Economics & Markets

My take on life in Australia during a recession

By Dr Shane Oliver
Head of Investment Strategy and Economics and Chief Economist, AMP Capital Sydney, Australia

Going into a recession is bad news. When the economy goes backwards, spending contracts, the jobs market gets tougher, wages go down – the list goes on. This period ahead has come as a shock to many Australians, but there are some things worth noting that might make it easier to bear.

Australia has been battling through a calamitous start to 2020 so far. We kicked off the year with devastating bushfires, which were already detracting from growth in the first quarter. February saw the beginning of COVID-19 disruptions to the local economy, starting with travel bans and moving to a lockdown from mid March which meant some sectors – like retail, tourism and hospitality – had to grind to a halt.

This accounts for negative growth in the March quarter, and the worst is yet to come in the June quarter results, meaning Australia is likely in its first recession since 1991, when Bob Hawke was prime minister and Paul Keating was treasurer. Many Australians weren’t even born then, and for those who were, it’s been nearly 29 years of growth since.

How this recession compares to 1991

This isn’t a typical recession. A typical recession is preceded by a boom – inflation goes up, the central bank tries to control it with higher interest rates, and we have a bust. The situation preceding this recession was almost the opposite – growth was low, interest rates were at record lows.

Because most of the economic damage has been caused by a disruption in the form of the coronavirus shutdown, and we haven’t had the classic build up of excesses you’d normally see before a recession, we should be able to re-start the economy a bit faster than we did in 1991.

Spending power is still in the economy – people have been restricted from spending because of lockdowns, not simply because of a lack of desire or confidence to spend. This means there is pent up demand, which can find a home as restrictions continue to ease.

In addition, there are a number of factors that have allowed Australia to fare relatively well compared to other countries throughout the pandemic, which provide hope for recovery:

  • Australia’s management and control of the COVID-19 pandemic has seen it ranked second in the OECD, behind New Zealand, for virus control. Its ability to mitigate and suppress the virus has allowed governments to relax some of the social distancing restrictions and shutdowns earlier than expected, which is good news for the economy.
  • In relation to stimulus from the government, Australia has among the highest rates of direct spending for stimulus, as opposed to loans in the world. Whilst the Governor of the Reserve Bank of Australia (RBA) has stated that it would be “extraordinarily unlikely” for cash rates to be cut to negative in Australia, the RBA has reiterated that it remains committed to do what is necessary, such as additional quantitative easing, to ensure Australia is positioned well for a recovery.
  • Australia appears to be well placed compared to other countries. Even with the March quarter being negative, this result is still a better outcome when compared to the rest of the world given the US declined by 1.3%, Europe contracted by 3.8% and Canada fell by 2%.

Important to remember: risks remain

There are still risks that could derail the good momentum. The main risk is the potential for a second wave of COVID-19 infections which could have a devastating effect if the economy was to be shutdown again. During the Spanish Flu pandemic in 1918, the reopening of trade and the relaxation of restrictions of public gatherings led to a significant wave of illness and death. In saying that, of the countries we are monitoring, it’s only Iran that is experiencing a true second wave. Hopefully, a strong regime of testing, quarantining and case tracking along with continuing social distancing and hygiene rules will keep a second wave at bay.

  • Covid-19
  • Economics & Markets
  • Market Watch
  • Multi-Asset
  • Opinion
  • SMSF News
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Article written by Shane Oliver

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