Shortcuts / 04 February 2021

What’s Happening With The Economy

The coronavirus pandemic is not just a health crisis – it’s also delivered a once-in-100-years economic blow. We talk a lot about the health issues, so in this Squiz Shortcut, we focus on the other side of the equation. We’ll get acquainted with the commonly used economic terms, look at the state of play, and outline 3 things to look out for this year.

‘The economy’ – so much jargon. For example GDP – what’s that about?
Gross Domestic Product – it’s the big one. It’s used to outline the size of a nation’s economy, and whether it’s growing or contracting. Specifically, it’s a measure of the monetary value of final goods and services produced in a country in a given period of time. So that’s everything from bananas grown in Far North Queensland to legal services provided by an office in Perth’s CBD. 

Here in Australia, the Bureau of Stats releases a GDP update quarterly through what’s called the National Accounts. And it’s this update where we learn if the Aussie economy is growing or if we’re in recession – something that happens when a country has 2 consecutive quarters of negative growth. 

Umm ‘negative growth’? What the what?
Yep, don’t you love it? All that means is the economy is contracting – and it’s not good. Here in Oz, we’ve had an incredible period of economic growth until the coronavirus crisis hit last year – more than 28 years in fact, making us world record holders. That’s not to say everything was great pre-COVID – our GDP was running below where the Reserve Bank and policymakers wanted it – but we were consistently thumbs up. 

  1. So what exactly happened to our economy after COVID hit?
    January to the end of June, the economy shrank. You remember – we stayed at home, people lost jobs, shops and restaurants closed etc – the economy went backwards. It was so ugly in the April to June quarter that Australia recorded the largest fall since quarterly measurement began in 1959. 

But then came the July-September quarter and a rise of 3.3%. Insert praise-hands emoji… Overall though when you look over the 12 months to that point, Australia’s economic activity fell 3.8 %. Ugh. 

Mark 3 March in your diary – figures for the October-December quarter will give us a complete top-level picture of the health of the economy for 2020. 

  1. So the economy’s a big thing. What things am I looking out for?
    The big ones: inflation, employment, interest rates. 

Inflation is important because…
It’s a measure of the rise and fall of prices. And it’s a balancing act – too much inflation can see people worse off if their wages aren’t keeping up, and too little means the economy can stagnate. So the Reserve Bank has a target of 2-3% and it’s currently at 0.9%. Boo…

And I get that employment is important. Where’s that at?
So our unemployment rate was tottering along between 5-6% for ages when it spiked to 7.5% in July – that meant an additional 875,000 people were out of work and required government income support. Thankfully, that dropped to 6.6% in December, which means 90% of those who lost work thanks to COVID are back in the workforce.  

And what about interest rates?
They’re at an all time low of just 0.1%. That’s to make it more attractive for individuals and businesses to borrow and invest and keep those economic wheels turning. The Reserve Bank sets rates, and it says they will stay that low until 2024, at least. What they want to see is inflation hit 2-3% – for that to happen, wages will need to go up and unemployment will need to come down. 

Anything else that’s an indicator for economic health?
Yeah there’s a few, including retail sales, building activity, home prices, tourism, agricultural production… the list goes on. It’s why we keep a close eye on the Bureau of Stats data releases every day in Squiz The Day.

I thought that was because you were weird… Has all Australia been impacted?
Yes, but to varying degrees. Melbourne’s three-and-a-half month lockdown to counter the deadly second wave of cases last year meant Victoria had a very different year economically to, say, Western Australia which largely ticked along uninterrupted – until just recently… CommSec’s State of the States report gives a good overview of what’s happened across the country. 

So to gaze into a crystal ball – what’s expected for our economy going forward?
Look, it’s impossible to predict what will happen in 2021. Every prediction and projection seems to have an asterisk against it indicating a high degree of uncertainty. 

Give it a go…
Well, we do know some things, like the impact of border closures.

To start, our $160 billion tourism sector which employs about 700,000 Aussies. The closure of the international border almost a year ago stopped about a third of that activity and the industry suffered big time.

That’s not going to be fixed anytime soon with the federal government flagging that our national border might not be open until the end of the year. 

What about domestic border closures?
It’s hard to predict the impact because who knows what will unfold this year. But one stat to know: domestic tourism accounts for about 70% of activity, and that’s why state and territory border closures are a big deal to the tourism sector. 

As a case study, the border closures that came into force as a result of 2 outbreaks in Sydney before Christmas will see the tourism sector lose an estimated $6.8 billion between 24 December 2020 to 31 January 2021. 

And other parts of the economy that have been affected by border closures too?
That’s right, there have been plenty of stories across the year about supply chains being interrupted, farm workers being prevented to travel to pick fruit, harvest crops and shear sheep and the like. And as well as the very real personal stories people have about not being able to cross state borders, the economic story is also real.  

So that’s the government doing?
JobKeeper’s a big part of the federal government’s response. It’s costing taxpayers more than $100 billion as part of $250 billion the government has pumped into the economy, so it’s a whopper. What happens is the government pays employers to help them pay their employees – whether they’re working or not. 

Umm it’s due to end on 28 March this year, so there are questions about what will happen then. Like: will employers keep those staff or will they let them go because they can’t afford to keep them on. So while our economic position isn’t as bad as it could have been, it’s an open question about whether it’s strong enough not to see a wave of people who were on JobKeeper form a line outside of Centrelink when the end of March rolls around. 

So our domestic economy looks like there’s challenges ahead. What about our export markets?
Good thinking, but we need our global partners to be going well for us to succeed. That’s absolutely the case for the US – it’s been significantly challenged by the coronavirus in both health and economic outcomes.  

And there’s still that little thing called China…
Gulp. Our largest trading partner…  Politics and China’s geopolitical ambitions created some testing times in 2020, and that hasn’t changed. 

Anything good to say on that front?
Well, China is buying heaps of our iron ore at a high price, and that’s been good for our overall export position. 

Squiz recommends:

Reading: The Age/SMH journo Stephen Bartholomeusz aka a Team Squiz favourite for accessible economics/business analysis. 

Double tapping: The Australian Bureau of Statistics Instagram account. It’s funny – trust us…

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