David Taylor* says history is no guide to how Australians will emerge from this Coronavirus-led recession.
Forget what you know about recessions, this one is very different — and it may be chronic.
That’s not to say we’re about to experience years of economic contraction or ‘negative growth’ as economists like to say, but it’s going to remain tough going for many Australians for years.
The beating heart of any economic system is demand.
Leading into this crisis the ‘animal spirits’, as the Reserve Bank Governor put it, were sorely lacking.
Now that we’re in recession, BIS Oxford Economics Chief Economist, Sarah Hunter says Australia has a “chronic lack of demand”.
This is the combination of two overbearing forces: An economy built on too much insecure work, and an economic crisis that has its roots in a problem that’s not going away any time soon.
At a basic level, the Great Depression of the 1930s followed enormous excess in the Roaring ’20s — it was cyclical.
The recession of the early 1990s was also cyclical.
It followed a boom period in the 1980s that led to a stock market crash.
Both economic downturns were the result of endogenous shocks: The economic system itself broke down and it took years of policy trial and error to rebuild it.
This economic crisis is exogenous — it’s largely come from outside the economic system.
The recession we’re all experiencing now has effectively been brought upon us by restrictions imposed on businesses and social distancing thanks to Coronavirus.
That’s not to say things were looking rosy before.
In December 2018, year-on-year economic growth was 2.2 per cent.
In June 2019 it dropped down to 1.6 per cent — well below the economy’s long-run growth rate.
By December last year, thanks to Government spending and some retail anomalies like Black Friday, it rose to 2.2 per cent.
However, this is hardly the picture of a robust economy.
By late last year unemployment had begun creeping up, wage growth was still close to record lows, while the retail sector was contracting, as was the construction sector.
Part of the reason Australia is performing well compared to others right now is the enormous amount of Government spending and the still vast quantities of iron ore being shipped to China.
Take these away and the economy looked, and still looks, incredibly fragile.
Government spending measures have not only been vital to propping up the economy leading into the crisis, but have been crucial in avoiding what the Treasurer calls “economic Armageddon”.
It’s also raised fears though of what may happen when support measures like JobKeeper disappear.
BIS Oxford Economics warns if the unemployment rate remains elevated, and the Government support measures conclude, the economy will contract again in the December quarter.
This has the potential to produce nine months of negative growth this calendar year, with a brief window of growth in the September quarter.
It also opens the window for more negative growth early next year.
It looks, at this stage, as if China will continue to support demand for Australia’s iron ore.
Government spending, though, is being supported by hundreds of billions of dollars of debt, sourced both locally and internationally.
This is political kryptonite for a Government that prides itself on sound economic management, so it will have to pull back on the borrowing later this year.
If the economy hasn’t picked up speed on its own by then, this chronic lack of demand we’re experiencing will drag on.
It’s hoped that as restrictions ease, 850,000 jobs will be created or re-engaged.
Against this though, habits are already forming which may continue to weigh on the economy.
An example of this is the huge increase in the saving rate.
According to the Bureau of Statistics’ National Accounts, this has soared to 5.5 per cent from 3.5 per cent.
Households are clearly still saving for a rainy day right now and have little intention of supporting the economy.
The same economic forces that kept shoppers from spending in recent years, and the under-employment rate from falling prior to the COVID-19 crisis, have not gone away.
The Australian economy was not robust leading into this recession, and the health crisis we’re now tackling looks as if it will remain as a threat for some time.
There’s a limit to how much the Government can support workers, so if there is a second wave of Coronavirus, or social distancing restrictions continue to hamper business growth, unemployment will remain elevated.
While Governments are fiscally restrained, there’s virtually no limit to what central banks can do in terms of stimulus — including money printing.
So far this has forced interest rates down to a bit above zero per cent, and in some cases into negative territory.
This makes saving a rather frustrating experience.
Money tends to gravitate towards places that yield the highest return so, assuming little changes, stock markets will continue to ratchet higher.
This crisis, as many others prior to it have done, will give some a leg-up in life, while others will become entrenched in long-term unemployment and poverty.
However long this technical recession remains, for the majority of Australians, having a secure job and the financial security it brings, may feel luxurious over the coming years.
That’s a classic symptom of a long-lasting economic downturn.
*David Taylor is a business reporter for the ABC’s Audio Current Affairs programs. He also writes regular financial analysis pieces for ABC Online. He tweets @DaveTaylorNews
The article first appeared at abc.net.au.
