Optimistic policy makers have talked about ‘building a bridge’ to carry us over the economic devastation of the coronavirus crisis to a recovery, a return to normalcy, hopefully by the end of the year.
But it is slowly dawning on people that we are on a highway to years of economic hell, of prolonged recession, and even worse. We are in a lethal health and economic crisis; and Scott Morrison is right to reject for as long as he can the alarmism of well-meaning health-first zealots who from their generally cushy, protected jobs downplay the economic front. He is right to try and strike a difficult balance between fighting both the economic and heath wars.
The Australian economy was already in trouble before the bushfires and coronavirus. Despite the mantra of ‘28 years of uninterrupted growth’, mass migration has covered over the cracks of Australia’s lacklustre economy. As the US Federal Reserve Bank of St Louis has noted, based on real GDP per capita, Australia has actually had three recessions since 1991. The most recent began in the second quarter of 2018.
We were in no position to weather an economic shock. But the most concerning aspect of the crisis is we face a demand and supply shock at the same time. We are in uncharted territory and that makes comparing this crisis to previous economic shocks, including the Great Depression, difficult.
A huge swathe of the economy has been stopped or scaled back. Production has stalled, creating a supply shock; and, at the same time, people will spend less as businesses shut and they are told to stay close to home, which is creating a demand shock.
It is difficult to see a quick recovery in either demand or supply. The damage to the production side of the economy is immense – the infrastructure of whole industries has crumbled in weeks; traumatised households, heavily indebted and now being stood down or retrenched and businesses with no revenue for months on end are slashing spending and hunkering down.
When the crisis began many economists forecast a V-shaped recovery: a short sharp slowdown, followed by a rapid bounce back, when the virus passes. But most are now accepting a U-shaped trajectory. The depth and length of U is uncertain.
But we face another particularly nasty situation that is yet to be canvassed widely. If stimulus measures do boost demand in coming years, we then could have the nightmare scenario of 1970s-style stagflation where economic growth is low and unemployment rises; but inflation also surges when, as economists say, ‘too much money (from stimulus) chases too few goods (caused by the supply shock shortage)’. The sudden virus-triggered deglobalisation of the world’s economy is increasing that risk.
I keep telling people that Australians will be lucky to get through this with any assets at all. If they don’t get caught in the deflationary downdraft, with its huge unemployment and cratering asset prices (including house prices), a rapid surge of inflation could then wipe them out.
One of the few positives is that the government and policy makers in Australia know they are battling an economic depression. The initial policy response of the Reserve Bank and government has been strong, including the unprecedented $130 billion income replacement offering support for business and households. It provides short-term hope but also reflects the enormity of the challenge. Many businesses have already fallen between the cracks and more will. They’re saying access to government and bank support is hard. I worry medium-sized businesses are particularly vulnerable; too small to be bailed out, but too big for government support to make that much difference. Yet they make up to a third of Australia’s employment.
The next few years for Australia and much of the world is simply about pain distribution: who suffers, and when.
So far the pain has fallen on casual workers and what US academic Joel Kotkin in his Quillette essay ‘The Two Middle Classes’ describes as the yeomanry – small business owners, minor landowners, craftspeople and artisans. They have had their businesses shut down, gigs and contracts cancelled, and tenants decimated.
But how much suffering will be done by the other middle-class group, Kotkin’s ‘clerisy’ – ‘a group that makes its living largely in quasi-public institutions, notably universities, media, the non-profit world, and the upper bureaucracy’? And how much will the leadership of big business, easily bailed out and in a stronger position to recapitalise, suffer?
I recognise the non-profit world and private media are being deeply affected, and universities are vulnerable, though likely to be propped up. If the government is to avoid serious anger, already brewing, based on the conversations I’m having with small and medium-sized businesspeople, it must show that the upper bureaucracy and public broadcasters particularly – many calling for harsher shutdowns – share in the pain. The government has announced a freeze to pay rises for top public servants, politicians, judges and ministerial staff. That won’t be enough to placate a decimated yeomanry and casual working class.
One of the tragedies in this drama is that it sends a message that if you are engaged in commercial activity, particularly on a small to medium-scale, you are in danger of being wiped out, overnight. But if you are in the public service, you are fine. Capitalism had already been suffering from a paucity of risk-taking and investment and this crisis could make an entire generation of entrepreneurs risk- averse. This economic outlook may sound dramatic, but who just weeks ago would have imagined their mother-in-law milling in the early morning outside Woolworths battling queue-jumpers just to get some toilet paper? We have learnt that anything can happen to us. The same also applies to the economy, so it is sensible from both a policy – and personal – perspective to assume the worst.
I’m a child of the early 1990s recession. Long forgotten after years of prosperity, for many Australians it was a time of snaking Centrelink queues – sadly now being repeated – the rattle of debt collectors at the door and fortunes big and small lost overnight. Many people never recovered from the trauma. Suicides increased. I’m not downplaying the seriousness of the health crisis and the suffering it will cause, but the early ‘90s recession taught me to never, ever, underestimate the suffering, short and long-term, caused by economic downturns. Unfortunately, now a few decades on, we confront something potentially much, much more serious.
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