The Times Australia
Business and Money

How will the coronavirus recession compare with the worst in Australia's history?

  • Written by John Hawkins, Assistant Professor, School of Politics, Economics and Society, University of Canberra

In a normal year we would be weeks away from the May budget and the official forecasts for the financial year ahead.

This year there will be no official forecasts until October 6, the date of the postponed budget.

It might be just as well.

The finance minister Mathias Cormann says it is nigh impossible to make realistic and credible forecasts[1] in the current environment.

He might also be worried that publishing negative forecasts creates the risk of self-fulfilling prophecies. (It’s an important difference between economic and weather forecasting – predicting rain does not make rain more likely.)

But on Tuesday Treasurer Josh Frydenberg saw fit to release details of Treasury forecasts of a 10%[2] rate of unemployment, which he said would have been 15% were it not for the JobKeeper allowance, so such concern can’t be universal.

Read more: 2020 survey: no lift in wage growth, no lift in economic growth and no progress on unemployment in year of low expectations[3]

Even before COVID-19, the Australian economy was tepid, with the bushfires and weak wages growth dampening consumer spending.

Now the cat is out of the bag.

Overnight the International Monetary Fund released shocking updated forecasts[4]. Australia’s 2020 recession will dwarf those that came before it.

Australian calendar year economic growth

image Growth through the year to December, IMF through-the-year-forecasts for 2020, 2021. ABS National Accounts, IMF World Economic Outlook April 2020[5]

The IMF expects real gross domestic product to shrink by 7.2%[6] throughout 2020.

This is much larger than the falls in real GDP in the early 1980s drought-related recession (2.2% throughout 1982) or “the recession we had to have[7]” (1% in 1991).

To find larger falls it is necessary to go back to the depressions of the 1890s and 1930s.

The Great Depression is one parallel

Australia’s 1890s depression[8] was the result of a global slowdown, the bursting of a speculative property bubble (particularly in Melbourne), bank failures and the prolonged Federation Drought[9].

Australia’s 1930s Great Depression[10] also followed some speculative excesses but was primarily a response to the global economic slump.

Both depressions predated the acceptance of Keynesian economics[11] in which it was understood that the best way to deal with a decline in private spending was for governments to increase public spending.

Read more: Memories. In 1961 Labor promised to boost the deficit to fight unemployment. The promise won[12]

Instead, back then, governments tried to get their budgets to balance by cutting their spending, making matters worse.

Those depressions occurred well before statistical agencies compiled national accounts.

But a survey of retrospective estimates[13] I did with Robert Ewing suggested that during the Great Depression real GDP may have contracted by 10% to 20%.

The Asian Economic Crisis is another

A more recent parallel to the size of the current fall in Australia’s GDP is the experience of some of our neighbours in the 1997 Asian financial crisis[14]. In 1998 it brought about huge falls in real GDP in Indonesia (13%), Thailand (8%), Malaysia (7%), Hong Kong (6%) and South Korea (5%).

The current contraction has been unusually rapid and it is hoped that the recovery will be too.

The IMF predicts Australia’s GDP will expand by 8.4%[15] in 2021 after falling 7.2% in 2020. It believes we are in the worst of the recession now and the recovery will begin in the September quarter that starts in July.

In year-average terms that understate the size of swings the IMF expects real GDP to shrink 6.7% in 2020 compared with 2019 and then to grow 6.1% in 2021 compared to 2020.

Read more: The next employment challenge from coronavirus: how to help the young[16]

It has revised down its forecast for global growth this year from an increase of 3% to a contraction of 3%. (By contrast, during the global financial crisis global GDP slipped by only 0.1%)

What it terms the “Great Lockdown” is the worst global economic scenario since the Great Depression.

Worse outcomes “possible, even likely”

The US economy should contract 5.9% this year before bouncing back 4.7% in 2021. China’s economy should barely grow in 2020 (1.2%) before bouncing back 9.2% in 2021.

Output and incomes in emerging economies are predicted to return to pre-pandemic levels in the second half of the year. The advanced economies generally won’t return to where they were until the end of 2021.

