GDP growth will be a big negative in 2020. Most forecasters expect a better economy in 2021 and a falling unemployment rate. But the unemployment rate will still be well above the level widely considered to be full employment. It will likely be some years before we will get back there.
The clear risk of further outbreaks means alternative (and direr) economic outcomes are possible. The OECD modelled such a ‘double-hit scenario’. Under both scenarios the OECD believes that 2021 will be a better one for the Australian economy. But in the ‘double hit scenario’ the unemployment rate continues to climb into 2021.
The length of our journey to return the economy back to full employment depends not only on the future speed the economy will travel but also the starting point. The unemployment rate in May of 7.1% was universally thought to have understated the weakness of the labour market. The underutilisation rate was at its highest ever level. Hours worked in April-May plunged 10% from the March quarter level. These numbers highlight the potential length of the economic journey ahead.
At the start of March we were all a little lost, hit by an event that has not happened in one hundred years. The good news is that we now have a better sense of the direction we need to take. The bad news though is that having to navigate the pandemic has taken us well off the economic path we had been travelling on.
Although the economy has begun making the right turns, the future economic path is still far from certain. As we have been reminded by the recent Melbourne outbreak ‘second waves’ of the virus are highly likely. Depending upon their size and spread, ongoing waves have the potential to cause serious damage to the economy. The impact comes not only from any government-directed shutdowns but indirectly from hits to business and consumer confidence.
The length of our journey to return the economy back to full employment depends not only on the future speed the economy will travel but also the starting point. The unemployment rate in May of 7.1% was universally thought to have understated the weakness of the labour market. The underutilisation rate was at its highest ever level. Hours worked in April-May plunged 10% from the March quarter level. These numbers suggest that there could be a long economic journey ahead.
Many workers who have lost their job have left the labour force. The participation rate is now at its lowest level in 20 years. The largest decline in the participation rate has been amongst the 15-24 year olds, a reflection of the problems that have hit the accommodation/food service and recreation sectors.
Mostly the decline in the participation rate will be cyclical. History has shown that people return to the labour force when more jobs become available. Indeed, it is common for people to get a job despite not being listed as in the labour force. Many 15-24 year old workers may have temporarily left the workforce because their industry is still closed (nightclubs in a number of states) or their employer has not fully re-opened (some shops). Others have left the labour force on a more permanent basis to study in the expectation that the number of jobs might be constrained for some time.
The economy is improving. More jobs will be created. But we are unlikely to be able to return to the unemployment rate we had in March for some years. And even longer to get to the 4-4.5% mark that is considered to be ‘full employment’. Even before COVID hit finding the right skilled workers was a challenge for some businesses.
With a slice of luck, the unemployment rate will again return back to ‘full employment’ levels. But the economy is likely to face a few twists and turns before we get back there.