Australia’s economy is contracting sharply as we hunker down and limit contact with other people.
Anyone could be infected, even ourselves, and for the hospitals not to be overwhelmed, self-isolation is our best choice.
Much economic policy is based on spurring animal spirits, optimism and borrowing money. But those policies don’t account for the situation we are in now — one where fear is useful, adaptive and helpful.
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Policies governing this emergency acknowledge this. By shutting down gatherings, the implicit advice is that the health needs of society take precedence over the economic.
It seems a short, sharp hiatus in face-to-face economic activity is what the doctor ordered. At least until the threat has abated.
Experts believe a recession is coming.
Westpac’s Bill Evans is Australia’s top private sector economist with an extremely strong forecasting record. When he talks, I listen. And on Wednesday, he announced an impending recession is coming.
“We analysed the government’s $17.6 billion stimulus package and concluded that the package would not be sufficiently stimulative to avert a recession in 2020,” Evans wrote in a note to clients.
Not only that, but the recession will be worse than previously expected.
“Our revised estimates of GDP growth in the March and June quarters, after adjusting for the stimulus package, are -0.7% and -0.3% respectively — a total contraction of 1% of GDP.
The hit to some sectors is truly enormous: “We expect outbound and inbound tourism to contract by 80% over the two quarters.”
It is hard to see how small tourism businesses will survive that sort of a contraction. And Evans was writing before Qantas grounded all planes.
This is a rapidly developing situation. So far most of the forecasts are to the downside but with the RBA expected to leap into the fray later today with quantitative easing, it is possible policy responses will provide some support for growth.
Evans is predicting a large jump in unemployment, from 5.3% today to 7% by October. The International Labour Organisation predicts 25 million jobs lost worldwide.
A recession might clear out some silly overpriced technology companies and reset the crazy housing market. But any upsides are small compared to the effect on people.
Any recession creates human misery. Economics is not about numbers and it is not about money. It is about human wellbeing, and we should all remember that. The awful choice that we face is that economic misery might be the lesser of two evils.
Rising unemployment is the price of the policies we adopt to fight the virus, and as we agree to pay that price we must acknowledge it will fall extremely hard on Australia’s most vulnerable.
I feel especially bad for people employed as casuals in the hospitality sector, and for tourism businesses that were already hard hit by the summer’s bushfires. Government support to the individuals and businesses in question will need to be very substantial.
However, Westpac predicts only two quarters of negative economic growth with a bounce-back forecast for the second half of the year. (Two quarters of negative growth is the minimum definition of a recession.)
Hopefully that bounce-back comes to pass. The recession we had to have — Keating’s one — dragged on for three grim quarters and was followed by a quarter of zero growth.
Any bounce-back depends on two things:
Number one is beating the virus back. For as long as we must restrict interaction, growth will be hard to find. The second is the strength of the government’s support for individuals and businesses. The government is considering more measures to be announced soon.
As a first step they should look across the Tasman where a package worth 4% of GDP has been tabled. That would, in the Australian context, amount to about $70 billion, and a sum like that is starting to look like a bare minimum.
This makes sense
Economics can explain the way we are reacting to the virus with the concept of “externalities”.
Many of us are familiar with externalities from the realm of pollution. An externality exists when a buyer and a seller get together and it creates an effect that falls “external” to the buyer and seller. (For example when we buy petrol for our cars that leads to particulates in the air and carbon emissions.)
Negative externalities create a reason for society to try to suppress a certain kind of trade or economic activity.
Mainstream economics tells us that when a trade comes with negative externalities the free market will provide too much of it. Society then tries to reduce the externality by reducing that kind of trade.
One way we do so is by bans, another is by taxing the goods and services in question. This is why there’s a big tax on petrol — to reduce the negative externalities from driving. The same goes for cigarettes and booze.
Not all trades have externalities. Most things we trade just create benefits and costs to the buyer and seller themselves.
The coronavirus is unusual. It creates a negative externality — a brand new negative side effect — in types of economic activity that previously had none. Any face-to-face contact is now a risk to society, and we are rightly suppressing it.
This is likely optimal for society: shrinking the economy is the price we pay. This could be the first time in recent history a recession was actually a good idea.
Assuming, that is, that we can’t easily substitute non face-to-face kinds of economic activity for the kinds we lost.