Will the economic crisis caused by coronavirus reshape our idea of a depression?

Will the economic crisis caused by coronavirus reshape our idea of a depression?


March 28, 2020 12:46:50


The percentage of the labour force seeking government transfer payments could reach higher than 20 per cent. (ABC News: Margaret Burin)

When a crisis or trauma hits, we all deal with it differently, in our own unique way, and in our own time.

Early this week, I stood opposite a long and winding Centrelink queue. I had parked two blocks away, walked through Sydney’s empty Darlinghurst streets, turned a corner, and was hit by 200-300 people queuing in virtual silence.

It was an eerie, sobering and humbling scene.


Hundreds of people were queued outside the Centrelink office in Darlinghurst, Sydney. (ABC News: David Taylor)

That was the moment the economic crisis hit me.

Journalists took their positions on the other side of the road to record the event for the history books. I was among them.

When filing a story like this you need to know who’s in the queue, why are they there, and how long have they been waiting?

It’s the answer to the question “who’s in the queue?” that makes this economic crisis so different to anything we’ve seen in the nation’s history.

There were engineers, successful small business owners, international flight attendants, retail workers … the list goes on.

Stay up-to-date on the coronavirus outbreak

In some cases, they still technically had a job and just been temporarily stood down.

Indeed, the companies they had been working for, in many cases, had been doing just fine up until this point.

It all had the look and the feel of an economic depression, but that’s not what this was.

It’s actually something altogether different, but before examining that, it’s important to go to the heart of what’s producing high levels of community anxiety — aside from the risk of falling ill.

Extent of economic crisis rests on unemployment rate

If you don’t have a job for an extended period of time, what used to be straight forward tasks like paying utility bills and groceries becomes a real challenge.

That’s especially the case if you entered this time with little or no savings.

It’s a frightening scene, to be frank.

This scenario is now facing millions of Australians.

Employment growth and unemployment rate
(Source: NAB)

The National Australia Bank (NAB) has forecast the unemployment rate will peak at roughly 12 per cent, before starting to fall at the end of this year.

The bank then believes by the end of next year it will have come down to 7.5 per cent (it’s currently under 5.5 per cent).

AMP Capital’s Shane Oliver has the jobless rate peaking somewhere between 10 and 15 per cent later this year.

Of course, both of these forecasts only count those in the labour force who are out of work altogether and actively seeking work.

The reality is that the percentage of the labour force that will be legitimately seeking government transfer payments (either unemployed, underutilised, run a business or have been stood down) will be significantly higher — potentially higher than 20 per cent.

Recession or depression?

When the prospect of large double-digit unemployment figures come through, it’s appropriate to start discussing the potential for a “deep recession”, as the NAB is forecasting, or a “depression” as AMP Capital is referencing.

It’s simply impossible to forecast exactly what will happen because there are too many unknowns at this point.

Dr Oliver sums it up pretty well here though: “While there is a huge unknown around how long it will take to control the virus and hence how long the shutdowns will last, it is looking clear that the short-term hit to GDP will be deeper than anything seen in the post-World War II period hence the increasing references to the pre-war depression.”

Impact to Australia’s GDP from Covid-19
(Source: AMP)

Other leading economists agree with this “forecast”.

The critical phrase above though is “short-term hit”. Of course, there’s a fear that the pandemic will remain uncontained indefinitely. However, not one authority is suggesting that. It’s generally understood that a vaccine will be developed by the end of the year.

This rules out, as much as we can at this point, an economic depression as we know it, because depressions, by their nature, linger.

Technical depression

It’s a bit scary when you look at the state of Australia’s economy during the Great Depression. Unemployment reached 20 per cent, and GDP fell 10 per cent.

These sorts of numbers are possible to achieve at this point (assuming the pandemic continues and business shutdowns remain).

Your questions on coronavirus answered:

Importantly though, there are other aspects of an economic depression we are not seeing at this point.

For example, in the lead up to the Great Depression, interest rates rose, the government practised austerity measures, and — despite the threats of an escalation in the US-China trade war — it pales in comparison to the Smoot-Hawley 20 per cent tariff on US imports that were met by global retaliation and saw global trade collapse in the 1930s.

Right now, policymakers are throwing everything but the kitchen sink at economies around the world and there is at least some sense of uniform global action.

Yes, we are creating even more debt and flooding the financial markets with extraordinary amounts of liquidity, but if these measures were not employed a global economic depression would be a foregone conclusion.

Grounds for hope

The consensus view now is that the economic hit to Australia will be harder than a typical recession and may even look and feel like a depression, but the bounce back in economic activity to come will prevent a depression as we know one to be.

What the experts are saying about coronavirus:

The NAB’s Alan Oster goes further. He says the bounce back in economic activity will be quicker and more intense than the recovery post-World War II — which is saying something.

A lot of uncertainty remains, but something we can all connect with is that life has changed for all of us.

Being stood down is becoming more common, lining up to receive a payment from Centrelink is becoming something of a normal daily routine (for all types of professionals), small businesses are needing to find new markets, there are fewer people out and about and folks all over the world are learning to work from home.

The economic system has been deeply wounded, but not from within. This is an exogenous shock. That means while there will be significant collateral damage, the economy, at this point, can recover, and at pace.












First posted

March 28, 2020 12:21:35

Leave a Reply

Your email address will not be published. Required fields are marked *