The Delta strain of Covid has hit Australia harder than any other major economy, according to the IMF, but overall its projections for Australia’s economy for the next five years are decidedly fine – but nothing more than that.
Trying to decipher the health of the economy is rather tough amid lockdowns.
The latest building approval figures out on Wednesday are a case in point. The actual amount of residential building work done by the private sector in the June quarter fell 0.6%, which in normal times suggests a weak construction sector.
But these of course are not normal times. The record low interest rates and the homebuilder initiative has seen an extraordinary increase in the number of home loans being taken out to build a house.
And as a result, while the value of work done fell, the value of residential building work commenced rose 24%:
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The amount of work that is in the pipeline and about to be done is quite large.
But all these figures cover the time before New South Wales, Victoria and the ACT went into severe lockdowns. That will likely have an impact, but still it would seem things are not too bad, and once the restrictions are eased there is a lot of work to get on with.
Certainly construction workers in NSW would hope this is the case because since the lockdown their jobs have shrunk, while construction work elsewhere continues apace:
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But if you think it is hard to explain what is going on in the economy right now, spare a thought for those trying to predict what will happen.
And into that space comes the latest IMF World Economic Outlook, which projects economic activity across the globe out to 2026.
The title of outlooks are always a good litmus test for how the global economy is travelling.
The last one before the pandemic arrived had the small optimism of Tentative Stabilization, Sluggish Recovery? then came The Great Lockdown followed in June last year by A Crisis Like No Other, An Uncertain Recovery.
This April, with vaccinations in the early stages, the recovery seemed more certain and so the IMF went with Managing Divergent Recoveries. But now with the Delta variant wreaking havoc, the IMF has begun to see problems: Fault Lines Widen in the Global Recovery.
Given the severe lockdowns in NSW and Victoria, the IMF has downgraded Australia’s projected economic growth for this year from the 4.5% prediction in April to 3.5%.
It is the biggest downgrade by any nation in the OECD:
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This of course is not something to boast about, but it is not all bad news, befcause it has also upgraded its prediction for growth next year – by almost more than any other OECD nation. All that had really happened is the IMF pushed out its prediction for growth by a year.
Even better, the IMF predicts stronger growth out to 2026 now than it thought was the case when it made its last prediction in April:
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The IMF also now predicts unemployment will fall closer to 4% than it expected in April:
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All of which is to say, once we get past the lockdowns, the economy should continue to recover as it was prior to July.
And for all the talk about inflation rising once again, while the IMF does predict inflation in the United States will be above 3% though next year, Australia’s inflation is not expected to rise on average above 2.5% any time before 2027:
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That does not suggest much hope for strong wages growth in that time either.
And perhaps one reason is that while the IMF has slightly upgraded its forecasts for Australia economic activity over the next four years, it is not what you would call stellar growth – it is fine, but fine in the sense of when someone asks you how you are feeling you say, “Fine, thanks.”
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Other than this year and the next, when the recovery from the pandemic has caused abnormally strong GDP growth, growth until 2027 looks pretty modest – averaging around the same level of growth we had in the decade after the GFC.
So while the big downgrade to GDP growth for this year might be the thing that catches the eye, the problem is not so much that short-term error but that after the pandemic there is little to get excited about.
But as we saw this year, predictions can easily go astray. For Australia it would be nice if from now on the predictive errors occur due to being too pessimistic rather than the opposite.
