Is Australia Going into a Recession in 2020?

2020 couldn’t have got off to a worse start. Some highly influential people have left us, such as Kobe Bryant, and there has been a surge of natural disasters, such as floods in Indonesia, earthquakes in Turkey and the on-going bushfires in Australia. Most devastating of all, the Coronavirus outbreak has caused a world-wide pandemic with global lockdowns and a death count that’s exponentially rising.

COVID-19 is not only a threat to our immediate health, but it poses the possibility of another 2008 economic crisis. As we know, this can cause deaths and suffering in and of itself; mass unemployment, mass insolvencies, inability to borrow and terrible savings rates.

Whether or not we’re going to see the depth of a 2008 crisis still cannot be predicted. What we do know is that the two crises will be fundamentally different, given that 2008 was a debt crisis that actually threatened the economic system we use as a whole — putting the validity of capitalism under question. This crash, if there is one, will be more akin to an immediate supply and demand issue, where workers cannot work, people fall ill and so on. But there’s certainly light at the end of that tunnel, even if the death counts and the degree of the crisis aren’t certain.

What we do know is that the Coronavirus has already had an impact on the global economy, and thus the Australian economy. On March 9th, the Dow Jones broke its record  for the biggest one-day point loss in its market history (-2014). By the 12th, that record had been succeeded (-2352) and had been broken again on the 16th (-2997).

 

Australia’s Economic Struggle Against COVID-19

Given that Australia’s economy is increasingly interdependent with its trading partners, both in their exports revenues and vital imports, it comes as no surprise that the economy has contracted recently. What might be a surprise is just how much it has contracted.

Bloomberg recently reported  Australia’s economy to have shrunk by a massive 10%. They have speculated that Australia’s economy is on its way to the deepest recession in 90 years, with a GDP predicted to decline by 10% in the first three quarters of the year, with some recovery in the final three months. James McIntyre, the Bloomberg economist who produced the reports, claims that the economy will not reach pre-Coronavirus levels for three years. Tough times ahead, it seems.

This will be something new for many residents of Australia, given that they haven’t seen a recession in almost 30 years. Four quarters in a row, GDP dropped from September 1990 to the same time the following year — a rather long recession. Many Australian’s aren’t old enough to have ever lived through one.

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The reasons behind the crash aren’t only the virus itself. As it stands, Australia is actually doing reasonably well with a relatively low number of cases and deaths, although there’s, of course, a huge capacity for growth. Instead though, it’s the measures taken in an effort to prevent the spread of the virus that is affecting the Australian economy — a sacrifice all countries are weighing up. Not only this, but the bushfires in Australia have been going on for so many months now that the country and economy hasn’t had time to heal in preparation for COVID-19.

It was on Monday, March 30th that the government would move to stage three. This means a new set of restrictions where skate parks, playgrounds, outdoor gyms and so on closes. This also means that gatherings of more than two people are banned all across the country in order to help prevent the spread of Coronavirus. This was a federal decision, but state governments will be left to enforce the restrictions.

The grim economic reality is that not all businesses and jobs will be able to be saved despite the best efforts of fiscal policymakers.” McIntyre writes in the Bloomberg repor

This is essentially a lockdown, and the reasons for leaving one’s home depends on the state. Generally, these reasons include only obtaining groceries, travelling for work or education, exercise or medical/care reasons.

It is expected that unemployment will rise and housing markets will decline. Despite the Reserve Bank’s interest rate cuts, the housing market appears to be struggling. Aside from the deep economic causes behind this, there’s a simple logistical issue to — viewing homes is difficult under such Coronavirus social distancing rules.

 

Impact on the AUD

By the nature of the COVID-19 crisis being global, all economies will be hurt. In this sense, one currency may not weaken against another as a direct result of the virus. However, not all countries are experiencing this crisis in the same way. Some have better reserves, resources and healthcare than others, whilst others have a smaller population to care for. If the 10% economic contraction is true for Australia, then this seems quite severe. In this sense, the AUD doesn’t have a promising outlook in 2020.

On the other hand, Australia’s plan to inject $11.4bn into the economy could certainly flatten the recession curve, so to speak. This fiscal injection may be more than many other governments, and this could arguably implement some damage limitation to the economy and thus the AUD — there will no doubt be countries that deal with this crisis worse than Australia’s fiscal readiness.

The good news is that, like the virus, this imminent crash appears to be temporary. Many analysts are predicting a rebound by 2021 in the housing market and economy. Knowing the number of cases that we will endure is the million-dollar question, but we will no doubt see this through. The destruction along its way cannot be understated, but we will recover, social distancing rules will alleviate, and the economy will pick up again.

Whilst it’s vital to flatten the curve to ensure hospitals are not overloaded, this will invariably mean the economic stagnation could be prolonged.