These are forecasts that might prove optimistic. Depending on conditions and programmes in place in each country, it is likely many business will not survive and many consumers will decide to remain cautious about their spending for some time.

IMF chief economist Gita Gopinath warns[17]

much worse growth outcomes are possible and may be even likely – this would follow if the pandemic and containment measures last longer, emerging and developing economies are even more severely hit, tight financial conditions persist, or if widespread scarring effects emerge due to firm closures and extended unemployment.

Rarely has the trajectory of a downturn been harder to forecast.

Much will depend on the virus itself, on the way in which countries adjust their restrictions to deal with it, and on us. At the moment few of us are feeling good.

References

  1. ^ nigh impossible to make realistic and credible forecasts (www.financeminister.gov.au)
  2. ^ 10% (www.smh.com.au)
  3. ^ 2020 survey: no lift in wage growth, no lift in economic growth and no progress on unemployment in year of low expectations (theconversation.com)
  4. ^ updated forecasts (www.imf.org)
  5. ^ ABS National Accounts, IMF World Economic Outlook April 2020 (www.imf.org)
  6. ^ 7.2% (www.imf.org)
  7. ^ the recession we had to have (www.smh.com.au)
  8. ^ 1890s depression (www.rba.gov.au)
  9. ^ Federation Drought (www.nma.gov.au)
  10. ^ Great Depression (www.britannica.com)
  11. ^ Keynesian economics (www.investopedia.com)
  12. ^ Memories. In 1961 Labor promised to boost the deficit to fight unemployment. The promise won (theconversation.com)
  13. ^ retrospective estimates (www.researchgate.net)
  14. ^ 1997 Asian financial crisis (www.rba.gov.au)
  15. ^ 8.4% (www.imf.org)
  16. ^ The next employment challenge from coronavirus: how to help the young (theconversation.com)
  17. ^ warns (www.imf.org)

Authors: John Hawkins, Assistant Professor, School of Politics, Economics and Society, University of Canberra

Read more https://theconversation.com/how-will-the-coronavirus-recession-compare-with-the-worst-in-australias-history-136379

Business Times

Agentforce for Financial Services: Merging AI and Human Expertise…

In this rapidly evolving world of financial services, deploying customer experiences that are personalized and intelligen...

Samsara Eco and lululemon announce 10 year partnership

lululemon and Samsara Eco Announce 10-Year Plan to Advance Recycled Material Portfolio Plan will see lululemon source a...

Barelli Bathrooms announces celebrity interior designer Kellie Ri…

Barelli Bathrooms, a leading name in contemporary bathroom accessories and design, is proud to announce its new national ...

The Times Features

The Role of Your GP in Creating a Chronic Disease Management Plan That Works

Living with a long-term condition, whether that is diabetes, asthma, arthritis or heart disease, means making hundreds of small decisions every day. You plan your diet against m...

Troubleshooting Flickering Lights: A Comprehensive Guide for Homeowners

Image by rawpixel.com on Freepik Effectively addressing flickering lights in your home is more than just a matter of convenience; it's a pivotal aspect of both home safety and en...

My shins hurt after running. Could it be shin splints?

If you’ve started running for the first time, started again after a break, or your workout is more intense, you might have felt it. A dull, nagging ache down your shins after...

Metal Roof Replacement Cost Per Square Metre in 2025: A Comprehensive Guide for Australian Homeowners

In recent years, the trend of installing metal roofs has surged across Australia. With their reputation for being both robust and visually appealing, it's easy to understand thei...

Why You’re Always Adjusting Your Bra — and What to Do Instead

Image by freepik It starts with a gentle tug, then a subtle shift, and before you know it, you're adjusting your bra again — in the middle of work, at dinner, even on the couch. I...

How to Tell If Your Eyes Are Working Harder Than They Should Be

Image by freepik Most of us take our vision for granted—until it starts to let us down. Whether it's squinting at your phone, rubbing your eyes at the end of the day, or feeling ...