Australia is beset by economic complacency

To be sure, the numbers in the recent Mid-Year Economic and Fiscal Outlook were good. GDP rebounded from minus 7 per cent in the March quarter to 3.3 per cent in the September quarter. Even by pre-COVID-19 standards 3.3 per cent is a great result: recall that GDP grew by only 0.4 per cent back in the December 2019 quarter.

The employment story was good, too. Treasury analysis found that 85 per cent of the 1.3 million Australians who lost their jobs or had working hours reduced to zero at the start of the crisis were now back at work.

With so much good news, what's the problem? The problem is that these results are both normal and expected. The first quarter coming out of a downturn is always big. As households and firms undertake the consumption and investment they delayed during the crisis, GDP gets a sugar hit. This was always going to happen when lockdowns were eased.

The other problem is that much of the economy remains on government life-support. Quarterly data is notoriously volatile and uncertain at the best of times, let alone when the economy is awash with JobKeeper, JobSeeker, JobMaker, Job-ready, Homebuilder and countless other programs in the biggest government cash splash in Australian history. It's hard to assess the health of a private sector that's being pumped full of cash from the government.

It's what happens next that will determine the shape of Australia's recovery. Even ignoring the impact of the most recent outbreaks over the normally busy Christmas-New Year period, the outlook for the Australian economy is not looking good. A handy formula that economists use to account for GDP is "C+I+G+NX", a simple equation that says GDP is the sum of consumption, investment, government spending and net exports. Sadly, there are problems with each.

Our net exports are perhaps the most uncertain. This is bad news for an economy that gets 20 per cent of its GDP from exports, two-fifths of which go to China alone. Australia's increasingly toxic relationship with China means trade will be less supportive of the Australian economy on the other side of COVID-19. At least 16 of Australia's export industries get more demand from China than from the rest of the world combined.

As tensions between Australia and China continue to rise, these and many more industries will protect themselves by limiting or removing China from their supply chains. For profit-maximising businesses, this means moving to second-best alternatives: lower prices and/or fewer exports.

Government spending is falling and similarly uncertain. The government cut JobSeeker by $100 last week, meaning less money going into the economy, less money going to those hit hardest by COVID-19 and less money going to those who are the most likely to spend it. Then, this week, JobKeeper was cut by $100 before being withdrawn entirely in just under three months' time. With more than 1.6 million Australians subsidised by JobKeeper in December, this represents a substantial withdrawal of government spending from the economy.

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Investment is unlikely to come to the rescue. Until a vaccine is widely available, the risk of further outbreaks creates a risky investment environment for an economy that relies on the rest of the world for its prosperity. The government's new restrictions on foreign investment further reduce the pool of savings available for investment in Australia at the worst possible time. Even if we could revert to pre-COVID-19 rates of investment, that would mean returning to period when investment was contracting on average rather than expanding. Weak investment is a long-run challenge made worse by COVID-19.

Consumption bucked the trend. Most of the recent sugar hit to the economy came from cashed-up households spending money they would have spent during the lockdown. But this is inherently temporary. As that extra cash evaporates, Australia will return to where it was before the crisis, with one of the highest levels of household debt in the world. The normal boost to consumption from the holiday period was dashed by the most recent outbreaks on the east coast, as Australian retailers continue to face a challenging environment.

And this is all short-term. The long-term sources of economic growth are just as troubling. Each of the three Ps in Australia - population, productivity and participation - face long-term challenges made worse by COVID-19. Two-thirds of population growth has come from immigration in recent years; post-COVID, that inflow will remain a shadow of its former self for years to come. And while the increased uptake of digital technologies and more flexible workplaces could boost female workforce participation, the disproportionate impact of the recession on women will push hard in the opposite direction.

The biggest concern is productivity. As the driver of long-run living standards, productivity growth has been less than one-fifth of its long-run average in recent years. While the uptake of digital technologies could provide a boost to productivity, the old adage "never waste a good crisis" has been all but forgotten. No major reform has been undertaken since the COVID-19 crisis began, despite the desperate need for reform in our tax and welfare systems, product markets, labour markets and capital markets.

The notion that Australia is experiencing a V-shaped recovery is fuelling this complacency. It is fuelling the belief that substantial reform is not required because the economy will correct itself. This is dangerous thinking. In the post-COVID world, Australia will have less trade, less immigration and less government spending. Its long-run challenges of weak investment, low innovation, weak consumption and high household debt will persist, if not worsen. The time to start planning economic reforms is now.