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The ’90 per cent economy’


Veteran forecaster Chris Richardson, from Deloitte Access Economics, doesn’t expect the economy’s production to get back to what it was at the end if last year until late 2021 or early 2022. He says our economy will be at least 3 per cent permanently smaller than it would have been had the pandemic not happened.

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Even so, maintaining a bit over 90 per cent of the economy’s output in the face of a deadly pandemic has been quite an accomplishment.

In a way we’re fortunate the coronavirus outbreak happened in 2020 rather than in 2000 because, even two decades ago, the economic damage would likely have been far more severe.

Technologies that facilitate remote work have allowed millions to keep doing their jobs during the crisis. A study by the consultancy AlphaBeta, a part of Accenture, found the tools that enable remote work and collaboration permitted 3.2 million Australian employees to keep doing their work safely during the pandemic, including about 1.6 million who may have otherwise been unable to do any work at all. That’s a vast amount of economic output that would have been lost before remote working became possible on a mass scale.

At the same time, online shopping has helped keep our homes stocked with goods during the pandemic, delivery apps have made it easy for us to keep eating meals from our favourite restaurants at home and the digital delivery of movies, apps and music have kept us entertained.

But the strange circumstances of the 90 per cent economy will have lasting consequences. The adjustments made to sustain economic activity during the pandemic have altered the behaviour of businesses, workers and consumers.

Loading

Take businesses first. There has been an astonishing acceleration in the use of digital technology during the past seven months. AlphaBeta’s research found Australian companies have, on average, increased their adoption of some digital technology during the COVID-19 period by as much as the previous 10 years. The uptake of digital collaboration options, such as video-conferencing, has been especially swift. Most businesses intend to continue using these new tools and practices after the pandemic has passed.

Associated with this shift has been the vast, unplanned experiment in working from home. Before the pandemic Australia had been something of a laggard when it came to remote work. On the day of the 2016 census only 4.1 per cent of non-farm employees reported working from home, only marginally higher than in 2006.

But this year a legion of employees had their first taste of working from home, and many liked it.

Loading

A survey published last month by Sydney University’s Institute for Transport and Logistics Studies showed three in four workers believed that, post-COVID-19, their employers were more likely to support work from home than they did before the pandemic. A separate study by Swinburne University researchers John Hopkins and Anne Bardoel found three in four managers now believed their staff would do more remote work after the pandemic than before it.

The office isn’t dead. But the evidence suggests things won’t go back to the way they were.

Professor David Hensher, the director of the Institute for Transport and Logistics Studies, says the “new normal” for how Australia’s workforce balances time spent working from home versus time at the office might not become apparent until late next year. But he anticipates a substantial fall in work-related travel around big cities with major implications for the use of transport infrastructure, demand for office space and the character of our central business districts.

“There will be a decline in activity around our CBDs but quite a bit of that will relocate to the suburbs,” he said.

Loading

Meanwhile, the pandemic has been altering the way we consume and spend. A recent survey by the McKinsey consultancy found a majority of Australians had tried “new shopping behaviours” since the onset of the pandemic and most intended to continue with them. While many old spending behaviours will return once health risks fade, new habits picked up during the crisis will persist. That will also have sweeping repercussions.

The coronavirus-induced downturn has changed the way businesses, workers and consumers behave. Our economy will be fundamentally different as a result.

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The most important news, analysis and insights delivered to your inbox at the start and end of each day. Sign up to The Sydney Morning Herald’s newsletter here, The Age’s newsletter here, Brisbane Timeshere and WAtoday‘s here.

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We’re running scared – and that’s a challenge for the economy


One of the trickiest aspects of the economic debate is breaking down which costs arise as the direct result of government lockdowns and which would arise anyway from the simple “fear factor” of the existence of the virus itself.

Economist Jeff Borland from the University of Melbourne has been reviewing the growing literature in the United States which compares economic outcomes, like consumer spending or mobility indicators, across jurisdictions that have pursued varying degrees of lockdown.

Illustration: Dionne Gain

Illustration: Dionne GainCredit:

The main way COVID-19 affects economies is through reduced household spending, be it on flights, meals out or shopping in malls.

There are two potential mechanisms for this. First, and most directly, spending is crimped when governments impose laws strictly prohibiting economic activity – like, for example, leaving your house – in an attempt to curb the spread of the virus. But second, there are also the voluntary actions individuals take in their desire to avoid contracting the virus themselves, or spreading it to others. Indeed, countries like Sweden which have pursued a lighter touch approach to lockdowns have still suffered a significant reduction in their economic activity thanks to these precautionary actions.

In Australia, Borland says our lower economic output is attributable to both government policies and individual voluntary precautionary actions. His rough run of the numbers suggests the blame lies about “half and half” between the two. What does that mean?

Well, Daniel Andrews is not as omnipotent as some would make out. Amid recriminations, and severe frustration with lockdown rules, it’s important to remember that even absent the harsh lockdown measures, Melburnians would likely have engaged in some degree of self-isolation in recent months amid rising COVID-19 cases, and that would have hurt the economy too.

