Despite the optimism of the media and policymakers that Australia will escape the worst of the COVID-19 downturn, it’s increasingly unclear how our economy will cope if the US continues to veer off the rails.
New infections in the US are now above the record levels of early April: a new national daily record of over 38,000 was set on Wednesday, but broken again yesterday. And what began as an accelerating trend in southern and “sunbelt” states is now expanding: the map of where US cases are growing rather than shrinking looks increasingly like the north-east alone has the pandemic under control.
In Texas, which reported a record 6000 new cases, governor Greg Abbott, a Republican and close to Trump, halted the re-opening in the state, while elective surgeries were banned in the four biggest cities to free up hospital beds.
Apple closed its stores across four states in the south last week and this week added another seven closures in Houston, where 97% of ICU beds are taken.
In California, which also saw record levels of new infections this week, Disney decided to halt the planned reopening of its Californian theme parks, due in July.
With Trump in the White House, a presidential election in November and many state governors unwilling to keep their states locked down until the virus is under control, the prospects for the US getting the pandemic under control any time soon look grim.
What turns out to have been the premature reopening of the US economy initially slowed the momentum of economic contraction. But while that contraction isn’t picking up pace again, it’s no longer slowing in the way policymakers want.
The number of new jobless claimants, which has been steadily falling since the staggering peak of nearly 7 million in late March, fell just 60,000 to 1.48 million in the latest weekly released overnight. That’s the 11th week in a row new claims have topped a million people, and there was a rise in new claims in California.
The patchwork nature of the US pandemic experience illustrates something that we are only slowly becoming aware of here: no country will have a single, uniform pandemic in which different states and regions experience the same infection curve at the same time.
Instead, infection rates, and the economic consequences of the lockdowns and other measures taken to address them, will vary widely within the same country, complicating the task of economic policymakers trying to engineer a recovery.
Certainly the US Federal Reserve is becoming more and more worried. Charles Evans, president of the Federal Reserve Bank of Chicago, said on Wednesday: “I expect broad recovery will take some time. Furthermore, the future is more uncertain now than at any other time in my professional career. The outlook depends on so many factors of a virtually unprecedented nature—we really are in uncharted territory.”
Evans is assuming what he calls “intermittent localised outbreaks — which might be made worse by the faster-than-expected reopenings”, will continue. But, he says, while “usually, we are able to look to the past for guidance on what is in store for the future … in this situation, there is simply no relevant benchmark”.
The International Monetary Fund (IMF) picked up on those concerns in this week’s updated World Economic Outlook. It downgraded its 2020 global growth forecast to a fall of 4.9% — compared to 3% in April — driven by a downgrade to the US, now expected to contract 8% this year instead of 6.7%.
Australia, however, had its prospects for this year revised upward: we are forecast to be down 4.5% this year, significantly better than the 6.7% contraction forecast in April.
But while that got the media’s attention, the IMF also slashed its estimate for Australian growth next year to 4.0% from 6.1%. That illustrates how expectations of an economic rebound driven by a US recovery are vanishing rapidly. Without a strong US recovery, overall global growth will be weak, and the 40% of our economic growth that comes from the international economy will suffer accordingly.
The Commonwealth Bank revised its forecast for Australia upwards too: from a contraction this year of 4.2% to one of 3.2%. But, significantly, it is also forecasting GDP growth of just 2.0% in 2021. That is, growth next year will be below even the dire level of 2019, when, courtesy of the Great Morrison Stagnation, growth only reached 2.2%. So after a major recession this year, CBA’s economists expect we will barely even return to stagnation levels next year.
If that eventuates, it will make a mockery of Scott Morrison’s implausible commitment to achieve growth of 1% above trend (2.75%) for five years after the pandemic.
It’s important to keep some perspective: Australia is one of the top economic performers in a struggling field. Our 0.3% contraction in the March quarter compares favourably with New Zealand’s 1.6% decline, 2.1% in Canada, 0.6% in Japan, 2.0% in the United Kingdom and 1.3% in the United States. That’s a testament to policymakers’ handling of both the pandemic and the economic impact of lockdown so far. But the job isn’t even close to being finished — even without the spike in Victorian cases.
The accelerating US crisis means there is no certainty its economy will be doing enough to help the rest of the world out of the mire. For a small economy that relies heavily on trade, Australia incurs some damage with every failure by America’s leaders — something well beyond the control of our own.