What a recession will mean for you

Talk of a Depression has subsided as Australia appears to be stemming the flow of new coronavirus cases, but we are still heading for the sharpest economic downturn this nation has seen in 90 years.

A huge spike in the unemployment rate and a fast shrinking economy are both likely in the coming months despite massive government financial handouts.

A recession is almost certain, economists say, so what is that going to look like?

 

The first step is knowing what a recession is: it's usually defined as two consecutive quarters of negative economic growth.

A Depression is a much deeper, longer downturn but there is no set definition - simply because there hasn't been one for close to a century.

AlphaBeta Advisors director Andrew Charlton said Australia's economy had already been weaker in the March quarter, before the coronavirus hit hard.

"It's very likely that the June quarter will be the weakest quarter of growth since the Great Depression," he said, adding that it could potentially contract by more than 10 per cent.

Dr Charlton, who was a senior economic adviser to the Rudd Government during the global financial crisis more than a decade ago, said the government stimulus spending so far was "a good start".

"Time will tell whether we need to do more," he said.

 

AlphaBeta Advisors director Andrew Charlton says the stimulus is a good start. Picture: Hollie Adams/The Australian
AlphaBeta Advisors director Andrew Charlton says the stimulus is a good start. Picture: Hollie Adams/The Australian

 

JOBKEEPER TO THE RESCUE

The Morrison Government's $130 billion JobKeeper scheme passed through parliament this week and is effectively throwing the kitchen sink at the coronavirus crisis.

It was the third round of stimulus since March and delivers fortnightly payments of $1500 each to six million Australians from the first week of May - paid through their employers.

BetaShares chief economist David Bassanese said without this subsidy Australia would have been looking at an unemployment rate of 15 per cent, "which is close to Depression conditions".

"Now it's likely to be under 10 per cent - around 8 per cent or so," he said.

Mr Bassanese said the Great Depression in the 1930s was marked by weak economic growth for a decade, while the current downturn would hopefully only last between three and nine months.

"We have Depression conditions but squeezed into a short time period," he said.

And for many, the massive shutdown of businesses across Australia feels like a Depression or worse - whatever that's supposed to feel like.

"If you were in the Great Depression and walked around the streets in the 1930s you would have seen people working and going about their business," Mr Bassanese said.

Today, Australia's busiest retail strips are full of shut-up shops.

Mr Bassanese said a big benefit of the JobKeeper package was that it kept workers on the books of their bosses so when business picked up they were ready to restart quickly.

"A lot more workers will retain some connection to their employers so there's a better chance we will bounce back into growth," he said.

In contrast, the US cash splash comprising one-off payments did not maintain that employment connection so "that will make it harder for the US to come out".

 

 

 

 

HOUSING HIT

Realestate.com.au chief economist Nerida Conisbee said April was going to be a "shocker" for the economy and May might be too.

But she said the government stimulus packages had given people a lot of confidence.

This financial support - combined with six-month repayment holidays offered by banks and other lenders - should help prevent massive falls in property prices because there is less likelihood of homeowners being forced to sell quickly.

Ms Conisbee said Australia had diverse property markets and their price movements would be "highly variable".

For example, Canberra should do well because 42 per cent of its workforce was government sector employees and there was surging demand for Centrelink, Australian Taxation Office and other services, she said.

Bigger cities were better placed than regional and tourist areas, Ms Conisbee said, and full-time workers were better placed than casuals and contractors.

"Well-paid, white-collar professionals are still largely employed - but some have taken pay cuts," she said.

However, residential tenants and landlords still face huge uncertainty.

"We can see very high levels of stress in the rental market and those issues around rents haven't been sorted," Ms Conisbee said.

The Federal Government last month announced a ban on tenant evictions, but this week left it up to individual states to deliver assistance packages for residential property.

 

Realestate.com.au chief economist Nerida Conisbee warns of stress in rental markets.
Realestate.com.au chief economist Nerida Conisbee warns of stress in rental markets.

 

SPENDING BOOST

Three rounds of government stimulus packages announced in March are injecting billions of dollars into Australians' pockets:

• On March 12 it announced help for businesses, pensioners and other welfare recipients totalling almost $18 billion.

• Then on March 22 another $66 billion of assistance was unveiled and included giving Australians early access to $20,000 from their super funds.

