- Author: Stephen Koukoulas
- Posted: March 31, 2020
The recession – how deep will it be and how long will it last?
It is clear – the economic fall-out from the coronavirus will be severe. The big questions being asked relate the shape of the downturn and the timing of subsequent recovery.
Will it be a “V” shape with a deep decline and a relatively quick pick up?
Or will it be a “U” shape with a deep decline, a long period bouncing along the bottom and an upturn thereafter?
There are grounds to expect a “V” shaped business cycle with GDP falling in the March, June and September quarters and then to expect a recovery at the end of 2020 and into 2021.
One reason for this expectation is the experience in China.
In China, where the coronavirus first struck and where a strict lock down was first imposed, there are signs that its economy is slowly emerging from the crisis.
While it is arbitrary to pick a starting point for the escalation of the crisis, Wuhan and surrounding districts in China saw coronavirus cases and deaths escalate from mid-January. Shortly after, it went into lock down, economic activity slumped and
The official data are starting to show the economic slump.
In recent days, the Chinese authorities gradually easing restrictions of personal movement, some factories and other businesses are opening and slowly gearing up. While still operating well below full capacity, the informal indicators for pollution and daily coal usage are picking up to suggest some form of economic recovery will be seen in the June quarter.
If Australia and the rest of the industrialised world follow the strict lock downs, which is slowly happening, the economic fallout may be limited to a period of 3 to 6 months. This is because most of the industrialised world, including Australia, appear to be approximately two months behind developments in China.
All up, this means that on a best case scenario for Australia, early signs of a gradual recovery is unlikely to be evident before June or July. More likely, the pick-up will be around August or September.
While economic forecasts in the current climate are difficult to make with any certainty, the informal consensus from market economists in Australia is a 5 to 10 per cent fall in GDP in the first three quarters of 2020; the unemployment rate is set to rise to around 10 to 15 per cent and the inflation rate will be negative (meaning broad price falls).
The government has released a range of measures designed to support the economy amid the mass business closures and rising unemployment.
Many payments to social security recipients will slowly flow during April. Some of the business assistance will flow even later, impacting during the latter part of April and only after the lodgement by business of regular Business Activity Statements.
The stimulus, to date, appears to be insufficient given the severity of the hit to the economy.
Accordingly, additional significant fiscal stimulus measures, totalling many tens of billions of dollars, will be needed in the days and weeks ahead.
The form of those measures are likely to refocus on support for households and small and medium business. It is essential that the policy response minimises the slump in economic output and the damage to the labour market.
These measures plus a collapse in tax revenue are likely to see the annual budget deficit exceed $100 billion, and it
That is one measure of the extent of the economic fallout from the coronavirus – it is extreme.
It is also important to recall that, one day hopefully not too far away, this will be over.
It is probably too early to suggest to business to be prepared to respond to this post-coronavirus pick up, to be agile and ready to participate in what is likely to be a strong upswing as life normalises.
That will be in issue in the months ahead.