The Organisation for Economic Cooperation and Development has warned Australia not to withdraw fiscal and monetary policy support before the recovery from the economic shock associated with the coronavirus pandemic is “well entrenched”.
The latest economic outlook from the Paris-based OECD, published ahead of new national accounts data from the Australian Bureau of Statistics due on Wednesday, forecasts the economy will contract by 3.8% in 2020 before rebounding in the new year to grow by 3.2% in 2021 and 3.1% in 2022.
While the OECD is pointing to a relatively rapid recovery from Australia’s first recession in 30 years, it has warned the government and the central bank to support the economy during the transition.
The new outlook published on Tuesday night notes the planned unwinding of Australia’s “strong” fiscal support rolled out during the first wave of the pandemic “will be a headwind to higher GDP growth in the second half of 2021”.
It predicts that unemployment will also rise further because of the “gradual phasing out of job retention programs and increased labour force participation”.
The OECD also points to two risks for the domestic outlook – a possible fall in business and consumer confidence “as reduced government support is accompanied by a rise in business liquidations and unemployment”.
The second nominated risk is the escalating diplomatic crisis with Beijing. The OECD warns any “additional escalation in geopolitical tensions with China” could undermine growth in exports.
While warning Australia to stay the course with fiscal support – echoing public commentary from Australia’s Treasury secretary, Steven Kennedy, and the Reserve Bank – the OECD says the impact of withdrawing the pandemic income support measures will be offset by the recovery in private sector activity as containment restrictions ease further.
As lockdowns and border restrictions lift and normal habits resume, “consumption will continue to be supported by households gradually drawing down their increased savings”.
The OECD says Australia should buttress the post-Covid recovery by “reducing barriers to labour reallocation”, boosting investment in skills programs and boosting labour market mobility by the recognition of occupational licensing across jurisdictions.
It has backed proposals in the states to replace taxes and fees on property transactions, such as stamp duty, with a recurrent land tax, arguing that would “achieve a more growth-friendly tax mix and promote labour mobility”.
The OECD also says the government needs to keep an eye to rising inequality as a consequence of the pandemic. “The authorities should permanently strengthen the social safety net and support increased investment in social housing,” the outlook says.
Australia’s central bank governor will appear before federal parliament’s economics committee on Wednesday morning. The RBA left official interest rates on hold at its regular board meeting on Tuesday.
In a statement the RBA governor, Philip Lowe, said the domestic economic recovery was under way and recent data had “generally been better than expected”.
But Lowe said the central bank’s expectation was the recovery was likely to be “uneven and drawn out and it remains dependent on significant policy support”.
“Given the outlook for both employment and inflation, monetary and fiscal support will be required for some time,” Lowe said, repeating previous advice that the RBA did not expect to increase the cash rate for at least three years.
Anticipating better economic news in the national accounts data after two quarters of negative growth, the treasurer, Josh Frydenberg, told parliament on Tuesday Australia’s economy was exhibiting a “comeback”.
But the shadow treasurer, Jim Chalmers, said the government should heed the warning from the OECD about supporting the economy through the transition.
“Scott Morrison’s decisions to withdraw support too soon and exclude more Australians from income support will exacerbate the economic damage being inflicted on those who were hit hardest by the virus outbreak and left behind by initial policy and fiscal responses to the crisis,” Chalmers said in a statement.
Chalmers noted the OECD had “joined the Reserve Bank, the IMF, Deloitte Access Economics and other prominent Australian economists who have called for more to be done, not less”.