Coronavirus: Treasury unemployment forecast unrealistically rosy, economists say

Monday, 25 May 2020

Some people who lost jobs during the Covid-19 lockdown haven't found themselves out of work for long.

Treasury's forecast for employment are unrealistically optimistic and would require bosses to hire 189,000 jobs in short order to get back to pre-crises levels of employment, economists say.

Evidence from the last financial crisis shows it actually takes many years to get unemployment back to pre-crisis levels — and the financial crisis was a much smaller shock than the one now facing the economy.

Infometrics economist Brad Olsen says the forecasts are wildly optimistic and don't take into account vast structural changes going on in the economy, such as the end of international tourism.

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“Treasury is banking on a quicker recovery,' Olsen said.

But this was unrealistic, he said.

'If tourism doesn't come back that's 10 per cent of the economy that can’t come back.'

He said the sheer scale of hiring required to for Treasury's forecasts to be accurate didn't seem credible.

'The economy went on to life support during level 4. I don’t know anyone who went from life support to running a marathon,' Olsen said.

Treasury released its most up-to-date economic forecasts earlier this month to coincide with the Budget.

Those forecasts showed unemployment surging to a peak 9.8 per cent by September this year, but dropping to just 5.7 per cent by 2022.

Olsen said during the Global Financial Crisis (GFC) it took 14 quarters for employment numbers to fall back to pre-crisis levels. Treasury thinks unemployment rates can fall back to roughly pre-crisis levels in just eight quarters, despite the Covid-19 shock being far more severe.

During the GFC, about 60,000 needed to be created to get the unemployment rate down. This time around, Treasury expects roughly 189,000 jobs to be found in a much shorter space of time.

Olsen's analysis was based on the number of people employed, rather than the rate of unemployment.

This more accurately measured the number of jobs that needed to be created, rather than the percentage of unemployed people.

Olsen isn't the only one to think Treasury's forecast is overly optimistic, ANZ Chief Economist Sharon Zollner is forecasting unemployment to rise to 10.5 per cent in September and stay high for some time.

By 2021 she's still expecting it to still be about 7 per cent.

Zollner thinks Treasury's forecasts are 'optimistic about the impact of Government policy'.

ANZ was forecasting a bigger hit to the economy's potential growth rate, which fed through to unemployment being higher for longer. Tourism was a particular concern as it was a very labour-intensive part of the economy.

'It's 8.8 per cent of employment, even though 5.8 per cent of GDP is direct tourism,' Zollner said.

While Treasury's central forecast is very optimistic, it also produced a series of scenarios, including a slower recovery, where unemployment would rise to 9 per cent in 2021 and fall very slowly to 6.7 per cent by 2024.