The substantial slump in economic activity triggered by COVID-19, coupled with images of Australians queuing around the block for Centrelink payments, has made some fear The Great Depression II. The optics might be alarming, but the parallels are not particularly strong.
Every Australian knows someone, or is someone, who has lost a job, a tenant, a place to live. This is an entirely unfamiliar experience for most Australians, particularly millennials, who have known nothing but economic expansion throughout their working lives.
Australia is most likely already in a recession, as huge chunks of the economy are shut down to slow the spread of COVID-19. We are experiencing a sharp contraction in economic activity, which is likely to eclipse the recessions of the early 1980s and early 1990s.
Huge as the gravity of this situation is, and as devastating as it is for the economy, there are things missing from the social and economic setting which were pivotal in the makings of the Great Depression.
1. This is not the roaring ’20s
The run up to the Great Depression was characterised by a massive boom, where a surging economy in the United States made way for excess and mass consumerism. A boom often leads to a bust, where excesses – like debt – are unwound.
“We haven’t had a boom, we’ve been talking about slow growth for years,” said AMP Capital’s chief economist and head of investment strategy, Dr Shane Oliver.
“The concern has been lack of growth, not excessive growth,” he said.
“We’ve had no inflation problem, and haven’t had the central banks hitting the brakes. Yes, there are pockets of excess. But nothing like what we saw prior to the Great Depression.”
2. 2020s economics is different to 1920s economics
The post-war period has served as an important lesson in precisely what not to do, and what to do, in avoiding a depression.
“In the Great Depression, countries did exactly the wrong thing. Since then, we all know what to when a recession or depression is threatened. That is – monetary and fiscal stimulus,” Dr Oliver said.
“Prior to the Great Depression in the 1920s, we saw a massive trade war globally, tariff hikes in the US and other countries did the same thing. We saw monetary and fiscal tightening in various countries across the world going into it, which made things worse,” Dr Oliver said.
“There was some weird view that the way to fix up a budget deficit was to just raise taxes and cut spending, which is not so good when you’re going into a slump, that made the whole thing worse,” he said.
“This time around you’re seeing the exact opposite. You’re seeing monetary easing on a massive scale, and of course massive fiscal stimulus – at this stage about 3.5 per cent of GDP in Australia, and even more in the US. This is very different to what we saw at the time of the Great Depression.”
3. The disruption is huge, but it should be temporary
The Coronavirus has been a sudden, severe disruption to economic activity and regular social functioning. It’s clear with the Great Depression, with the benefit of hindsight, that there was a long lead up of factors which led to the eventual and devastating slump. The trajectories for the two events are quite different.
“This is a temporary supply and demand gap and it’s happening in the global economy at the same time. The rest of 2020 is going to be really challenging, shutting down your economy causes a huge amount of disruption, but there will be a rebound. Economic activity will be ramped back up on the other side,” said co-portfolio manager in the Australian equities team, Dermot Ryan.
“It’s important to remember as well, companies that can get through this period will be stronger on the other side,” Mr Ryan said.
No doubt, COVID-19 can move to a point of out of control – we’ve seen that in Italy, and there are worrying patterns forming in the US. But, there is nothing to suggest it’s a situation that can’t be controlled, using known methods of success that governments worldwide are replicating.
“This really should be seen as a disruption. The key is keeping collateral damage to a minimum, then bouncing back,” Dr Oliver said.
“The recovery from the Great Depression only really came around the time of World War II, and I don’t think it will take anywhere near as long this time around.”
Subscribe below to SMSF News to receive my latest articlesKatarina Taurian, Content Editor and Senior Writer
While every care has been taken in the preparation of this document, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) makes no representation or warranty as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. The information in this document contains statements that are the author’s beliefs and/or opinions. Any beliefs and/or opinions shared are as at the date shown and are subject to change without notice. This document is solely for the use of the party to whom it is provided and must not be provided to any other person or entity without the express written consent of AMP Capital.