Says Borland: “You can’t blame the lockdown for all of the reduction in economic activity that has occurred. A lot of that would have occurred anyway.”

And yet, lockdowns are clearly not blameless: “It’s still the case that the restrictions have had some effect on reducing economic activity and then it’s a matter of whether you think those short-term costs are worth it for the longer-term benefits.”

The long-term benefits of lockdowns are that, if successful, they limit the spread of disease and give consumers greater confidence that they can go back to their economic activities sooner with less risk of contracting COVID-19.

According to Borland, to date it appears the benefits of lockdowns have exceeded the short-term pain: “I think that yes they definitely have, particularly when you look at what’s happening in Europe at the moment and having to go into second lockdowns.”

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Studies in the US have shown that consumer spending is closely – and inversely – linked to COVID-19 case numbers and death rates. “The point is that everything comes back to the disease.”

Which is one way to look at it and certainly for many people, fear of actually contracting coronavirus remains their driving concern. To what extent that is justified, given low mortality rates for healthy individuals, is another matter. But fear can become a hydra-headed thing during a pandemic. And fear kills economies.

As restrictions ease, there is a hanging dread that rising caseloads may provoke yet another harsh government lockdown that would be difficult, mentally, for many.

There is, of course, continued fear of losing your job, or having insufficient income to continue meeting household expenses. The point at which these other fears become more terrifying than fear of the actual disease itself is hard to judge. But these are no mere bogey men.

Unfortunately, there are plenty of things to fear during a pandemic, including fear itself. Helping Australians to manage these competing fears and maintain a good quality of life during this period of intense uncertainty is the defining political challenge of our time.

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Call it the ’90 per cent economy’. Post-pandemic, it will never be the same


If the economy manages to return to a normal growth rate in the second half of this year, quarterly gross domestic product will still be about $30 billion smaller at the end of 2020 than it was at the end of 2019. Only a super-strong burst of growth lasting several years will make up for the economic output lost to the pandemic.

Loading

Even so, maintaining 90 per cent of the economy’s output in the face of a deadly pandemic has been quite an accomplishment.

In a way we’re fortunate the coronavirus outbreak happened in 2020 rather than in 2000 because, even two decades ago, the economic damage would likely have been far more severe.

Technologies that facilitate remote work have allowed millions to keep doing their jobs during the crisis. A study by the consultancy AlphaBeta, a part of Accenture, found the tools that enable remote work and collaboration permitted 3.2 million Australian employees to keep doing their work safely during the pandemic, including about 1.6 million who may have otherwise been unable to do any work at all. That’s a vast amount of economic output that would have been lost before remote working became possible on a mass scale.

At the same time, online shopping has helped keep our homes stocked with goods during the pandemic, delivery apps have made it easy for us to keep eating meals from our favourite restaurants at home and the digital delivery of movies, apps and music have kept us entertained.

But the strange circumstances of the 90 per cent economy will have lasting consequences. The adjustments made to sustain economic activity during the pandemic have altered the behaviour of businesses, workers and consumers.

Loading

Take businesses first. There has been an astonishing acceleration in the use of digital technology during the past seven months. AlphaBeta’s research found Australian companies have, on average, increased their adoption of some digital technology during the COVID-19 period by as much as the previous 10 years. The uptake of digital collaboration tools, such as video-conferencing, has been especially swift. Most businesses intend to continue using these new tools and practices after the pandemic has passed.

Associated with this shift has been the vast, unplanned experiment in working from home. Before the pandemic Australia had been something of a laggard when it came to remote work. On the day of the 2016 census only 4.1 per cent of non-farm employees reported working from home, only marginally higher than in 2006.

But this year a legion of employees had their first taste of working from home, and many liked it.

Loading

A survey published last month by Sydney University’s Institute for Transport and Logistics showed three in four workers believed that, post-COVID-19, their employers were more likely to support work from home than they did before the pandemic. A separate study by Swinburne University researchers John Hopkins and Anne Bardoel found three in four managers now believed their staff would do more remote work after the pandemic than before it.

The office isn’t dead. But the evidence suggests things won’t go back to the way they were.

Professor David Hencher, the director of the Institute for Transport and Logistics Studies, says the “new normal” for how Australia’s workforce balances time spent working from home versus time at the office might not become apparent until late next year. But he anticipates a substantial fall in work-related travel around big cities with major implications for the use of transport infrastructure, demand for office space and the character of our central business districts.

“There will be a decline in activity around our CBDs but quite a bit of that will relocate to the suburbs,” he said.

Loading

Meanwhile, the pandemic has been altering the way we consume and spend. A recent survey by the McKinsey consultancy found a majority of Australians had tried “new shopping behaviours” since the onset of the pandemic and most intended to continue with them. While many old spending behaviours will return once health risks fade, new habits picked up during the crisis will persist. That will also have sweeping repercussions.

