Economists say only thing to be sure of is that things won’t be the same

Economists say only thing to be sure of is that things won’t be the same

January 29, 2021

When Victoria’s “remarkable” economic recovery from the depredations of COVID-19 hit the headlines this month, many in the state must have wondered how it went from basket case to poster-child in just a few months.

Deloitte Access Economics tipped the state’s economy to grow by a remarkable 5.3 per cent this year – coming off the contraction of 2020 – outpacing NSW and even Queensland while the NAB predicted Victoria’s economy would be back in pre-pandemic shape by as early as next year.

The outlook for Victoria’s economy should give Treasurer Tim Pallas some reasons to be cheerful.Credit:Penny Stephens

Unemployment has failed to reach the direst predictions that were made in the depths of the crisis, with the jobs figures expected to improve further and house prices forecast to shrug off the downturn and soar again.

But forecasting anything is tricky in the age of COVID and economists are warning that despite the positive early sentiments from the financial sector, 2021 remains fraught with risk and uncertainty.

The big picture

David Hayward, professor of economics at RMIT, says several large unknowns – most importantly the trajectory of the virus and the progress of vaccine roll-outs – mean 2021 remains uncharted territory.

“These estimates are based on all sorts of assumptions about us getting through COVID and it’s just too early to tell,” Professor Haywood said.

“It’s not surprising that Victoria has done pretty well on those [forecast] figures and construction is coming back pretty strongly as a driver [of the economy], but it’s just too early to tell.”

Professor Hayward said Deloitte’s forecast looked like a “best-case scenario”.

“Worst case would look considerably worse because maybe we don’t get on top of the coronavirus, there’s trade wars, industries that don’t come back and there’s probably a middle scenario too,” he said.

Professor Hayward also warned the looming withdrawal of the JobKeeper wage subsidy and the Coronavirus Supplement compounded the difficulty of forecasting, with conflicting views about the probable economic impacts of the withdrawals of the stimulus payments.

Victoria University economist Janine Dixon agreed that certainties were hard to come by and the prediction most likely to come true in 2021 was that things would never be the same again.

“In a post-COVID world we probably won’t go back to how it was,” Dr Dixon said.

“Different parts of the economy are recovering at different speeds. Yes, lots of local activities seem to be picking up reasonably well but there are massive disruptions to international trade.

“There are big holes in this recovery, particularly around trade, so not everything is going to go back to normal and the big question is whether businesses and investors just sit it out or whether they start looking for different opportunities.”

NAB chief economist Alan Oster said on Friday that the only major potential hazard to the recovery he and his colleagues could see was a resurgence of the virus.



“We’re looking at the week-to-week data that we get on consumption and revenue and also unemployment and it’s still really good,” Mr Oster said.

“It’s hard to see something that’s going to come along and crush you, outside of the virus.”

Housing

The latest sales data shows median prices for detached housing hitting record highs, despite a sharp decline in population growth amid international border closures.

But post-COVID, the old real estate market adage of “location, location, location” may need a reboot, with regional Victoria and NSW driving the unexpected recent surge in dwelling values.

Dr Dixon said the virus may have permanently changed how we value urban property too.

“If business and government really do embrace working from home and really encourage and allow employees to do that, the value of an extra bedroom on your house, relative to being an extra 10 kilometres closer to the city is really going to change,” Dr Dixon said.

“So that is a bit of an unknown but it may change the relative values of those types of houses.”

Professor Hayward says the price growth story may have a twist in the second half of the year.

“It’s complex and we don’t know how it’s going to play out because of the impact of very low levels of population growth at the same time as we have a building boom taking place because of federal government stimulus and the new [state government] social housing coming on stream,” he said.

“Those things could combine in the second half of the year to really take the heat out of the housing market.”

The flight from the city, and the absence of tens of thousands of overseas students, is likely to be good news for renters, Professor Hayward said, but less positive for investors.

“In the inner city, rents are going backwards at quite a clip and landlords are going to find it increasingly difficult to find tenants for those apartments. There could be distressed sales, there could be other knock-on effects.”

Jobs

Unemployment in Victoria was down to 6.5 per cent in December, way below the peak of more than 9 per cent feared by the state government.

But if you have a good job you should keep it, says Alison Pennington, senior economist at the Australia Institute’s Centre for Future Work.

Ms Pennington said Australia’s record on employment in the pandemic was excellent by international standards, with more than 80 per cent of those who lost work in the first wave of shutdowns early in 2020, back in work by November.

But that success story marked some worrying trends.

″⁣We have been tracking the quality of the jobs that have been created since May to November bounce-back, and 60 per cent of them have been casual,″⁣ she said.

″⁣So that’s over 400,000 jobs, casual job created in the last six months, this is the fastest casual job creation in our history.

″⁣We’re not talking good quality jobs here.″⁣

Wages

Nor does Ms Pennington believe that many of us are likely to see much of a pay rise in 2021, pointing out the pandemic has simply worsened Australia’s five-year trend of wages “going nowhere”.

“Nationally wage growth has never been weaker since the depression … The last WPI from the Bureau of Statistics [for the September 2020 quarter] was just 0.1 per cent, barely keeping pace with inflation. So we’re not talking about any increase in wages at all.”

Ms Pennington is pessimistic about the prospects for take-home pay in 2021 without major interventions in the industrial relations system.

“The overall picture is wage growth going nowhere,” she said.

Dr Dixon agrees that wage growth is likely to be “sluggish” with only isolated bright spots in industries that found themselves short of workers in the pandemic.

“I don’t think there’s going be much room overall for wage growth,” Dr Dixon said.

But Victorian Chamber of Commerce and Industry chief executive Paul Guerra is more upbeat, pointing out that in the 12 months to September 2020, wages growth outstripped inflation even with both indices at the very low rates of 1.4 per cent and 9 per cent respectively.

“You wouldn’t want to be anywhere other than Australia right now,” he said.

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