Recession and the long way out
On Wednesday, when the national accounts confirmed Australia’s biggest economic contraction since the Great Depression, the federal government had a ready and credible excuse. But it was of little consolation to the one million Australians already out of work, or for the 400,000 people who the government expects will lose their jobs by the end of the year.
The soon-to-retire Finance Minister Mathias Cormann told journalists at Parliament House, “Everybody knows what is causing the challenge. Economies around the world have been hit very hard by the impact of the global coronavirus pandemic.”
In his earnest fashion, Cormann listed the devastating outcomes: “a contraction of more than 20 per cent” for Britain, an average drop for OECD countries of “just under 10 per cent” in the June quarter. By comparison, Australia’s 7 per cent, he implied, is world-beating.
But in Australian terms, it is the worst performance on record. You would have to go back 46 years to find another figure that’s anywhere near as dismal – a 2 per cent contraction in June 1974, thanks to the world oil price shock. Back then, many Australians couldn’t afford to put petrol in their cars. The worst quarter of the 1991 recession came in March of that year – a contraction of 1.3 per cent, which would look like a blip compared with our current crisis.
Prime Minister Scott Morrison told parliament it was “a devastating day for Australia”. The crestfallen treasurer, Josh Frydenberg, says we haven’t seen the likes of this recession before. He says Australia has been hit by a “faster and deeper recession”. And recovery is a long way down the track.
The impact of the stage-four lockdown in Melbourne, which makes up about 20 per cent of the country’s GDP, was not included in this week’s economic figures and will not be fully known until the next quarter.
Cormann lamented that the outcome had been on track to be better in June and July with significant jobs recovery ,“but then the outbreak in Victoria happened and that did set us back”. Unlike his colleague the treasurer, the Finance minister sounded almost phlegmatic about it. The contrast was stark. No doubt Frydenberg is aware that this sort of economic performance could do great damage to his reputation and ambitions for higher things, if he copped all the blame.
On Monday, an almost breathless Frydenberg at a doorstop in the Press Gallery corridor lashed out at Victoria and its premier, Daniel Andrews. He slammed Andrews’ response to the virus, calling it “the biggest public policy failure by a state government in living memory”.
The treasurer began a political assault – five interviews in two days – against Andrews with a Sunday Agenda interview. He spoke of the “litany of failures” and cited “expert evidence to the [hotel quarantine] inquiry that 99 per cent of cases in the second wave” can be traced to those quarantine failures. Frydenberg called on the premier to bring forward a road map for recovery – “to be talking more about the road out than about a longer road in”.
Andrews responded on Monday with a promise to outline his road map this Sunday. By Wednesday, he was talking about “several road maps” – acknowledging different responses for different parts of the state, depending on the number of cases. Andrews said he will be “driven by the data”. The nation’s recuperation, in no small way, depends on what he does.
Whatever way he goes, the recovery will be “uneven and bumpy”, according to Reserve Bank governor Philip Lowe. This week, the RBA decided to leave the official cash rate at its lowest-ever level – 0.25 per cent – and extend to $200 billion its cheap cash facility to commercial lenders. The message was blunt: the federal government needs to continue the past six months’ “substantial, co-ordinated and unprecedented” support of the economy into the future. Lowe says it will be “some months before a meaningful recovery in the labour market is under way”.
The RBA chief is encouraging governments to continue plunging into the red because they can afford to take on more debt. Their “balance sheets … are in good shape”, he says. But there is every indication the Coalition in Canberra hasn’t the stomach to go beyond the $100 billion it has already committed to keep a tapered JobKeeper wage subsidy in place until next March. Morrison and Frydenberg seem to have pushed their luck with some of the small-government ideologues within their ranks. Former PM Tony Abbott sniping from London for the government to let “nature take its course” won’t encourage the sort of spending being widely urged on them by economists and the opposition, as well as the RBA.
On Tuesday, the Coalition won support in the senate to extend JobKeeper beyond the end of this month. From September 28, the payments will drop by $300 to $1200, tapering down to $1000 from January 4. Labor supported the bill, but denies it also supported the tapering of payments. Shadow treasurer Jim Chalmers told Fran Kelly on RN Breakfast that the legislation didn’t set the rates or the eligibility. Labor has argued for JobKeeper to be extended to casuals, university staff, and arts and entertainment workers – all of whom have missed out. As yet, the opposition hasn’t secured this concession from the government.