The coronavirus-induced downturn has changed the way businesses, workers and consumers behave. Our economy will be fundamentally different as a result.

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The most important news, analysis and insights delivered to your inbox at the start and end of each day. Sign up to The Sydney Morning Herald’s newsletter here, The Age’s newsletter here, Brisbane Timeshere and WAtoday‘s here.

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Economists reveal their ‘dream budget’ to save the Australian economy


A recession entirely of government making now requires a recovery plan of the same origin.

Tax cuts or vouchers?

Asked for their one “burning” policy recommendation, interestingly, both Wood and Eslake nominate the same big, bold idea: a voucher program, whereby Australians have to spend the money by a certain date and with a list of certain industries.

Eslake wants it instead of tax cuts; Wood in addition to pulling forward Stage 2 of the government’s already planned income tax cuts.

“Hospitality, tourism and the arts have been the sectors hardest hit,” says Wood. “Tax cuts help indirectly but there is so much leakage, both to savings and to overseas-made goods.”

“Voucher systems or discount schemes can be targeted at hard-hit sectors to provide some short-term momentum. And every dollar spent hits the economy,” she adds, pointing to Britain’s ‘Eat Out to Help Out’ scheme and tourism vouchers made available by the Tasmanian and Northern Territory governments.

Danielle Wood: for vouchers and tax cuts.

Danielle Wood: for vouchers and tax cuts.Credit:Dominic Lorrimer

Eslake wants the revenue which would be lost in a pull-forward of tax cuts to instead be spent on a program of vouchers which expire by a certain date.

“The great advantage of [vouchers] versus bringing forward tax cuts is that you guarantee the money will be spent. It will be spent when it is most helpful for it to be spent; and it will be spent in areas most in need of stimulus or in ways that are most likely to result in increased employment. Bringing forward tax cuts doesn’t do any of that.”

Eslake has thought it all through. The vouchers could be spent on any areas still affected by government restrictions, like tourism and the arts. Or areas that help people get back to work, such childcare or training. Or on essential bills like electricity, water and gas. They could be distributed by the Tax Office to taxpayers and through Centrelink to non-taxpayers.

Also arguing against tax cuts in this budget is Miranda Stewart, a fellow of the Tax and Transfer Policy Institute at the Australian National University’s Crawford School of Public Policy.

“There is little evidence that they will stimulate greater economic activity or consumption,” says Stewart.

However, supporting the case for tax cuts is Deloitte Access Economics’ Chris Richardson, along with PricewaterhouseCoopers chief economist Jeremy Thorpe and UNSW economist Gigi Foster.

JobSeeker and infrastructure

While divided on many things, the six economists are unanimous on two fronts: the need for greater infrastructure spending – although they differ on the format –and the need to permanently increase the rate of JobSeeker, currently scheduled to return to its old rate of $565 per fortnight come January.

Stewart is against any more one-off cash payments to households, such as the $750 coronavirus payment to pensioners. “As a general rule, I’d like to see our transfer/welfare system returning to a more normal systemic approach,” she says.

None of the economists supported an immediate extension to the JobKeeper scheme, currently set to expire on March 28 – although several said the option of extending should be kept open as required in the event of further lockdowns.

Deloitte Access Economics director Chris Richardson.

Deloitte Access Economics director Chris Richardson.Credit:Alex Ellinghausen

According to Stewart: “We should be moving towards JobSeeker as our main way of supporting those who are out of work, have lost jobs or reduced income due to the pandemic and lockdowns. It does not need to be as high as it was in July this year [boosted by a $550-per-fortnight supplement] but that inevitably means that it needs to be at a higher, liveable rate.”

And couples should be subject to individual income tests for JobSeeker, says Stewart, so that a high-income partner does not render a person ineligible for support. The work test should also be relaxed, so that the jobless can pick up more hours of casual or part-time work without being kicked off the payment.

Wood says JobSeeker should be permanently increased by at least $200 a fortnight for singles and rent assistance boosted 40 per cent; Foster wants “the bulk” of the $550 coronavirus supplement retained; and Eslake wants it set at 80 per cent of the age pension.

As for infrastructure spending, all six economists unanimously agree more spending is necessary.

PWC’s Thorpe wants “smart roads” investments to fit out roads and vehicles with the smart tags and meters needed to implement a system of road-user charging. Richardson wants similar forward thinking on congestion charging, along with smaller works projects in the bush. Eslake wants more money for repair, maintenance and upgrade of existing infrastructure, “even though that provides fewer opportunities for politicians to cut ribbons or unveil plaques with their own names on them”.

Social housing and childcare

Wood, Foster and Richardson all back more spending on social housing. Wood also suggests a program of sustainability retrofits of public buildings and cautions against simply plucking large projects from the existing transport wish-lists: “COVID will almost certainly lead to long-term changes to patterns of work and travel as well as lower population growth, so the existing pipeline of city-shaping transport infrastructure projects may no longer stack up.”

Unprompted, four of the six economists nominate childcare as an area where more government resources should be targeted in this budget.