• Finally, JobKeeper and its massive $130 billion price tag was outlined on March 30.

And the Reserve Bank of Australia is providing up to $90 billion of extra funding to help banks lend to small and medium-sized businesses.

Dr Charlton said research by his firm's economists and credit bureau illion had found that consumer discretionary spending spiked in late March as a result of the stimulus.

But some types of spending were still down sharply. For example, gym and fitness spending had plunged to 95 per cent below a normal week, while travel and public transport was down 78 per cent, education down 43 per cent and cafes down 42 per cent.

However, spending on online gambling surged 67 per cent, home improvements rose 64 per cent, food delivery 63 per cent, and online retail and subscription services rose 61 per cent.

Some businesses are still doing well, even with social distancing. Picture: AAP
Some businesses are still doing well, even with social distancing. Picture: AAP

 

HELICOPTER MONEY

Cash handouts by the Federal Government during the GFC helped protect Australia from a recession, and Dr Charlton said this was a potential future strategy.

The current stimulus is being funded by government debt, but future handouts could be funded by the Reserve Bank of Australia printing money then dishing it out - which could potentially cause inflation problems.

"There's an option called helicopter money - stimulus which is financed by nothing other than the Reserve Bank," Dr Charlton said.

"That would be the next step if the government was to go down that road. If the pandemic gets a lot worse I think that's definitely a possibility."

Dr Charlton said the economy would definitely shrink in the current June quarter, but might start bouncing back in the September quarter.

"Australians have to remember that the impact of this will last for some time," he said.

"Government, consumer and company debt will all step-change up and that will be an ongoing drag on our economic performance for a long time to come."

 

 

 

 

HOW WE COMPARE

AMP Capital chief economist Shane Oliver said Australia's economic performance for the March quarter was already likely to be negative as a result of the bushfires and China's early battles with the virus.

Those figures won't be released by the Bureau of Statistics until June 3, but Dr Oliver has already pencilled in a two per cent downturn in gross domestic product (GDP).

"The June quarter looks like it could be negative to the tune of 10 per cent," he said.

That's because about a quarter of the economy - which includes retail, hospitality, travel and real estate - is likely to suffer a 50 per cent contraction.

While the government - and indirectly the taxpayers - takes on a huge amount of new debt.

Dr Oliver said Australia's starting position going into this crisis was stronger than many countries.

"As a starting point our public debt as a share of our economy is about a quarter of comparable countries," he said.

European countries such as Italy are much more vulnerable, while the US left it too late to respond to the spread of coronavirus - resulting in a horrific death toll.

"Each country is in the same situation - we might see less exports, but we will also see less imports," Dr Oliver said.

Australia's strict health controls are helping to make us the envy of the world in stopping the spread of the virus - which means we are better placed than many countries to reduce business restrictions sooner in a controlled way.

AMP Capital chief economist Shane Oliver says the economy could fall 10 per cent in the June quarter. Picture: Jane Dempster/The Australian
AMP Capital chief economist Shane Oliver says the economy could fall 10 per cent in the June quarter. Picture: Jane Dempster/The Australian

 

WHAT COMES NEXT?

Dr Oliver said the JobKeeper package would result in many hibernating workers earning extra cash.

He said $1500 per fortnight had been the average wage of retail and hospitality workers before the virus struck.

"You will see a lot of people getting paid more than they previously were," Dr Oliver said.

"And people who get the wage subsidy can't call themselves unemployed - they're just at home.

"People are realising that it will help quite a lot and we won't be in a four-year Depression where unemployment goes to 20 per cent and stays there."

 

@keanemoney

 

 

OUR DRAMATIC SPENDING CHANGES

(compared with normal average consumption)

Gym and fitness down 95%

Travel down 78%

Public transport down 78%

Education down 43%

Cafes down 42%

Taxi/rideshare down 36%

Restaurants and fast food down 13%

Fashion and leisure retail down 6%

Telecommunications up 3%

Groceries/supermarkets up 15%

Pharmacies up 20%

Pet care up 28%

Alcohol and tobacco up 33%

Online retail and subscriptions Up 61%

Food delivery up 63%

Home improvement up 64%

Online gambling up 67%

Source: AlphaBeta Advisors, illion analysis based on transactions of 250,000 consumers

Originally published as What a recession will mean for you



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