Chalmers was critical of the JobKeeper rate cuts, given the state of the economy. “It makes no sense when unemployment is rising for the government to be withdrawing support from the economy without a comprehensive plan for jobs to replace it,” he told Kelly.
The treasurer is very sensitive about his plan to cut JobKeeper. He stunned ABC TV’s Michael Rowland on Monday when he scolded the News Breakfast host for saying the level was being cut. “That statement is just false,” Frydenberg shot back. When pressed about cutting the level, he confirmed it, but emphasised that the scheme was originally legislated to cease this month. By midweek, Frydenberg was still defending the “tapering off”. He even claimed Labor agreed with it. “We’ve looked at it and now we’re implementing it and we think that is the way forward for the Australian economy,” he said at his recession news conference.
In the party room this week, there was evidence the government was flying by the seat of its pants. Scott Morrison adopted a very different tone from Frydenberg’s in regard to the states’ border closures and Victoria’s lockdown. He told his colleagues – those in the room and those dialling in via video – that they would have to be “patient with the federation”. The prime minister said his goal was not to “pick fights” with state and territory leaders.
Morrison sounded every bit like a circuit preacher as he urged this congregation that “the way we remain a humble, in-touch and focused government is to remain in touch with each other and continue to be respectful of each other”.
He later told parliament that Victoria “has turned the corner”. Morrison said that in discussion with the premiers of Victoria and New South Wales on Monday night there was a “commitment to see Australia opened up again” and for the border between the two states to be opened “as soon as it is safe to do so”. He said he welcomed the co-operation of the two state governments.
No doubt encouraging Morrison’s humility in regard to the premiers, including Frydenberg’s chief villain, Daniel Andrews, was the Newspoll result. Yet another opinion survey had found overwhelming public support for the states and their refusal to move on border closures. The poll found 80 per cent of Australians support closures when outbreaks occur. The states with the hardest closures had the strongest support. South Australia had 92 per cent, Western Australia 91 per cent and Queensland 84 per cent. The much-maligned Victorian premier garnered 74 per cent support, and the much-lauded NSW premier, Gladys Berejiklian, was on 76 per cent. As one Labor strategist put it, “If there’s one thing Morrison can do expertly, it’s read an opinion poll.”
Morrison is running a risk with the tapering of JobKeeper and the cutting of the JobSeeker unemployment benefit. The hardship being suffered by the unemployed and their families could be visited more on him than the virus. This is the dynamic that has seen governments historically fall in times of deep recession.
Much is hanging on October’s budget. The government has been playing catch-up on aged-care policy and delivery but a mounting death toll in nursing homes gives it little choice but to direct hundreds of millions of dollars more to the sector and deliver a root-and-branch reform of the arrangements. The Royal Commission into Aged Care Quality and Safety has given it more than enough to act on already.
Adding to the government’s degree of difficulty as it struggles to design a recovery road map are the unresolved tensions with our largest trading partner, China. The irony is that, so far, demand for our commodities, iron ore and coal especially, is strong. Morrison sees this in terms of mutual benefit based on Beijing’s hard-nosed business assessment. But still, it’s by no means certain how willing China is to help us out of this recession. At stake are our multibillion-dollar education exports and our hitherto growing exports of grain, wine and beef – all now mired in contrived suspensions.
The detention of an Australian citizen, journalist Cheng Lei, by authorities in Beijing is being seen widely in terms of China’s “Wolf Warrior diplomacy”, aggressively asserting Beijing’s displeasure with Canberra. Anthony Albanese says it is a real concern the government can’t manage the relationship with China.
The Global Times, a Chinese Communist Party mouthpiece, fired off a warning this week that “decoupling with China will not send China back to poverty” but could see Australia risk becoming “the poor white trash of Asia”. It was a deliberately provocative statement, echoing the warning given by former Singapore prime minister Lee Kuan Yew in the 1980s. But with the prospect of Australia’s economy contracting even further in the next quarter, Beijing’s hyperbole is not so easily dismissed.
This article was first published in the print edition of The Saturday Paper on Sep 5, 2020 as "Ducking for Covid".
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