Foster says the best way for the government to create jobs both in the short and long term would be to introduce universal childcare: “This would be a great source of employment, including in the regions, plus has huge benefits for young working families, distressed parents and of course future Australian productivity, as the period from 0 to 5 years of age is arguably the most important in human development.”

Childcare is a sector which all six economists agree needs additional attention in the budget.

Childcare is a sector which all six economists agree needs additional attention in the budget.Credit:Glenn Hunt

Getting back to business

As for stimulating business investment and activity, the economists are mixed on the best approach. Thorpe supports a further reduction in the company tax rate for small businesses, currently at 26 per cent.

“We need to shift from taxing people and business to taxing consumption,” he says. However boosting overall consumer confidence is the crucial missing ingredient to getting business to invest, he adds: “Incentives are good and necessary at the margin, but confidence that the market will be there is the key.”

As for Stewart: “I’d prefer a general tax cut for business to 25 per cent.”

Miranda Stewart: proposed a 25 per cent general tax cut for business.

Miranda Stewart: proposed a 25 per cent general tax cut for business.Credit:Vince Caligiuri

Wood says the current instant asset write-off scheme for business could be extended or eligibility broadened for accelerated depreciation. But she too adds that confidence is key: “Priority needs to be boosting demand … certainly these are much bigger barriers to investment than tax in the current environment.”

Eslake proposes a cut in company tax for all new businesses to “say, 15 per cent for the first five years”. This would be far more effective in creating jobs and innovation than tax cuts targeted at small businesses, he says.

Richardson agrees the tax burden on business needs to fall, but says this can be achieved through a business investment allowance rather than a cut to the headline corporate rate.

Foster is against cutting company tax: “Thirty per cent compares favourably with the corporate tax rates in many other countries. Plus large companies will spend resources to find ways to evade tax, meaning fiddling at the margin is unlikely to make a meaningful impact.”

Foster’s bold idea is for a HECS-style loans scheme for small businesses to encourage risk-taking and investment. Such loans could be repaid once revenues hit a threshold: “Such a scheme would take the downside risk burden onto the shoulders of government, and thereby reduce the negative impact of the uncertainty of the present environment on business’ appetite for investment.”

If the economists agree on one main thing, it’s the need for the government to step in – and step in big – to support the economy with extra spending.

Says Foster: “Let’s not worry too much about the debt levels per se. Let’s worry instead about getting the expenditure programs right to transition Australia back into full employment and a healthy, productive private sector.”

Richardson agrees: “I think the budget has to aim at getting jobs back as fast as we can.”

And Thorpe concludes: “We should not get too caught up in specific individual reforms. As we cross the bridge to recovery we need to be running, not walking.”

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JobSeeker payment cut to cost 145,000 jobs, billions to economy


Slashing welfare payments to workers who lost their jobs as a result of government mandated shutdowns is set to drain the economy of billions of dollars and cost an estimated 145,000 jobs.

Respected analysts Deloitte Access Economics have crunched the numbers on the Morrison Government‘s plans to cut welfare payments to the unemployed this month by $300 a fortnight.

And what they‘ve found is that the sharp reduction in spending that will follow, as one million families are forced to do more with less, will reduce spending so much that it will force thousands of more workers on to the dole queue.

“Every dollar that the government invests in JobSeeker is generating a significant economic return, helping to pave the road out of recession,” Deloitte Access Economics Lead Ally Nicki Hutley said.

“Providing people without paid work with enough to get by is highly effective economic stimulus, as they have little choice but to spend straight away on essentials.

“People on higher incomes have the option of saving, which many are doing right now given the uncertainty of the pandemic.

“This is why other measures, such as income tax cuts, would not be as effective in getting us out of this recession.”

RELATED: Follow our latest coronavirus coverage


The ‘dole’ or JobSeeker payment was doubled to help newly laid off workers cope earlier this year but the temporary coronavirus supplement is being phased out from September 24.

Under the changes, the unemployed will have their payments cut by $300 a fortnight but they will also have more flexibility to earn up to $300 a fortnight to ‘top up’ the welfare payments if they can find work.

But that‘s not an option for millions of workers in Melbourne, who remain the subject of some of the toughest restrictions in the world.

Just before Christmas, the same workers face the prospect of JobSeeker being slashed again down to the original Newstart rate of just $40 per day.

“The doubling of Newstart at the start of the pandemic came as a huge relief. After 26 years without a real increase to Newstart, people without paid work were finally able to afford the basics,‘’ Australian Council of Social Service CEO Dr Cassandra Goldie said.

“But they now face a deeply uncertain future, with the prospect of these devastating cuts to their already tight budgets. There are 12 people receiving JobSeeker for every job vacancy and this is 28 people for every vacancy in regional areas.

“There are a lot of things that are not in our control in this pandemic but one thing that the Government does have control over is ensuring that everyone has enough to cover the basics of life, including a safe place to live.

“Not only is this the right thing to do, it’s one of the best things we can do to support jobs now and on the long, hard road to full recovery.

