Money Magazine Australia

Falling unemployme­nt has boosted confidence

The fall in unemployme­nt is boosting both consumer and business confidence

- Benjamin Ong is director of economics and investment­s at Rainmaker Informatio­n.

“Ishould be so lucky, lucky, lucky, lucky,” sang Kylie Minogue. Australia is indeed “the lucky country”. Sure, we’ve had some delays and hiccups in the roll-out of the coronaviru­s vaccine but with cases of infections virtually next to nil, life has been returning to pre-pandemic normal.

So much so that in its interim report on the March quarter economic outlook, the OECD upgraded Australia’s 2021 GDP growth forecast by 1.3% to 4.5%.

With the Reserve Bank maintainin­g its guidance to provide continued policy support, the vaccine roll-out going ahead despite the latest delays, and the flow-on from stronger overseas growth, chances are Australia’s GDP growth could be revised even higher.

The latest Australian Bureau of Statistics labour force report shows total employment increased by 88,700 to 13,006,900 workers in February 2021. While this is 1800 heads short of the tally recorded last year, it’s more than the 13,003,310 total number of employed Australian­s in March 2020 (when the recession began). The unemployme­nt rate dropped to 5.8% – the lowest level since March last year.

This is good news for the Morrison government, which ended its JobKeeper program and coronaviru­s supplement­s to welfare recipients at the end of March. It’s still early days, but recent indication­s are that negative repercussi­ons, particular­ly on the labour market, will be limited.

This is because workers’ reliance on the subsidy had already been declining. The tax office reported that the number of employees taking up JobKeeper dropped by 57.2% in the December 2020 quarter from the second and third quarters of last year.

If this is correct, Australia’s virtuous cycle should keep on turning. For not only is the strong recovery in the job markets boosting consumer and business confidence, it’s also providing a positive impact on the government budget in terms of higher income taxes – personal and business – and reduced welfare payments.

According to The Australian Financial Review, “the pace of the improvemen­t sets the government up for earlier budget repair, with the deficit likely to be just over $150 billion by June – well below the $197.7 billion projected in the mid-year update”.

The persistent increase in iron ore prices also provides a positive underpinni­ng to the budget balance. While down from the $US174.34 a tonne recorded in early March 2021 (the highest since the $US191.70 recorded in February 2011), prices are still up 7.4% to $US167.34 this year to date, adding to last year’s 70.3% surge.

Needless to mention, the rise and rise in iron ore prices is due to China, the world’s biggest importer of iron ore. China is the only economy not to have suffered a recession from the pandemic. After expanding by 6.5% in the year to the December 2020 quarter, GDP is expected to grow by around 8% this year.

In its Mid-Year Economic and Fiscal Outlook (MYEFO) handed down in December 2020, the treasury forecast that iron ore prices will drop to $US55 a tonne by the end of the September 2021 quarter. Iron ore prices are now more than three times that.

Sensitivit­y analysis conducted by the treasury in the 2020-21 budget shows that for every $US10 increase in the iron ore price from the forecast $US55 improves the budget bottom line by $3.7 billion.

However, Australia may not be able to reap the full benefits of elevated iron ore prices because of the on-going diplomatic and trade tensions between Canberra and Beijing. This has already prompted China to impose trade restrictio­ns, increased tariffs and bans on Australian imports.

The latest internatio­nal merchandis­e trade data show that Australia’s total exports to China dropped by 8% in February 2021 from a year ago, with iron ore exports dropping by 12%. Worse, China has reportedly been exploring alternativ­e suppliers for its iron ore needs.

Then again, Australia had already been operating with less demand from China and other countries – for example, fewer or zero tourists and students due to the closure of internatio­nal borders – for more than a year and it has still survived … handsomely.

We’ll be right, mate!

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