Economic Update: Three issues shaping the Australian Economy

Updated: Oct 23


The labour market is too good to be true

When the economic history of 2020 is written, it will be about GDP growth declining by more than any time since the Great Depression. The economy started to plunge in late March as the ‘first wave’ appeared, and reached rock bottom in early May. The economy picked up significantly in June. Although a ‘second wave’ arrived in July the economy still had a decent month.


Given the extent of the lockdown in Victoria a tougher August was expected. And certainly that was the message coming from the business and consumer surveys - but not from the headline labour market data. Payrolls data released earlier by the ABS suggested that the number of jobs declined by over 1% in the month to August. So the rise of over 100,000 in the month was a shock, and so was seeing that the unemployment rate fell to 6.8% (from 7.5%). And that the participation rate rose.


But the old saying of being too good to be true comes to mind. The ABS reported a remarkable rise of over 50,000 sole traders in the month. Possibly that reflects an extraordinary spontaneous rise in the entrepreneurial spirit, although the confidence needed to start a business is not consistent with the survey evidence.


The long run implications of pandemics

Pandemics can have substantial long-term economic consequences. They reduce the size of the workforce (because workers have died), reducing the need for investment (because there are fewer workers to use that investment). The result is that productivity (and therefore GDP per person) growth is lower.


At this stage COVID-19 looks unlikely to have the same sizeable implications as previous pandemics (the bubonic plague killed 30-50% of people living in Europe in the 14th century). The death toll is lower (particularly when measured relative to the size of the global population).


The one clear outcome from the pandemic is that Government spending and debt is likely to be at a higher level (relative to GDP) than it was entering the pandemic. At a time when private demand is very low that makes sense. And higher spending if well directed (such as on infrastructure) has the ability to boost private demand in the future.


The demographic trends have not changed

Understandably the current economic focus is very much on the cyclical story of the fallout from fighting the pandemic. But that cyclical story is taking place amidst the massive structural demographic story of an ageing and slowing in world population growth.


Fewer people mean less demand for cars or trips to the cinema. Fewer people mean fewer taxpayers to provide services for an ageing population. This can be overcome if there is a substantial rise in productivity growth. The challenge is for Governments to be able to put in place the policies to encourage strong productivity growth to flow.


Until COVID-19 the demographic outlook for Australia was not as dire. While natural population growth (births minus deaths) was slowing, Australia’s population had historically received a major boost from immigration growth. Post COVID-19 immigration has essentially slowed to a standstill, and is the reason why population growth in Australia this year will be at its lowest growth rate since the First World War.


Discover the In Front difference. Find out how easy it is to rent equipment from In Front that we purchase on your behalf.

40 views

Contact Us

Enter your enquiry below and the In Front Australian Business Solutions team will get back to you.

Head Office
Level 1, 110 Erindale Road, Balcatta WA 6021

Postal Address (WA)
PO Box 647, Balcatta WA 6914

 

Adelaide Office
Level 1, 255 Port Road, Hindmarsh SA 500 7

 

Melbourne
PO Box 1048, Hartwell VIC 3124

© 2018 by Copyright © In Front Australian Business Solutions 2018
ABN 21 127 427 445

  • LinkedIn - White Circle