“We’re calling on the Government to extend the existing Coronavirus Supplement to prevent income cuts in two weeks and move quickly to legislate a permanent, adequate JobSeeker rate that means people can cover the basics.”

RELATED: Man reveals what it is like raising a family of eight on JobSeeker


The grim prediction follows warnings more than 400,000 Australians are set to join the dole queues as the government tightens eligibility for COVID-19 wage subsidies, forcing companies to make more staff redundant.

Labor‘s treasury spokesman Jim Chalmers has urged the Morrison Government to reconsider plans to also cut the wage subsidy JobKeeper by $300 in September.

“We‘ve got a million unemployed, and something like 400,000 expected to join the unemployment queues between now and Christmas,’’ Dr Chalmers said.

“When the Government decided to cut JobKeeper it was on the assumption that Victoria would be open and going fine, and that the international border would be opening soon. These things turned out not to be true.

“Our view is that they should reconsider cutting JobKeeper while unemployment is rising and we‘re in the worst recession we’ve been in for almost 100 years.”



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Trump is taking credit for the Fed’s work on the economy


By retaining his predecessor’s patient approach to rate increases — and then stopping them altogether as inflation, which the central bank tries to keep under control, hovered at low levels — Powell’s Fed helped to keep the longest economic expansion in US history chugging along. The stretch of unbroken growth pushed unemployment to its lowest level in 50 years, prompting companies to cast a wider net for employees, pulling long-sidelined workers back into jobs.

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“Both monetary and fiscal policy were stimulative, and it did lead to a strong labour market,” said Stephanie Aaronson, a former Fed researcher who is now at the Brookings Institution. Very low inflation “has given policymakers the latitude to try new things.”

That matters as more than a talking point: It could fundamentally shape the post-pandemic economy. The Fed has signalled that it intends to leave rates low to push unemployment down again, which could help return the labour market to strong levels. But the challenges posed by business closures and job reshuffling mean that elected officials, who have taxing and spending powers that the Fed lacks, may prove crucial to the speed and scope of the rebound.

“The single most important thing we can do here is to support a strong labour market,” Powell said in late August remarks. “That is more of an all-governmental society project,” and “to wait to the eighth and ninth year of the cycle to get those results — we can do better than that with other policies.”

To be sure, it is easy to overstate how strong conditions were before the pandemic struck.

About 83 per cent of adults in their prime working years were in the labour force at the start of 2020, which was a marked improvement but still down from an 84.6 per cent high in the late 1990s. Inequality prevailed. Wage growth had picked up from the expansion’s early years, but it remained shy of historical records.

But there is no doubt that the pre-pandemic job market was robust. Unemployment had declined to 3.5 per cent, its lowest level in half a century. Prime-age workers who had dropped out of the labour market were surprising economists by applying for jobs. Unemployment for black and Hispanic workers hit record lows, and pay was picking up for those who earned the least.

Now, the pandemic recession has thrown millions out of work, hitting disadvantaged groups especially hard. Black unemployment stood at 13 per cent in August, for instance, compared to 7.3 per cent for white workers.

Trump is already taking a victory lap as the job market begins to heal, calling the rebound “the fastest labour market recovery from an economic crisis in history” during a news conference on the weekend. But about half of the people who have lost jobs since February remain unemployed. Economists have warned that the return to full strength could become a grinding process, and Powell has said that some workers may struggle to return to jobs.

Understanding the policy mix that helped make the labour market so strong in 2019 will be critical to putting the United States back on track for another robust period of growth.

Some of the policies pushed through by Trump and lawmakers did help to bolster economic growth, which can drive hiring, economists said. The government was spending more freely, and the administration’s signature tax cuts, passed in late 2017, seem to have delivered a fleeting jolt to the economy.

Economists at the University of Pennsylvania’s Penn Wharton Budget Model say that the Tax Cuts and Jobs Act helped growth to jump to about 3 per cent for 2018, but the effect faded as growth returned to 2.2 per cent in 2019.

“We don’t project any material impact on growth from TCJA in 2019 or going forward,” said Alexander Arnon, a senior analyst at the Penn Wharton Budget Model, a research centre that analyses and predicts the effects of tax and other policy changes on the federal budget.

Data make it clear that the administration’s policies were not the whole story.

A chart of employment gains over the expansion show that they continued with remarkable consistency, month over month and year after year, starting from around 2010. The jobless rate slowly and steadily dropped. And people gradually trickled back from the labour market’s sidelines.

The patient approach taken by the Fed under Jerome Powell paid dividends for the US economy.

The patient approach taken by the Fed under Jerome Powell paid dividends for the US economy. Credit:AP

Much of the improvement seems to have been driven by a long, steady economic expansion, creating a self-sustaining cycle in which workers got hired, spent more and fuelled demand that created more jobs.

Fed policy helped to enable the progress. Starting under Powell’s predecessor Janet Yellen, the central bank chose to lift interest rates at a historically slow pace, treading carefully to avoid crashing the expansion while also trying to avoid runaway inflation.

