Commitments to more investment in research like this year’s infectious diseases funding are critical to following Australia out of this month’s sharp economic contraction.
Comment: Australian gross domestic product rose 0.7 percent in the June quarter, according to Australian Bureau of Statistics data, compared with a 1.9 percent increase in the first three months of the year. Slowing growth in the second quarter and the expected economic contraction in the third quarter should not divert policy makers’ attention from structural reforms and improving welfare.
That comes after a strong start to the year: GDP in Australia grew 1.9 percent in the first quarter of 2021, following increases of 3.6 percent in the third quarter and 3.2 percent in the fourth quarter of 2020. These gains more than offset the sharp drop (-7.0 percent) in the second quarter of 2020. GDP was up 1.3 percent compared with the first quarter of 2020.
Australia’s economy grew more strongly than the US, the UK, Japan, Germany, France, Italy and Canada, and more strongly than the whole of the G7 in the March quarter of 2021.
The British economy shrank by 1.6 percent in the first quarter of 2021 compared with the previous three months. The UK GDP remained well-below pre-crisis levels.
GDP growth remained positive in Canada in the first quarter of 2021 (1.4 percent), after 2.2 percent in the previous quarter.
France barely avoided falling into recessions in the first quarter of 2021 with a 0.05 percent growth. It followed 1.1 percent contraction in the final three months of 2020. According to the provisional estimates, Germany’s economy shrank 2 per cent in the first quarter of 2021 compared to the previous three months.
And according to revised estimates, GDP growth turned positive in Italy in the first quarter of 2021 (0.2 percent) after a contraction of 1.8 percent in the fourth quarter of 2020.
Japan’s economic output fell 1.1 percent in the first quarter of 2021, marking a return to contraction after the economy grew by 2.8 percent in the final quarter of 2020.
Many New Zealanders thought they could see light at the end of the tunnel. But then the Delta variant arrived ... Economic contraction will be very sharp in the third quarter of 2021.
The Australian Government’s economic response to the Covid-19 pandemic continued into the March quarter this year. According to the Australian Bureau of Statistics, JobKeeper payments (subsidies for businesses significantly affected by Covid-19) accounted for $6.4 billion in March quarter, down from $12b in the December quarter of 2020.
Boosting cash flow for employers (temporary cash flow boosts to support small and medium businesses and not-for-profit organisations during the economic downturn associated with Covid-19) contributed $692m, down from $6.7b in the December quarter.
Growth beats expectations but still outpaced by US
The Australian economy rose 0.7 percent in the June quarter, more than the forecasts that were clustered around 0.4 to 0.5 percent. The terms of trade rose 7 percent, following the 8.2 percent rise in the March quarter, and is now at its highest level in history.
Strong export prices for mining commodities drove the quarterly rise. The pandemic interrupted a 28-year run of uninterrupted growth, but Australia’s economy went back to pre-pandemic size with the performances in the first two quarters of 2021.
The US GDP grew by 1.5 percent in the first quarter of 2021 over the preceding three months, and 1.6 percent in the second quarter of 2021. The US economy is virtually back to its pre-pandemic level.
The UK was the fastest-growing G7 country in the June quarter. Britain’s economy grew 4.8 percent in the second quarter of 2021. However, the UK’s economic growth is still lagging behind Australia and the US. The UK GDP remains well-below pre-crisis levels.
Timely policy responses are effective
Australia has been implementing several economic reforms to ensure a competitive and innovative business environment. One important step was the introduction of the Relocation Assistance to Take Up a Job program, which helps eligible participants to relocate to take up new work.
This is such an important step once you recognise the importance of job mobility for a well-functioning market economy. Job mobility provides individuals a way to boost their labour income. From May this year, if you relocate to take up ongoing work, including an apprenticeship, for more than 20 hours a week for more than six months, you may be eligible to receive between AU$3,000 and $9,000.
Small business is Australia’s biggest employer. In the pre-Covid world, from June 2018 to June 2019, the number of small businesses increased by over 55,000. In addition to its impact on public health, Covid-19 has caused a major economic shock for small businesses in Australia. Cash flows and small business insolvency created challenges.
