Saturday, May 2, 2020

After the anti-social lockdown comes the anti-jobs recession

Until now, old farts like me have thought it a terrible thing that next to no one under 50 has any experience of how terrible recessions are. Even ABC guru Dr Norman Swan sees the costs of the lockdown as mainly social: the boredom, loneliness, anxiety, depression, suicide and domestic violence. Really? That’s as bad as it gets, eh?

But at least our lack of herd immunity from unrealistic expectations means only us old-timers will be expecting this recession to be pretty much the same as those we experienced in the early 1990s, the early ’80s and the mid-1970s. That’s good because this recession will be markedly different to any of those.

Usually, recessions happen because of governments’ policy error. Their attention wanders while the economy is speeding down the road, but then they realise how high inflation’s getting and they panic. They jam on the interest-rate brakes but hit them too hard for too long, and the economy ends up careering off the road and hitting a tree, with many people losing their jobs.

That’s why former prime minister Paul Keating said our last major recession was “the recession we had to have”. He was trying to conceal the truth that all recessions happen by accident.

Until now. Uniquely, this recession has happened because of a knowing act of government policy. It’s “the recession the medicos said we had to have” as the only way to stop the virus killing people.

As we’re about to discover, it’s a huge price to pay. And a month or two cooped up at home is the least of it. Many of those people who’ve lost their jobs will still be cooped up at home many months after the rest of us have resumed normal lives.

And let me tell you, being unemployed for months on end also has adverse social consequences: feelings of anxiety, inferiority and worthlessness, depression, suicidal thoughts, money worries that lead to marital conflict, breakups and violence.

It’s because this recession is happening by government decree – by the government ordering many industries to cease trading – that it will be so much bigger than usual. Usually, economies slow for months before they stop; this time, most industries stopped on pretty much the same day. (Not to mention that the same thing has happened around the world to the countries that buy our exports.)

This recession will be so big and bad that not even the official always-look-on-the-bright-side brigade is trying to gild the lily. Reserve Bank governor Dr Philip Lowe said last week the recession would be a “once in a lifetime event”.

“Over the first half of 2020, we are likely to experience the biggest contraction in national output and income we have witnessed since [the Great Depression of] the 1930s,” he warned.

More specifically, his best guess was that real gross domestic product would fall by about 10 per cent over the first half of this year, with most of that in June quarter. The unemployment rate is likely to have doubled to about 10 per cent by June, though the total hours worked in the economy is likely to fall by much more than that would suggest: about 20 per cent (because many of those on the JobKeeper payment won’t be working much, but won’t be counted as unemployed).

Preliminary figures from the Australian Bureau of Statistics show that employment fell by about 780,000 people over the three weeks to April 4. And so far, 3.3 million workers are covered by JobKeeper.

This week, Treasury Secretary Dr Steven Kennedy said that whereas unemployment rose to higher levels than this in the Great Depression [to 20 per cent], it did so over the course of a couple of years, compared with just a couple of months this time. “We have never seen an economic shock of this speed, magnitude and shape, reflecting that this is both a significant supply [shock] and demand shock,” he said.

The shock to supply comes from the government closing our borders to foreign tourists and overseas students, and ordering so many industries to cease supplying goods and services to their customers. The shock to demand comes from the loss of wages to workers laid off, the loss of profits to firms unable to sell their products, and the loss of confidence that spending big by households and firms at this time sounds like a good idea.

But the differences between this coronacession and previous recessions don’t stop there. As we’ve seen, recessions are usually preceded by booms. Not this time. Former top econocrat Dr Mike Keating has noted that our economy was performing very poorly for some years before the virus hit.

“Over the three years . . . to December 2019, real GDP growth averaged only 2.3 per cent, business investment was flat, labour productivity did not increase at all and real wages averaged only a 0.4 per cent annual rate of increase,” he says.

One thing this means is that whereas the fall in real incomes caused by a recession usually reverses only some of the strong growth in incomes during the preceding boom, this time the fall in incomes will be a much bigger setback.

Yet another difference this time is that, whereas the Reserve Bank responds to a recession by using its “monetary policy” to slash interest rates and impart a big stimulus to borrowing and spending, this time rates are already so low it’s been able to cut them by a mere 0.25 per cent before reaching its effective zero bound.

During the global financial crisis in 2008, it cut the official interest rate by 4 percentage points in five months. So the budget – “fiscal policy” - is the only instrument the government has to respond to the recession.

There is, however, one important respect in which this recession will resemble all others: unemployment shoots up a lot faster than it comes back down. I’d be sceptical of any happy talk about the economy bouncing back. Crawling back, more likely.