Deloitte Access Economics: World coming a COVID-19 economic cropper - but Australia to fare better than most has been saved
Deloitte Access Economics: World coming a COVID-19 economic cropper - but Australia to fare better than most
12 May 2020: Global recession is here, and it’s big. Supply is a problem as more and more nations have lockdowns. There is already notable disruption in manufacturing, automotive, high tech, pharma, clothes, transport, retail and tourism, and to everyday businesses as face-to-face work grinds to a halt.
But the even bigger problem is a lack of demand. Fear is an incredibly powerful driver, and families and businesses are hunkering down amid fears of what comes next. Politicians are too, for that matter.
Former US Treasury Secretary Lawrence Summers notes that, in the financial crisis in 2008-09 “we had to encourage people to go out and shop and buy and boost economic activity. Today the job is to put the economy in a coma without doing harm to people so as to keep people apart. It is arguably an even bigger challenge.”
So the world is coming a cropper in 2020. As the chart below shows, prospects for 2020 are rather worse than they were in 2009, when the GFC’s full force was felt. Yet while the coronavirus is throwing big spanners into the global economy, it may not leave a long rainshadow behind in the way that the GFC did.
The good news for Australia is that our backyard will fare much better than the rest of the world. The bad news is that the world may now enter a more inward-looking phase.
Like the rest of the world, Australia is trying to protect both our health and our economy. But some of the things that keep us healthy also necessarily hurt the economy. So a million jobs were lost in the last week of March. Although the outlook is subject to spectacularly wide bounds, this looks set to be the sharpest recession Australia has seen since the Great Depression of the 1930s.
Yet there are also some major positives: the Feds and States have rolled out extraordinary support, the Reserve Bank is on the job, China will be the world’s strongest economy in the coming year, the $A’s tumble adds extra protection to Australia’s economy, rains mean this year’s winter crop will be stronger, and a big fall in petrol prices will help as well.
In the meantime, however, families and businesses are scared. And scared people don’t spend.
Fear is the key to the outlook, and fear generates its own momentum. That makes it really hard to stop.
Some things that help protect our health also hurt our economies. And that’s understood – it’s a deliberate trade-off. Fighting an awful virus is really hard. Fighting both a virus and fear is doubly hard.
The negatives are well-known (a lamentable, if not overwhelming, list):
- Coronavirus – a million jobs were lost in the last week of March as new restrictions hit home. And although JobKeeper was a vital gamechanger, families and businesses are still scared, and scared people don’t spend as much. Supply chains are bent or broken amid global and local shutdowns, lockdowns and travel bans, while businesses are delaying laying out their dollars on capacity expansion, and consumers have deserted discretionary spending in droves
- Consumer caution – consumers are cowering in their foxholes: key components of consumer confidence were recently tracking at their worst ever levels. That also blunts the effectiveness of some of the measures that federal and state governments have rolled out
- Bushfires – some communities entered this crisis already reeling from the impacts of a disastrous bushfire season. Now they face the challenge of rebuilding while the whole country is in recession.
- Fewer apartments – Australia is amid a downswing in residential construction activity that will get worse before it gets better
- Drought – two years of drought (longer in many places) broke the hearts and emptied the pockets of many of Australia’s farmers. They cut back on their spending as a result. And even the very welcome rains over the last three months won’t stop lingering pain in meat production in Australia.
The positives are rather less well-known, and rather smaller (but they are better than you think):
- Relative success against the virus – Australia’s world-leading success against the virus is why we expect this nation to be among the five or six fastest growing nations in the world in the next 12 months. Unlike some trying to reopen their economies, such as the US, Australia is doing so from a position of strength
- Policy effects – it isn’t just a lower dollar. Interest rates have been cut, quantitative easing has begun, and federal and state governments have rolled out support. Although those various effects don’t fill the full pothole left by the virus, they will still be generating momentum in the economy as we enter the recovery phase
- Dollar driver –the Australian dollar is around 5% lower (in trade-weighted terms) than it was at the start of 2020. As it always takes time for a more competitive currency to work its magic, that will be more of a positive down the track than it is today. In an environment where demand is chloroformed, that’s a positive that’s merely nice-to-have. But the more strength that the recovery gathers, then the greater the positive potential wrapped up in improved currency competitiveness
- Winter wonderland – meat production won’t leap any time soon, because farmers had to slaughter a lot of cattle and sheep through the drought. But it’s been good rain in a bunch of places of late, and so the 2020-21 winter crop should be comfortably larger than the 29 million tonnes harvested in 2019-20
- Apartment turnaround – fewer apartments are being built, which is hurting both housing construction and retail spending. But the bottom for the housing construction cycle still looks like being in late 2020. That says a key driver of the business cycle will be back in upswing mode through the course of 2021.
The 1990s recession (the one we “had to have”) was awful but, as the chart above of Deloitte Access Economics’ forecasts shows, it is already dwarfed by what is happening in Australia and around the world today.
Policymakers have been able to fight previous recessions by measures that encouraged people to spend. At this stage in this recession, however, policymakers are mostly trying to make economies worse off so they can make our health better off.
Accordingly, the hit to the Australian economy is spectacularly sized. All policymakers in Australia are trying to ensure that it is also spectacularly short.
The impact on Australia’s economy is expected to be worse than the impact on domestic demand. Given the nature of social distancing, our spending won’t go through quite the same degree of rollercoaster ride that our ability to produce will.
Yet although disruptions to supply chains are a worry, it is the hit to demand that will hurt the economy the most. That said, the eventual recovery in demand will drive better news in the Australian economy.
However, the pre-condition to a recovery in demand is a recovery in the confidence of families and businesses.
The news is getting better there. The ANZ-Roy Morgan consumer confidence rating has lifted for five successive weeks, and is up by more than a third since hitting record lows at end-March (the lowest in almost half a century). Yet overall confidence is still woeful. Watch this space.
And, speaking of businesses and their confidence – or lack of it – business investment always acts as a turbocharger on the business cycle. When times are good in the economy, business investment typically makes them even better still. And when times are bad, corporates are too cautious to splash their cash, thereby deepening the downturn.
Other things equal, a range of surveys over the last 12 months were pointing to a recovery in capex that had been looking set to gradually pick up pace in the next year or two.
But the coronavirus looks set to be a party pooper. It’s too early to say just how much the uncertainty flowing from the virus will manifest itself in business boardrooms. But Australia’s boardrooms were already very cautious, and virus-related fears are likely to cement that caution in the near term.
Other things equal, that says there’s a huge downgrade underway in expectations for business investment.
It’s worth noting that a collapse in business investment will occur partly because businesses are losing money, partly because credit is harder to come by, and partly because future demand is uncertain.
But it is also because supply chains are disrupted (meaning that even the businesses who’d like to be able to spend in some cases are unable to do so) and because lockdowns simply make it hard to move people and equipment into place in the construction sector.