Powell, who assumed the Fed chair in February 2018, raised rates four times during his first year — still a much slower pace than in prior business cycles — before pausing in early 2019 as markets gyrated. Under his watch, the central bank allowed the unemployment rate to fall to recent lows without trying to offset that change, and even lowered interest rates in the second half of 2019 to help sustain the expansion amid Trump’s trade war, which included steep tariffs on Chinese goods.

The good news for the post-crisis recovery and rebound is that the Fed is likely to again let unemployment fall sharply.

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In an update to its long-run framework in late August, the Fed officially signalled that it will no longer raise interest rates because of a low unemployment rate alone, effectively codifying the practice adopted last year.

The bad news is that the central bank is low on ammunition to prod the economy. It was able to cut interest rates by only 1.5 percentage points when the pandemic started, compared to cuts that totalled about 5 per cent during the prior two recessions. Relying too much on low rates could make for another very gradual recovery — one like the last long expansion, which took nearly a decade to really pull workers in from the sidelines.

“We really need it to be broader than just the Fed,” Powell said of post-pandemic labour market policies, speaking at the Kansas City Fed’s conference in late August.

The New York Times

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We’re in for a long haul to get the economy working properly


This coronacession is distinguished by its very front-loaded and cruelly uneven nature. “Unlike past recessions, which usually evolve over a year or so, most of the contraction in the economy took place within two short months,” Bassanese says.

The sudden need to lock down much of the economy and get people to leave their homes as little as possible raises the hope that, as the economy is re-opened, much of that activity will be resumed. And if we switch the focus from what’s happening to GDP – the economy’s production of goods and services – to the more important issue of what’s happening to jobs, we see this is already happening.

Treasurer Josh Frydenberg reminds us that, of the 1.3 million people who either lost their job or were stood down on zero hours following the outbreak, more than half were back at work by July.

This suggests we should be able to expect a significant bounce-back in production in the present September quarter, which has less than a month to run. Sorry, Victoria’s second wave and return to lockdown have put paid to that fond hope.

With the rest of the nation re-opening, but Victoria accounting for about a quarter of GDP, the optimists in Treasury are hoping for a line-ball result, but most business economists seem to be expecting a further (though much smaller) fall.

With any luck, however, Victoria should have started re-re-opening by the end of this month. So, a big recovery in production in the run up to Christmas? Sorry. Unless the government changes its tune by then, the economy will be struggling to cope with the withdrawal of much of Scott Morrison’s budgetary support.

Time for some good news. Remember that, no matter how tough things are looking in Oz, they’re looking better than in the rest of the developed world, with the United States losing 9 per cent during the June quarter, the Europeans down 12 per cent, and Britain down 20 per cent.

Why have we been hit less hard? Because we closed our borders earlier and had more success at containing the virus. We didn’t have to lock down as hard and were able to re-open earlier.

Now back to the details of how our 7 per cent contraction came about. The great bulk of it came from consumer spending – accounting for well over half of GDP – which fell by a remarkable 12.1 per cent during the quarter.

Consumption of goods fell a bit, while consumption of services fell hugely. Why? Because staying at home and social distancing slashed our spending on services such as hospitality, recreation and transport (public, car and air).

To the fall in consumer spending we must add falls of 6.8 per cent in new home building and 6.2 per cent in business investment in new equipment and structures. Note that this continued the declines in these two areas that began well before the virus arrived, showing the economy was weak even before the crisis.

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This collapse in private sector spending was partly offset by growth in two parts of the economy. First, public sector spending grew by 2.5 per cent, mainly reflecting greater health care costs. (Note that, being “transfer payments”, the huge spending on the JobKeeper wage subsidy scheme shows up as an addition to wage income, while the greater spending on JobSeeker unemployment benefits also shows up as an addition to household disposable income.)

This increased government assistance, at a time when job losses meant wage income was falling, actually caused household disposable income to rise by 2.2 per cent. Combined with the remarkable fall in consumer spending, however, this helps explain why the rate of household saving leapt from 6 per cent of household income to almost 20 per cent.

Second, our international trade made a 1 percentage point positive contribution to growth because, although the volume of our exports of goods and services fell, the volume of our imports of goods and services (which subtract from growth) fell by more.

(Just so you know, partly because of this we recorded our largest quarterly current account surplus on record of $18 billion, or 3.8 per cent of GDP. This is our fifth consecutive surplus, the longest run of surpluses since the 1970s. For a financial capital-importing economy like ours, this is actually a sign of economic weakness.)

Remembering that the outlook for coming quarters isn’t bright, I leave the last, sobering word to the ANZ Bank’s economics team: “Significant further stimulus over the next few years is likely to be required to generate growth and jobs and drive the unemployment rate down.”

Ross Gittins is the Herald’s economics editor.

