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[HSC] Economist: 21st February

A summary of this fortnight's Economics news: unstable growth & labour force!

Zack Bolland 99.80 ATAR, Dux, 8th in NSW for Econ

With the Australian border reopening, the flock of international arrivals is expected to boost the economy, boost employment rates and stimulate economic growth. Moreover, the expectation is that the arrival of international passengers will boost hard-hit industries, such as tourism and services. However, is this really going to happen? Our previous article analysed the implications of high inflation and how a lack of price stability will impact Australia’s external balance. Looking at the other major objectives of the Australian Government, sustainable economic growth and full employment are priorities amidst the discussion of a higher cash rate. This week’s article will assess whether these two objectives have been achieved in the early months of 2022.

The growth problem and why Australia’s supposedly high growth appears to be unstable

At the height of the COVID-19 pandemic in late March 2020, quarterly GDP growth fell to a low of -7% as Australia entered its first technical recession since the early 90s. However, since the recession, Australia has embarked on a national recovery through a strong expansionary budget stance and a low cash rate of 0.10%. Despite there being two major outbreaks and lockdowns in Australia since early 2020 (Delta and Omicron), domestic economic activity bounced back in both instances due to imminent surges in household spending and a paring back of restrictions. As a result, Australia recorded 5% GDP growth (year-ended) in December 2021, with a projection of 5% GDP growth again for June 2022.

With this in mind, GDP growth appears to be well-above its 3-4% ‚Äėsustainable‚Äô goal as set out in the Mortimer Report of 1997. This is further corroborated by the fact that Australia‚Äôs GDP growth (year-average) was 4¬ĺ% for 2021 and looks to be 5¬Ĺ for 2022. Clearly, the Australian economy has bounced back from recurrent lockdowns and nationwide closures.

However, as detailed in the RBA Snapshot, Australia’s most-recent growth statistic of 3.9% monthly growth for February 2022 is sluggish compared to China’s 3.9% and the G7’s average of 4.1% for the same month. Regardless, Australia’s growth, as mentioned before, appears strong and is driven by business and dwelling investment, as well as household spending recoveries. But will Australia see strong growth forever?

As mentioned in last week’s article, inflation has accelerated in recent times, reaching 3.0% in the latest RBA Snapshot, which has damaged consumer confidence and created uncertainty. This is furthered by the discussions surrounding a potential cash rate hike, causing uncertainty amongst homeowners and first-home buyers. As a result, Westpac measured Australia’s Consumer Confidence Index to have reached a low of 100.8 in February 2022, declining from 118.8 in April 2021. NAB’s Business Confidence Index has also seen a significant drop since last April, with the index falling from 23 to a low of -12 at the end of 2021. Evidently, the future of Australia’s growth remains unclear, as the ostensibly high growth rate does not take into account the rising level of uncertainty across the nation.

The unemployment rate and why it doesn’t tell the full picture about Australia’s labour force

‚ÄćAs mentioned in the introduction of this article, there is an expectation that the inflow of international passengers, workers and students will boost employment growth in Australia and reduce the unemployment rate even further than its current 4.2%. In fact, Scott Morrison himself stated that there are over 1.2 million people waiting to come to Australia, which should boost Australia‚Äôs long-lost tourism industry and promote job participation nationwide. However, is this really going to happen?

Currently, Australia has an immigration ceiling of 160,000 for 2021-22, which is expected to increase to 190,000 at some point in the near future. As per an article by The Conversation, this ceiling is inadequate and will have limited implications for both growth and employment, contrary to what is expected by the Government. This same article interviewed 49 economists to ask about their preferred intake of permanent migrants for Australia, leading 37.5% of them to argue that the 190,000 ceiling is ‚Äúnot enough‚ÄĚ and should be higher.

Whilst migration may raise the level of GDP, Adelaide University labour market specialist Sue Richardson argues that migration will not influence GDP per capita and will make a minor contribution to economic development and employment in Australia. Interestingly enough, the article explains that many economists failed to discuss the potential implications of migration on the rate of employment and wage growth in Australia - a popular topic of discussion in 2022.

Despite this, more needs to be done to address the growing issue of working hours and limited employment opportunities in Australia. According to the ABS, total employment in Australia is at 13.2m in December 2021, which is 2.2% lower than what was expected from the 2015-20 trend. Greg Jericho, an economist with the Guardian, reveals that employment has only increased by 2.1% since the end of 2019, which is half the speed it had been prior to the pandemic. With higher growth and higher demand, Australia would expect there to be strong employment growth due to the derived demand for labour, but this is clearly not the case.

Australia has boasted its 4.2% unemployment rate since December 2021, but this fails to take into account the fact that monthly hours worked fell by 8.8% from December 2021 to January 2022. As argued by the Guardian, NSW and Victoria saw a 13.5% and 13.2% drop in hours worked respectively amidst the Omicron-induced shutdowns and rising COVID cases. Whilst rising migration levels may lead to improvements in the number of employed persons, Australia is currently facing a crisis surrounding the certainty of work and the numbers of hours that employees can actually work.

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