suffer … ultimately that means fewer people employed across the country,” Mr Pickering said.
The good news, according to independent economist Saul Eslake, is that consumers are already driving a shift in economic activity, with household spending rising a solid 4.3 per cent over the quarter, particularly on clothing and vehicles.
Those spending shifts have helped nine of 19 industries record positive year-on-year growth in the December quarter, up from just five out of 19 in the September quarter.
Mr Eslake told The New Daily about $43 billion that Australians would have spent overseas over the past six months has instead been spent in Australia due to international border closures.
“[It’s] been an under-appreciated source of stimulus spending,” he said.
And household balance sheets have room to support further spending, with the household savings ratio at 12 per cent over the December quarter, higher than at any point during the global financial crisis in 2009.
Economists: National income bounce to buoy recovery
The economic tailwind from our closed international borders isn’t the only surprise helping the recovery, either.
Deloitte Access Economics partner Chris Richardson said Australia is lapping up a pay rise in its terms of trade with other countries, delivering real domestic income that is 0.5 per cent above pre-pandemic levels in the December quarter.
In other words, rising prices for key exports like iron ore are driving up the value of goods and services, despite the impact of the ongoing global recession.
“The world gave us a pay rise,” Mr Richardson told The New Daily.
“[Real national income] is already comfortably stronger than it was, and while most of the discussion tends to be about GDP, living standards are driven by real national income.”
The benefits will also flow through to business investment as companies increase supply to take advantage of better terms of trade, hiring more workers in the process.
Business investment contributed to GDP for the first time since the March 2019 quarter over the last three months of 2020, according to Jo Masters, chief economist at EY.
“The quarterly acceleration was led by a surge in machinery and equipment investment, which rose 8.9 per cent in the quarter and is consistent with a 20 per cent increase in capital imports over the past two quarters,” Ms Masters said in a statement.
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