Australia leads on economic recovery: OECDMatthew Cranston and John Kehoe
Jun 10, 2020 – 6.41pm
Australia is leading the developed world out of the pandemic-induced recession but governments must reform labour markets, tax, regulation and competition to ensure a sustained recovery, the Organisation for Economic Co-operation and Development says.
In a warning to the Morrison government not to withdraw its emergency spending too quickly in September, the OECD also advised Australia to consider further stimulus to boost incomes and reduce unemployment.
The OECD issued fresh forecasts on Wednesday night showing Australia's recession would see economic output contract 5 per cent in 2020 and consumption to plunge 7.6 per cent – trailing only South Korea, China and Indonesia in terms of economic resilience.
The local economy is tipped to rebound 4.1 per cent in 2021 if the coronavirus is kept under control and a "second wave" is avoided.
World GDP is expected to fall 6 per cent this year – the largest ever projected in the 60 years of the OECD, while the loss of income will exceed that of any previous world recession over the last 100 years except during times of war.
OECD chief economist Laurence Boone said "business failure and bankruptcy risks loom large" and that governments needed to respond with better targeted assistance and significant economic reform to weather further shocks.
"Extraordinary policies will be required to walk the tightrope towards recovery," Dr Boone said.
"Governments must seize this opportunity to engineer a fairer and more sustainable economy, making competition and regulation smarter, modernising government taxes, spending, and social protection.
"Improving employer-employee relationships should accompany ongoing public support for workers and firms."
Dr Boone said: "The Australian government has been very efficient in shielding firms and workers"
The OECD warned that emergency support measures – such as the $70 billion JobKeeper wage subsidy – should be adapted because tourism, travel, entertainment, restaurants and accommodation “will not resume as before”.
"Governments can provide the safety nets that allow people and firms to adjust, but cannot uphold private sector activity, employment and wages for a prolonged period.
"Capital and workers from impaired sectors and businesses will have to move towards expanding ones."
"Such transitions are difficult, and rarely happen fast enough to prevent the number of failing firms from rising and a sustained period of unemployment."
Keeping viable firms alive through indirect financial supports such as loans and guarantees was advised.
The OECD's report said Australia had "ample fiscal space" to support the economic recovery to avoid the scarring effects of unemployment, especially for young workers.
The government should consider "further stimulus" to support income once existing measures – such as JobKeeper – are scheduled to expire at the end of September.
"Such support should focus on improving resilience and social and physical infrastructure, including strengthening the social safety net and investing in energy efficiency and social housing," the OECD said.
"Firms should continue to be supported, including through expanded loan guarantees, accompanied by expedited insolvency procedures."
The Paris-based OECD's outlook is less gloomy for Australia than the 6.7 per cent contraction the International Monetary Fund forecast in April – the worst downturn since the Great Depression of the 1930s.
On Wednesday Westpac's consumer sentiment index surged by 6.4 per cent for June to erase all its losses from the March/April crisis period.
Credit and debit card data also showed spending was now 5 per cent higher than the same time last year.
While health outcomes have underpinned Australia's stronger than expected economic performance, a significant part of the resilience has been fiscal and monetary stimulus measures which account for about 13.3 per cent of GDP, including loan guarantees and cheap RBA funding to the banks.
Direct government spending and tax stimulus measures account for 6.9 per cent of GDP – among the highest in the world even after the $60 billion adjustment to the cost of the JobKeeper program.
The OECD data showed Australia's forecast gross government debt of about 60 per cent was only half the OECD average.
This week Treasury Secretary Steven Kennedy said the magnitude of the economic hit to Australia had been "steadily revised down" and that unemployment would not be as bad as its earlier 10 per cent forecast by June.
The Reserve Bank has also indicated an easier landing for the economy than first thought but insisted that governments engage in reform and free the economy of smothering regulation.
Treasurer Josh Frydenberg said pre-COVID fiscal discipline had been key to the outcome but said the government would provide all that was necessary to ensure sustained recovery.
"We entered this health and economic crisis from a position of economic strength which has enabled us, in the words of the OECD, to provide “massive macroeconomic policy support” with $260 billion or 13.3 per cent of GDP in support for workers, households and business," Mr Frydenberg said.
"There is still a long way to go in recovering from this once in a hundred year global pandemic but we are heading in the right direction and we will continue to do all that is necessary to ensure Australia bounces back stronger on the other side of this crisis.”
The OECD also raised concerns of growing inequality as a result of the virus, after lockdown measures imposed by governments hit low income earners and younger workers the hardest.
"Everywhere, the lockdown has also exacerbated inequality across workers, with those able to telework generally highly qualified, while the least qualified and youth are often on the front line, unable to work or are laid off, with the effects further compounded by unequal access to social protection," the OECD says.
The OECD outlook, titled World Economy on a Tightrope, outlines two possible scenarios.
The first is the virus recedes and remains under control and the second is a "second wave" of rapid contagion erupting later in 2020.
Under the latter more pessimistic scenario, Australia's economy could contract 6.3 per cent in 2020, compared to a 7.3 per cent decline for the G20 and a 7.6 per cent fall for the world.
Continued restrictions on international travel throughout 2020, together with Australia’s geography, imply that a second outbreak could be smaller than elsewhere.
Posted: Fri Jun 05, 2020 12:27 pm
