The virus did not infect a healthy economy – it knocked out one that was already sick
As we look towards next week’s GDP figures, the latest construction data released on Wednesday by the bureau of statistics shows that well before the coronavirus hit, Australia’s economy was in dire need of stimulus.
Next week we will see what happened across the entire economy in the first quarter of this year. But because those first three months only partly cover the impact of the coronavirus, the true economic horror of the virus will likely be seen in the second quarter figures that include April, May and June.
The March quarter will take in the bushfires, and the beginnings of the virus shutdown, and as such may even cause some “not as bad as expected” views to be stated next week should the GDP not completely implode.
Of course we don’t need to wait for the GDP figures to talk about a recession. When employment falls 3%, unemployment rises 1 percentage point and underemployment rises 5.2 percentage points in one month, you are in a recession. Any measure that does not register that fact is broken.
But what the plethora of data out in the next week will show us is not so much the total impact of the virus, but just how badly things were going before we had to shut down the economy to keep people alive.
We already know that the economy grew slower last year than it had in any one calendar year since the 1990s recession. And the early data does not suggest there was any great improvement about to occur.
The virus did not so much infect a healthy economy as it did knock out one already rather sick.
The latest construction figures out on Wednesday show that in the March quarter, both the level of building work and engineering construction declined:
The level of building work done in March was back to December 2015 levels, while engineering construction is now lower than any time since 2007.
But this is not some recent phenomenon to be blamed on either a virus or even the bushfires. The annual growth of both building and engineering construction has now been falling for over a year:
There will be a lot of talk about how the coronavirus has damaged the economy – and of course that is correct. But let us not forget the grim reality that existed before the health crisis occurred.
The decline of the construction sector is a major story of the past decade.
The investment mining boom of the 2000s was as much a boom for construction as it was actual mining. But while the mining sector continues to increase production, the construction industry has flatlined for six years: It is actually a stunning turnaround. During the first decade of this century, the construction industry was the biggest contributor to the growth in the economy – more so than the finance, health and mining sectors:
But over the past decade its importance has fallen steadily, and over the past five years it has been the worst performed industry – indeed it reduced GDP growth last year by 0.2 percentage points – a significant amount given the economy only grew by 2.05%.
And yet, the sector remains a massive part of our economy as a whole. It is the fifth biggest industry – 7% of the total economy, and just marginally below the size of the healthcare industry.
But six years ago it was our biggest industry.
It remains one of the biggest employers – even as the share of its production within the economy declined, its share of total employment has remained steady, and even grew a little:
But declining production with increasing employment will not continue long term, and neither is it a situation beholden to improving wages. This is why it has been six years since annual wage growth in the construction sector was above the national average:
Yes, there were some massive pay spikes back during the mining boom when companies were desperate for workers, but the past decade has seen construction workers’ pay rise by less than the national average.
And while the major issue is the lack of work coming from the private sector, the latest construction figures show this has been greatly exacerbated by the lack of construction work coming from the public sector.
For nearly two years now, while the private sector has been in retreat, the public sector has failed to step in and provide work that would stimulate the economy (as occurred during the GFC):
The failure of the construction sector – and by extension the failure of the economy – prior to the coronavirus lays at the feet of the government, for it desired a return to surplus above economic growth and determined the best way to stimulate the economy was through tax cuts and the Reserve Bank cutting interest rates.
The decline of the construction industry shows record low interest rates and tax cuts sold as “reform” were nowhere near enough to stimulate the economy, and neither will they be in the years ahead as we hope to recover from the depths of a coronavirus-induced recession.
• Greg Jericho writes on economics for Guardian Australia