The world is fighting Covid-19 relentlessly. The global economy is trying to come back as more than 5.8 billion vaccine doses have been administered globally. The pace of economic recovery varies considerably across countries, however.
The related policy response targeted adjusting insolvency legislation. Reforms to the insolvency framework took effect in January. These were designed to make the framework more fit for small business, reducing complexity, time and costs. These will enable more Australian small businesses to quickly restructure. The crucial aspect of this legislation is that small businesses can restructure their debts while remaining in control of their business.
The new OECD Economic Survey for Australia appreciates Australia’s economic reforms discusses the necessity of more structural reforms future sustained growth. The report lists the avenues of economic reforms in (i) competition and regulation, (ii) education and skills, (iii) environmental policy, (iv) tax system, and (v) inclusiveness.
What is going to happen next for Australia?
The September quarter growth will be negative, with lockdowns in Sydney, Melbourne, Canberra and other cities, with the possibility of significant economic contraction. Some argue that contraction will be around 4 percent. This will more likely be followed for a bounce back growth in the fourth quarter of 2021.
According to the OECD forecasts in May 2021, GDP was projected to grow by 5.1 per cent in 2021. These forecasts were revised in the light of outbreak of the delta variant in June 2021. The September 2021 OECD Economic Survey of Australia reports the OECD projections of 4 per cent growth in 2021 and 3.3 per cent growth in 2022.
Australia’s Covid-19 vaccine roll out continues to expand. As at 16 September 2021, more than 24 million doses of Covid-19 vaccines have been administered in Australia.
The OECD is optimistic that economic activity will pick up with the increased vaccinations rates.
Lessons for New Zealand
The world is fighting Covid-19 relentlessly. The global economy is trying to come back as more than 5.8 billion vaccine doses have been administered globally. The pace of economic recovery varies considerably across countries, however.
New Zealand avoided a recession with a promising March 2021 quarter growth. GDP climbed 1.4 per cent in the March 2021 quarter following a December quarter dip of 1 per cent. That 1.4 per cent growth was a nice positive surprise. All industry groups rose in the March 2021 quarter.
The Economist Intelligence Unit published a report in early June 2021, The Global Liveability Index 2021. This report compares the challenges to an individual’s lifestyle in 140 cities worldwide. Auckland topped the rankings and in fourth place was Wellington. Six of the top ten cities were in New Zealand or Australia (Adelaide, Perth, Melbourne, and Brisbane), and this was primarily due to our ability to contain the global pandemic.
Establishing a quarantine-free trans-Tasman bubble was an achievement in comparison with the rest of the advanced world. The number of people crossing New Zealand’s border climbed since two-way quarantine-free travel opened with Australia on 19 April 2021. The increase was mostly due to the Trans-Tasman travel bubble.
Many New Zealanders thought they could see light at the end of the tunnel. But then the Delta variant arrived. All of New Zealand moved to Alert level at 11:59pm on August 17 this year.
We learned on September 16 that GDP had risen by 2.8 percent in the June 2021 quarter. Those June quarter figures look increasingly dated given most recent lockdowns. Economic contraction will be very sharp in the third quarter of 2021.
Structural problems are still with us
In the short run, say a few quarters or years, fluctuations in GDP are driven by movements in demand.
In the medium and long run, however, the structure of a particular economy determines the aggregate output: The capital stock (both physical and human capital), the level of technology, rigidities in the labour market, saving and investment rates, and institutional issue and public policy play important roles.
The OECD released a five-page note for New Zealand in April 2021, with a list of priorities for more inclusive economic growth. Among the priorities are housing, innovation, labour market, and education. The Government should promote innovation in tandem with foreign direct investment.
Basic research should be supported. This week's announcement of a $36 million investment by the Government to boost Aotearoa New Zealand’s Covid-19 response and preparedness for future pandemics and develop a new Infectious Diseases Research Platform is one step in this direction.
We need more sound policies regarding these priorities and Australia provides a good example to follow.