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Business

The dismal US economy could be Trump’s secret weapon


Part of Trump’s lead on economics is due to the economy’s pre-pandemic strength. Voters remember the historically low unemployment rates, including for black and Hispanic populations. It is more difficult to blame the president for a downturn that was triggered by a virus originating in China that rocked most economies worldwide. Especially because, in many voters’ eyes, Trump was less keen than Democrats on the lockdowns they think exacerbated today’s problems.

Nobody would go so far as claim that the ongoing economic struggles are “good” for Trump, obviously. But what’s remarkable is how little evidence there is that the economy is harming him. What ultimately makes Biden the clear favourite still is not Americans’ economic pain, but Trump’s handling of the pandemic and personal conduct.

This also explains why many voters might prefer Trump on economics. Who do you want to lead you out of a downturn? The guy who oversaw a booming economy before the virus hit, or an opponent promising huge new spending, higher taxes, and vast government regulation of labour markets?

For Americans, a nation with a deeper scepticism of government anyway, Democratic claims the economy was a wreck before COVID-19 ring hollow.

Now Joe Biden is no socialist, however much Trump paints him as one. But Biden’s agenda would constitute a sharp shift Left for economic policy. The former vice president wants the election discourse to be a referendum on Trump’s character and judgment, which has seen the president lose support among the high turnout elderly. But the Republicans can rightly claim that a big government economic agenda lurks behind the Democrat’s stated focus on “the soul of the nation”. By my reckoning, Biden’s official manifesto would add around five percentage points of GDP to government spending per year. It would embolden unions, stamp down on gig economy work, create a raft of new welfare state programmes, broaden government provision of healthcare and overhaul the energy industry. Add to that Biden’s musings about the possibility of a national lockdown and there’s enough there for many Americans to fear.

Nor is it easy for Democrats to claim Trump has not provided enough economic relief during the pandemic. Whatever you think about the wisdom (or indeed legality) of the measures, the administration has not taken a laissez-faire approach during this crisis.

They went along with the massive $US2.2 trillion ($3 trillion) bill for businesses and households. They recently announced (using public health authority) a temporary halt to evictions from rental properties. And, with Congress gridlocked, Trump’s administration unilaterally extended elevated unemployment benefits (albeit at a lower level than Democrats wanted) as well as a payroll tax holiday akin to an employees’ national insurance cut for most workers until January.

Nobody would go so far as claim that the ongoing economic struggles are “good” for Trump, obviously. But what’s remarkable is how little evidence there is that the economy is harming him. What ultimately makes Biden the clear favourite still is not Americans’ economic pain, but Trump’s handling of the pandemic and personal conduct.

Even so, in the past month or so Trump has made up some ground. The Real Clear Politics polling averages show a tightening through July and August, as violence and protests in Democratic cities has given Trump the opportunity to declare himself the “law and order” candidate.

COVID-19 has rocked dense metropolitan areas where professionals live and spend. The fact rents are down for single-bedroom apartments by 10 per cent or more in New York, San Francisco, Washington DC, and San Jose, gives an indicator of the economic carnage hitting cities.

Yet violent protests alongside Black Lives Matter and Antifa activity in many cities has allowed Trump to highlight the role of lawlessness in making cities unpleasant places to be right now. The more radical elements on the streets gave the president the chance to reframe himself as the defender of American values, norms, and order, as opposed to the president who has himself played fast and loose with the rule of law and exacerbated divisions.

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As a result, Trump is still in this race and it is extraordinary that such a significant economic downturn appears to be putting so little drag on his prospects. What’s more, the timing of official statistics could give the president a final, late economic election boost too.

One consequence of a sharp contraction induced by vast shutdowns in second quarter will be a large rebound in the third quarter. Though this will be far from a full recovery, Trump will feasibly be able to say that the quarter represents the fastest growth on record, just days before polling day.

His narrative will then be: why risk the recovery?

Ryan Bourne holds the R Evan Scharf chair for the public understanding of economics at the Cato Institute

Telegraph, London

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Business reaches out to state government on reopening economy


Mr Little, one of Melbourne’s leading business figures and philanthropists, said the idea for the advisory group came from his work on the National COVID Commission, which since March has provided strategic advice to the federal government to mitigate the economic impact of the pandemic.

The establishment of the group was facilitated by former Victorian premier Steve Bracks.

“It is good that Tim Pallas has picked this up,’’ Mr Bracks said. “They have got a skilled, able group there and it will mean they will make better decisions on how things might work as we move to open up.’’

Doherty Institute director Sharon Lewin is advising the Victorian government through the newly formed VCAG.

Doherty Institute director Sharon Lewin is advising the Victorian government through the newly formed VCAG.Credit:Jason South

The group includes construction magnate Michael Argyrou, Coles general manager Tony O’Toole, GMHBA chairman Jim Walsh, logistics and transport executive Mark Kellett, and Sharon Lewin, the director of the Doherty Institute and an expert on infectious diseases.

Mr Little said the primary role of the group was to gather street-level intelligence from large industries – construction, manufacturing, health, logistics, infrastructure, retail, and banking and finance – and small and medium enterprises to inform government policy.

The group is also intended to be a pandemic problem solver, with its members encouraged to tap into expertise and resources within their business and industry networks.

“The advisory function becomes even more important at a time when the community’s behaviour is changing regularly to accommodate the implementation of COVID restrictions,’’ Mr Little said.

“With current speculation surrounding possible easing of stage four restrictions, the [advisory group] role is centred around recommendations relating to which industry sectors could safely be further relaxed without the risk of further transmission.’’

The relationship between the Andrews government and business community has been under pressure since the second wave forced Melbourne and eventually, the entire state back into lockdown.

Daniel Andrews has been criticised for failing to consult more widely on Victoria's pandemic response.

Daniel Andrews has been criticised for failing to consult more widely on Victoria’s pandemic response.Credit:Jason South

A recurring criticism levelled at Mr Andrews from the business community is his perceived reluctance to accept advice outside a small, trusted circle of political confidantes and public health officials.

Mr Pallas said this criticism was not accurate. “We need the voices of industry to inform how this reopening can happen practically, safely and steadily,” he said.

“Collaboration and communication are key and that is exactly what we’ve been doing with our business community since the coronavirus pandemic hit.”

Mr Andrews has consistently said the economy can be repaired only once the virus is contained. On Thursday, Deputy Chief Health Officer Allen Cheng said daily case numbers would need to return to single figures to safely consider wholesale changes to restrictions.

Within this broad framework, the Victorian COVID Advisory Group is seeking to identify areas where specific economic activity can be safely increased.

An example is advice provided by Mr Argyrou at the start of stage four restrictions to loosen the government’s mandated 25 per cent staff limit on building sites. Subsequent changes gave building companies more flexibility to operate within the restrictions.

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Mr O’Toole led the push for changes to the proposed 33 per cent reduction of employees across Victorian-based distribution centres, which would have threatened the supply of goods and other essential goods.

More recently, Ms Lewin’s advice about the reduced risk of transmitting the virus outdoors has influenced the government’s thinking on when it might allow a resumption of al fresco dining at cafes, pubs and restaurants, and the reopening of outdoor swimming pools.

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AFL grand final moving interstate to be huge blow to Victorian economy


Losing the AFL grand final is tipped to cost Victoria’s economy between $50 million and $100 million.

AFL chief executive Gillon McLachlan on Wednesday announced the game would be held at Brisbane’s Gabba on October 24, the first time it will be played outside Melbourne.

The massive economic blow includes the loss of local and interstate spectators, hotel and restaurant turnover, and other events such as the Brownlow, and the Grand Final Parade and breakfast.

The value to Victoria is usually particularly high when two interstate teams make the final, such as the Sydney and West Coast clash in 2006.

University of New South Wales economist Tim Harcourt estimated this season’s total loss would soar to about $340 million when considering that most games involving Victorian clubs were played interstate.

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AFL chief executive Gillon McLachlan announcing the first-ever grand final to be played outside Melbourne.

But gaining the grand final would not be as lucrative for the Queensland economy, Mr Harcourt said.

The AFL grand final is usually played before more than 100,000 fans at the MCG, while the Gabba is looking at a maximum crowd of around 30,000.

“It won’t be the same as having it in Victoria simply because the attendances aren’t as large as at the MCG,” Mr Harcourt said.

“All the economic benefits are going to be COVID-adjusted.”

It is yet another cruel hit for Victoria’s struggling tourism and events industry, which first experienced a downturn during the summer bushfires, followed by the ban on Chinese tourists.

Warnings many tourism businesses may not survive

Over the grand final long weekend last year, $13.5 million was spent on accommodation in central Melbourne, according to the Victorian Tourism Industry Council.

“This year, our hotels are sitting at between 13 and 15 per cent occupancy,” the council’s chief executive, Felicia Mariani, said.

“The average room rate is actually down by 40 per cent over the same time last year.”

AFL at the MCG, crowd and field shot
The MCG would normally be packed for the AFL’s grand final.(Flickr: K. S. T, File photo)

She has warned that many businesses may not survive until the end of the year and is urging the State Government to commit to a $250 million relief package in its post-lockdown roadmap.

“Our industry is absolutely on its knees,” she said.

“So, we will have lost all of the growth that we would have realised over the subsequent years.”

But the majority of the focus must be on tackling the virus so that other events such as the Melbourne Cup, the Australian Open and the Grand Prix can go ahead in some form, the Chamber of Commerce and Industry has said.

“We need, as Victorians, to get the COVID crisis back under control and make sure that businesses can get back to work,” the chamber’s chief executive Paul Guerra said.

Victoria has an agreement for the grand final to be played at the MCG until 2058, although Mr Harcourt said the one-off interstate move was a good opportunity to see the benefits of holding it elsewhere.

“It’s Australian rules football, not Victorian rules football alone, so in some ways, it’s good to make it a national game,” he said.

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The Queensland Government made a pitch to host the AFL grand final at the Gabba in Brisbane.



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